<PAGE>
As filed with the Securities and Exchange Commission on July 9, 1999
Registration No. 333-
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TOWN SPORTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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NEW YORK 7991 13-2749906
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------------------
C/O RICHARD PYLE
CHIEF FINANCIAL OFFICER
TOWN SPORTS INTERNATIONAL, INC.
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPY TO:
JOSHUA N. KORFF
KIRKLAND & ELLIS
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
TELEPHONE: (212) 446-4800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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Town Sports International, Inc. 9 3/4% Series B
Senior Notes due 2004........................... $40,000,000 $1,000 $40,000,000 $11,120.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) based upon the book value of the securities
as of July 9, 1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION DATED JULY 9, 1999
PROSPECTUS
, 1999
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[LOGO] [LOGO] [LOGO] [LOGO]
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TOWN SPORTS INTERNATIONAL
OFFER FOR ALL OUTSTANDING 9 3/4% SERIES A SENIOR NOTES
DUE 2004 IN AGGREGATE PRINCIPAL AMOUNT OF $40,000,000 IN EXCHANGE
FOR 9 3/4% SERIES B SENIOR NOTES DUE 2004
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1999, UNLESS EXTENDED.
We will not receive any proceeds from the exchange of these notes.
TOWN SPORTS INTERNATIONAL:
- We own and operate fitness clubs in the Northeast and Mid-Atlantic regions
of the United States.
- Town Sports International
888 Seventh Avenue
New York, New York 10106
(212) 246-6700
TERMS OF THE EXCHANGE NOTES:
MATURITY:
October 15, 2004
REDEMPTION:
- We may redeem the exchange notes at any time on or after October 15, 2001.
- Before October 15, 2000, we may, subject to requirements, redeem up to 35%
of the exchange notes so long as 65% remain outstanding immediately after
the redemption. Before October 15, 2002, we may, subject to requirements,
redeem all of the exchange notes in the event of a change of control.
MANDATORY OFFER TO REPURCHASE:
- If we sell all or substantially all of our assets, or experience specific
kinds of changes in control of our company, we may be required to offer to
repurchase the exchange notes.
SECURITY:
- The exchange notes are unsecured.
RANKING:
- These exchange notes rank pari passu with all of our current and future
senior indebtedness.
INTEREST:
- Fixed annual rate of 9 3/4%.
- Paid every six months on April 15 and October 15.
<PAGE>
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE EXCHANGE NOTES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PAGE
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Offering Memorandum Summary........................................................... 1
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Risk Factors.......................................................................... 5
Use of Proceeds....................................................................... 12
Capitalization........................................................................ 12
Selected Historical Consolidated Financial Data....................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Business.............................................................................. 27
Management............................................................................ 40
Security Ownership and Beneficial Owners.............................................. 46
Relationships and Related Transactions................................................ 48
Description of the Credit Facility.................................................... 49
Description of Exchange Notes......................................................... 50
Legal Matters......................................................................... 91
Experts............................................................................... 91
Where You Can Find More Information................................................... 91
Index to Financial Statements......................................................... F-1
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i
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PROSPECTUS SUMMARY
THE OLD NOTE OFFERING
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OLD NOTES We originally sold the notes to Deutsche Banc Alex. Brown
("DBAB"), an investment banking firm, on June 10, 1999. DBAB
subsequently resold the old notes to qualified institutional
buyers and to a limited number of institutional accredited
investors. These purchasers of the notes agreed to comply
with transfer restrictions and other conditions.
EXCHANGE AND REGISTRATION As required in the purchase agreement, we and DBAB entered
RIGHTS AGREEMENT into a registration rights agreement on June 21, 1999. This
agreement grants the holder of the notes exchange and
registration rights. The exchange offer is intended to
satisfy these exchange rights which terminate once the
exchange offer is completed.
We will pay additional interest on the notes if:
- we do not file the required registration statement on
time;
- the Commission does not declare the required registration
statement effective on time; or
- we do not complete the offer to exchange these notes for
the exchange notes within 30 days from the date the
registration statement is declared effective.
You will not have any remedy other than additional interest
on the notes if we fail to meet the targets listed above.
THE EXCHANGE OFFER
SECURITIES OFFERED $40,000,000 of 9 3/4% Series B senior notes due 2004. The
terms of the exchange notes and old notes are identical in
all material respects, except for transfer restrictions and
registration rights relating to the old notes.
THE EXCHANGE OFFER We are offering to exchange the old notes for a principal
amount equal to the principal amount of exchange notes. Old
notes may be exchanged only in integral principal multiples
of $1,000.
EXPIRATION DATE; Our exchange offer will expire 5:00 p.m., New York City
WITHDRAWAL OF TENDER time, on , 1999, or such later date and time as we may
extend. You may withdraw your tender of old notes at any
time prior to the expiration date. We will return any old
notes not accepted by us for exchange for any reason at our
expense as promptly as possible after the expiration or
termination of our exchange offer.
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ii
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CONDITIONS TO THE EXCHANGE We believe that the exchange notes issued by us in exchange
OFFER for the old notes may be offered for resale, resold and
otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the
Securities and Exchange Act. We have based this belief on
letters issued in connection with past offerings of this
kind in which the staff of the Securities and Exchange
Commission has interpreted the laws and regulations relating
to the resale of notes to the public without the requirement
of further registration under the Securities Act. Any holder
which is our "affiliate" within the meaning of Rule 405
under the Securities and Exchange Act, however, may not
offer for resale, resell or otherwise transfer the exchange
notes without meeting these registration and prospectus
delivery requirements.
In order for the exchange notes to be offered for resale,
resold or otherwise transferred,
- they must be acquired in the ordinary course of your
business; and
- you must not intend to participate and have no arrangement
or understanding with any person to participate in the
distribution of such exchange notes.
Our obligation to accept for exchange, or to issue the
exchange notes in exchange for, any old notes is subject to
conditions relating to compliance with law, or any
applicable interpretation by any staff of the Securities and
Exchange Commission, or any order of any governmental agency
or court of law. We currently expect that each of the
conditions will be satisfied and that no waivers will be
necessary.
PROCEDURES FOR TENDERING NOTES Each holder of old notes wishing to accept the exchange
offer must complete, sign and date the accompanying letter
of transmittal, or a facsimile thereof, in accordance with
the instructions and mail or fax it, together with the old
notes and any other required documentation, to the exchange
agent at the following addresses:
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BY OVERNIGHT COURIER: BY HAND: BY REGISTERED OR CERTIFIED
MAIL:
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
770 Broadway, 13th Floor 111 Broadway P.O. Box 844
New York, New York 10003 Lower Level Cooper Station
Attn: Corporate Trust New York, New York 10006 New York, New York 10276-0844
Services Attn: Corporate Trust Attn: Corporate Trust Services
Services
</TABLE>
BY FACSIMILE:
212-780-0592
Attn: Corporate Trust Services
iii
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ACCEPTANCE OF NOTES AND We will accept for exchange any and all notes which are
DELIVERY OF EXCHANGE NOTES properly tendered in the exchange offer prior to 5:00 p.m.,
New York City time, on the expiration date. The exchange
notes will be delivered promptly following the expiration
date. See "The Exchange Offer" for a description of the
purpose and effect of the exchange offer, the expiration
date and the procedures for tendering the old notes.
USE OF PROCEEDS We will not receive any cash proceeds from the exchange of
notes pursuant to our exchange offer.
EXCHANGE AGENT United States Trust Company of New York is serving as the
exchange agent in connection with our exchange offer.
FEDERAL INCOME TAX The exchange of old notes in accordance with the exchange
CONSEQUENCES offer should not be a taxable event to you for federal
income tax purposes.
THE EXCHANGE NOTES
ISSUER Town Sports International, Inc.
TOTAL AMOUNT OF NOTES OFFERED $40,000,000 principal amount of 9 3/4% Series B senior notes
due 2004.
MATURITY October 15, 2004.
INTEREST RATE 9 3/4% per annum.
INTEREST PAYMENT DATES April 15 and October 15, beginning on October 15, 1999.
Interest will accrue from the issue date the notes were
issued.
RANKING OF THE EXCHANGE NOTES The notes will be unsecured senior obligations of our
company and will rank equal in right of payment to our
existing and future senior debt, including the existing
notes. The notes will be effectively subordinate to all of
our secured indebtedness. As of March 31, 1999, pro forma
for this offering, we estimate that we and our subsidiaries
would have had $129.8 million of indebtedness outstanding,
excluding approximately $23.0 million that we expect to have
available to borrow under our credit facility.
We are generally permitted to incur debt, notwithstanding
the notes, only if we comply with financial ratios
stipulated in the indenture. However, these financial ratios
do not apply to indebtedness incurred for specific purposes
which do not exceed stipulated amounts. This category of,
"permitted debts" is described in the indenture and allows
us, for example, to incur debt represented by capital lease
obligations, mortgage financings or purchase money
obligations, so long as the amount of the indebtedness does
not exceed $20.0 million at any one time. In addition, we
may also incur debt to some of our subsidiaries, so long as
such indebtedness is unsecured and subordinated to our
obligations under the indenture. We may also incur debt
under our credit facility up to an amount of $25.0 million.
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iv
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OPTIONAL REDEMPTION We cannot redeem the notes until October 15, 2001.
Thereafter we may redeem some or all of the notes and the
existing notes at the redemption prices listed in the
"Description of Exchange Notes" section under the heading
"Redemption--Optional Redemption" plus accrued and unpaid
interest.
OPTIONAL REDEMPTION AFTER At any time (which may be more than once) before October 15,
PUBLIC EQUITY OFFERINGS 2000, we can choose to redeem up to 35% of the outstanding
notes and existing notes with money that we raise in one or
more public equity offerings, as long as:
- we pay 109.750% of the face amount of the notes plus
accrued and unpaid interest;
- we redeem the notes and existing notes within 120 days of
completing the public equity offering; and
- at least 65% of the aggregate principal amount of notes
and existing notes originally issued remains outstanding
afterwards.
CHANGE OF CONTROL OFFER If a change in control of our company occurs on or before
October 15, 2002 we may, at our option, redeem all of the
notes and existing notes at a price equal to 100% of the
face amount of the notes and existing notes plus the
applicable premium plus accrued and unpaid interest.
The applicable premium is the greater of:
(1)1.0% of the principal amount of the notes; and
(2)the excess of
(a) the present value at such time of:
(x)the redemption price of the notes at October 15, 2002,
plus
(y)all required interest payments, excluding accrued but
unpaid interest, due on the notes through October 15,
2002, computed using a discount rate equal to the
treasury rate plus 75 basis points, over
(b)the principal amount of the notes.
If we choose not to so redeem the notes and existing notes
or such change of control occurs after October 15, 2002, we
must give holders the opportunity to sell their notes and
existing notes to us at 101% of their face amount plus
accrued and unpaid interest.
We might not be able to pay the required price for notes and
existing notes presented to us at the time of a change of
control, because:
- we might not have enough funds at that time; or
- the terms of our secured debt may prevent us from paying.
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v
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ASSET SALE PROCEEDS If we or our subsidiaries engage in asset sales, we
generally must either invest the net cash proceeds from such
sales in our business within a period of time, prepay
secured debt or make an offer to purchase a principal amount
of the notes and existing notes equal to the excess net cash
proceeds. The purchase price of the notes and existing notes
will be 100% of their principal amount plus accrued and
unpaid interest.
BASIC COVENANTS OF THE We will issue the exchange notes under an indenture with
INDENTURE United States Trust Company of New York, as trustee. The
indenture governing the notes will be the same indenture
that governs the existing notes. It contains covenants that,
among other things, limit our ability to:
- incur additional debt;
- pay cash dividends or distributions on our capital stock
or repurchase our capital stock;
- issue preferred stock of subsidiaries;
- make investments;
- create liens on our assets to secure debt;
- enter into transactions with affiliates;
- merge or consolidate with another company; and
- transfer and sell assets.
For a more detailed description of the material covenants of
the indenture, see the section "Description of Exchange
Notes" under the heading "Material Covenants" and "Merger
Consolidation or Sale of Assets."
When there is a registration default, the annual interest
rate on the notes will increase by 0.50%. The annual
interest rate on the notes will increase by an additional
0.50% for each subsequent 90 day period during which the
registration default continues, up to a maximum additional
interest rate of 2.0% per year over the interest rate shown
on the cover of this prospectus. If we correct the
registration default, the interest rate on the notes will
revert to the original level. If we must pay additional
interest, we will pay it to you in cash on the same dates
that we make other interest payments on the notes, until we
correct the registration default.
MARKETABILITY The exchange notes are new securities, and there is
currently no established market for them. We do not intend
to list the exchange notes on any securities exchange.
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vi
<PAGE>
TOWN SPORTS INTERNATIONAL & INDUSTRY OVERVIEW
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THIS OFFERING.
IT LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A
MORE COMPLETE UNDERSTANDING OF THIS OFFERING, WE ENCOURAGE YOU TO READ THIS
ENTIRE DOCUMENT AND THE DOCUMENTS WE HAVE REFERRED YOU TO. THE FOLLOWING
DISCUSSION MAKES REFERENCE TO ADJUSTED EBITDA WHICH IS DEFINED AS EARNINGS
BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, DEFERRED LEASE EXPENSE,
COMPENSATION EXPENSE IN CONNECTION WITH STOCK OPTIONS, EXTRAORDINARY CHARGES AND
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING POLICY. INVESTORS SHOULD BE AWARE
THAT THE ITEMS EXCLUDED FROM THE CALCULATION OF ADJUSTED EBITDA, SUCH AS
DEPRECIATION AND AMORTIZATION, ARE SIGNIFICANT COMPONENTS IN AN ACCURATE
ASSESSMENT OF OUR FINANCIAL PERFORMANCE. ADJUSTED EBITDA IS PRESENTED BECAUSE WE
BELIEVE IT PROVIDES USEFUL INFORMATION REGARDING OUR ABILITY TO INCUR AND/OR
SERVICE DEBT. ADJUSTED EBITDA SHOULD NOT BE CONSIDERED IN ISOLATION OR AS A
SUBSTITUTE FOR NET INCOME, CASH FLOWS, OR OTHER CONSOLIDATED INCOME OR CASH FLOW
DATA PREPARED IN ACCORDANCE WITH GAAP (AS DEFINED) OR AS A MEASURE OF OUR
PROFITABILITY OR LIQUIDITY. ADDITIONALLY, INVESTORS SHOULD BE AWARE THAT
ADJUSTED EBITDA MAY NOT BE COMPARABLE TO SIMILARLY TITLED MEASURES PRESENTED BY
OTHER COMPANIES.
EFFECTIVE DECEMBER 31, 1998, WE CHANGED OUR FISCAL YEAR END FROM MAY 31 TO
DECEMBER 31, WHICH RESULTED IN A TRANSITION PERIOD OF SEVEN MONTHS ENDED
DECEMBER 31, 1998. THE DECISION TO CHANGE THE FISCAL YEAR WAS MADE FOR MORE
CONVENIENCE IN BOTH INTERNAL AND EXTERNAL COMMUNICATIONS. AS USED HEREIN, "TOWN
SPORTS," "WE," "US," AND "OUR" REFER TO TOWN SPORTS INTERNATIONAL, INC. AND ITS
SUBSIDIARIES.
TOWN SPORTS INTERNATIONAL
We are one of the two leading owners and operators of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States. As of March 31, 1999,
we operated 74 clubs that collectively served approximately 192,000 members. We
develop clusters of clubs to serve densely populated major metropolitan regions
in which a high percentage of the population commutes to work. We service such
populations by clustering clubs near the highest concentrations of our target
members' areas of both employment and residence.
From June 1, 1995 to March 31, 1999, our club base has grown from 25 clubs
to 74 clubs. Over the same period, our revenues and Adjusted EBITDA, as defined,
have increased from $33.3 million and $3.4 million, respectively, for the year
ended May 31, 1995, to $124.6 million and $27.1 million, respectively, for the
twelve months ended March 31, 1999. At the same time, our net loss decreased
from $0.7 million for the year ended May 31, 1995 to $0.4 million for the twelve
months ended March 31, 1999. We believe that we will have opportunities for
continued growth and increased profitability due to:
- our leadership position in the Northeast and Mid-Atlantic regions;
- our regional clustering strategy which allows us to maximize cash flows by
providing high quality, conveniently located fitness facilities on a
cost-effective basis;
- our affordable monthly dues and an electronic funds transfer system which
provides us with stable and predictable cash flows; and
- our experienced management team which has the depth, experience and
motivation to manage our growth.
We intend to continue to increase revenue and cash flow by implementing our
business strategy to:
- open up new clubs and the acquisition of existing clubs; and
- increase the additional services available to our members.
1
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INDUSTRY OVERVIEW
The fitness club industry in the United States is highly fragmented.
According to the International Health, Racquet & Sportsclub Association
("IHRSA") the industry's leading trade organization, there were more than 14,100
commercial fitness clubs in operation during 1998. However, the ten largest
companies in the industry, as determined by consolidated revenue, account for
approximately 18% of all industry revenue and own less than 6% of all clubs. We
believe that independent operators have found it increasingly difficult to
compete with multi-facility operators like us that enjoy substantial economies
of scale. We believe that the long-term trend of increasing fitness awareness
and the fragmented nature of the industry make it attractive for continued
investment.
According to IHRSA, revenues generated by the United States fitness club
industry increased at a compound annual rate of 8.3% from $5.5 billion in 1991
to $9.6 billion in 1998. Over the same period, memberships in all clubs have
grown at a 5.0% compound annual growth rate, from 21.0 million to 29.5 million.
Both fitness club revenues and memberships have benefited from the increasing
awareness among the general public of the importance of physical exercise. In
July 1996, the Surgeon General issued a report on Physical Activity and Health
highlighting the connection between regular physical exercise and better health.
We believe the Surgeon General's report and other medical evidence supporting
the importance of regular physical exercise are leading more Americans to become
increasingly health conscious and to regularly incorporate exercise into their
lives.
CORPORATE ORGANIZATION
We act primarily as a holding company that derives operating income and cash
flow from its subsidiaries. We own the real estate that houses one of our clubs.
Generally, our wholly-owned subsidiaries enter into leases and/or operate one of
our clubs. In December 1996, we consummated a merger in accordance with which,
Bruckmann, Rosser, Sherrill & Co., L.P. a private equity firm, and some of its
employees and affiliates and various institutional investors and members of our
management acquired our newly authorized common stock, series A preferred stock
and series B preferred stock. In addition, pursuant to the merger, we instituted
a new option plan granting certain members of our management options to acquire
our newly authorized series B preferred stock and common stock. In the
aggregate, our management owns approximately 25% of our common stock, on a
fully-diluted basis. See "Security Ownership and Certain Beneficial Owners" and
"Certain Relationships and Related Transactions" for a more detailed description
of the ownership interests in our company.
------------------------
Our company is incorporated under the laws of the State of New York. Our
principal executive offices are located at 888 Seventh Avenue, New York, New
York 10106. Our telephone number is (212) 246-6700. We maintain the following
internet web sites: www.nysc.com, www.bostonsportsclubs.com,
www.philadelphiasportsclubs.com, www.washingtonsports.com and www.tsag.com.
2
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
Set forth below are our summary historical and pro forma consolidated
financial data as of March 31, 1999 and for the fiscal years ended May 31, 1996,
1997, 1998, the twelve months ended December 31, 1998, the three month periods
ended March 31, 1998, 1999 and the twelve month period ended March 31, 1999.
Effective December 31, 1998, we changed our fiscal year end from May 31 to
December 31, which resulted in a transition period of seven months ended
December 31, 1998. The consolidated statement of operations data, balance sheet
data and other data for fiscal years ended May 31, 1996, 1997 and 1998 were
derived from our audited consolidated financial statements. The consolidated
statement of operations data, balance sheet data, other data and pro forma data
as of March 31, 1999 and for the three month period ended March 31, 1998, for
the three and twelve month period ended March 31, 1999 and the twelve month
period ended December 31, 1998 were derived from our unaudited consolidated
interim financial statements for such periods, which, in our opinion, reflect
all normal and recurring adjustments necessary to present fairly the financial
position and results of operations for the periods presented. The club and
membership data, for all periods presented, was derived from our unaudited books
and records. The information contained in this table should be read in
conjunction with "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and accompanying notes appearing
elsewhere in this prospectus.
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TWELVE MONTHS THREE MONTHS TWELVE MONTHS
FISCAL YEAR ENDED ENDED ENDED
ENDED MAY 31, DECEMBER 31, MARCH 31, MARCH 31,
------------------------------- ------------- -------------------- -------------
1996 1997 1998 1998 1998 1999 1999
--------- --------- --------- ------------- --------- --------- -------------
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(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 43,755 $ 56,567 $ 82,350 $ 111,022 $ 22,553 $ 36,139 $ 124,608
Operating expenses............................. 41,626 55,291 74,170 103,550 19,791 33,402 117,161
Operating income............................... 2,129 1,276 8,180 7,472 2,762 2,737 7,447
Interest expense, net.......................... 952 2,455 5,902 7,911 1,769 1,918 8,060
Income tax (benefit) provision................. 628 (243) 1,131 (156) 465 395 (226)
Net income (loss).............................. 549 (936) 277 (283) 528 424 (387)
</TABLE>
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AS OF MARCH 31, 1999
--------------------
ACTUAL
---------
(DOLLARS
IN
THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents............................................................................................... $ 16,817
Total assets............................................................................................................ 168,227
Long-term debt, including current installments.......................................................................... 89,829
Redeemable senior preferred stock....................................................................................... 38,034
Stockholders' deficit................................................................................................... (3,018)
<CAPTION>
ADJUSTED(1)
-----------
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BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 52,552
Total assets..................................................... 208,227
Long-term debt, including current installments................... 129,829
Redeemable senior preferred stock................................ 38,034
Stockholders' deficit............................................ (3,018)
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TWELVE MONTHS THREE MONTHS
FISCAL YEAR ENDED ENDED
ENDED MAY 31, DECEMBER 31, MARCH 31,
------------------------------- --------------- --------------------
1996 1997 1998 1998 1998 1999
--------- --------- --------- --------------- --------- ---------
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(DOLLARS IN THOUSANDS)
OTHER DATA:
Adjusted EBITDA(2)............................. $ 8,302 $ 13,048 $ 20,029 $ 24,371 $ 5,799 $ 8,489
Adjusted EBITDA margin(2)...................... 19.0% 23.1% 24.3% 22.0% 25.7% 23.5%
Net cash provided by operating activities...... $ 5,695 $ 12,302 $ 15,733 $ 15,933 $ 5,475 $ 10,521
Net cash used in investing activities.......... (5,487) (13,571) (36,040) (71,030) (8,969) (12,462)
Net cash provided by (used in) financing
activities................................... 144 2,809 40,836 34,591 (712) (396)
Deferred lease expense(3)...................... 1,277 1,620 2,671 2,810 715 933
Compensation expense in connection with stock
options...................................... 1,967 5,933 1,442 1,479 184 190
Depreciation and amortization.................. 2,929 4,219 7,736 12,610 2,138 4,629
Capital expenditures........................... 5,380 11,403 16,170 32,681 5,730 11,731
CLUB AND MEMBERSHIP DATA:
Total clubs operated at end of period(4)....... 28 35 49 69 43 74
Members at end of period(5).................... 54,800 78,600 125,100 169,900 102,500 183,700
<CAPTION>
TWELVE MONTHS
ENDED
MARCH 31,
-------------
1999
-------------
<S> <C>
OTHER DATA:
Adjusted EBITDA(2)............................. $ 27,061
Adjusted EBITDA margin(2)...................... 21.7%
Net cash provided by operating activities...... $ 20,979
Net cash used in investing activities.......... (74,523)
Net cash provided by (used in) financing
activities................................... 34,907
Deferred lease expense(3)...................... 3,028
Compensation expense in connection with stock
options...................................... 1,485
Depreciation and amortization.................. 15,101
Capital expenditures........................... 38,322
CLUB AND MEMBERSHIP DATA:
Total clubs operated at end of period(4)....... 74
Members at end of period(5).................... 183,700
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
FISCAL YEAR ENDED ENDED
ENDED MAY 31, DECEMBER 31, MARCH 31,
------------------------------- --------------- --------------------
1996 1997 1998 1998 1998 1999
--------- --------- --------- --------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA DATA(1):
Cash interest expense(6)....................................................................................
Ratio of Adjusted EBITDA to cash interest expense...........................................................
Net debt(7).................................................................................................
Ratio of net debt to Adjusted EBITDA........................................................................
<CAPTION>
TWELVE MONTHS
ENDED
MARCH 31,
-------------
1999
-------------
<S> <C>
PRO FORMA DATA(1):
Cash interest expense(6)....................... $ 12,791
Ratio of Adjusted EBITDA to cash interest expen 2.1x
Net debt(7).................................... $ 77,277
Ratio of net debt to Adjusted EBITDA........... 2.9x
</TABLE>
- ------------------------
(1) Information set forth under the caption "As Adjusted" and "Pro Forma Data"
has been adjusted to give effect to the issuance of the notes, net of $4.3
million of transaction costs.
(2) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, deferred lease expense, compensation expense in connection
with stock options, extraordinary charges and cumulative effect of changes
in accounting policy. Adjusted EBITDA is presented because we believe it
provides useful information regarding our ability to incur and/or service
debt. Adjusted EBITDA should not be considered in isolation or as a
substitute for net income, cash flows, or other consolidated income or cash
flow data prepared in accordance with GAAP or as a measure of our
profitability or liquidity. Adjusted EBITDA margin is defined as adjusted
EBITDA as a percentage of revenues.
(3) Deferred lease expense reflects the difference between accrued rent expense
in accordance with GAAP and cash rent expense actually paid in a given
period, which difference is typically positive in the early years of a lease
and negative in the later years of a lease.
(4) Includes all clubs whether wholly-owned or managed.
(5) Represents members at wholly-owned clubs only.
(6) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.
(7) Net debt is defined as total debt less cash and cash equivalents as of March
31, 1999 adjusted for the application of proceeds from this offering.
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" INCLUDING, IN
PARTICULAR, THE STATEMENTS ABOUT OUR PLANS, STRATEGIES, AND PROSPECTS UNDER THE
HEADINGS "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS". ALTHOUGH WE
BELIEVE THAT OUR PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR SUGGESTED BY
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT
SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED. IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS WE MAKE IN THIS PROSPECTUS ARE SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING
ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE FOLLOWING
CAUTIONARY STATEMENTS.
RISK FACTORS RELATED TO THE NOTES
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT THE
FINANCIAL HEALTH OF OUR COMPANY AND PREVENT US FROM FULFILLING OUR OBLIGATIONS
UNDER THESE EXCHANGE NOTES.
We have a substantial amount of debt. As of March 31, 1999, on a pro forma
basis after giving effect to the offering and the net proceeds therefrom, our
total indebtedness would have been approximately $129.8 million. In addition,
subject to restrictions in our credit facility and the indenture governing the
notes and the existing notes, we may incur up to $23.0 million of additional
borrowings under the credit facility. See "Description of the Credit Facility"
and "Description of the Exchange Notes."
The level of our indebtedness could have important consequences to holders
of the notes, including:
(1) a substantial portion of our cash flow from operations will be dedicated
to debt service and may not be available for other purposes;
(2) our leveraged position may impede our ability to obtain financing in the
future for working capital, capital expenditures and general corporate
purposes, including acquisitions, and may impede our ability to secure
favorable lease terms; and
(3) our leveraged financial position may make us more vulnerable to economic
downturns and may limit our ability to withstand competitive pressures.
ABILITY TO SERVICE DEBT--DUE LARGELY TO FACTORS BEYOND OUR CONTROL, WE MAY NOT
IN THE FUTURE BE ABLE TO GENERATE THE CASH WE NEED TO SERVICE OUR
INDEBTEDNESS.
Our ability to pay interest on the notes, to repay portions of our long-term
indebtedness and to satisfy our other debt obligations will depend upon our
future operating performance and the availability of refinancing indebtedness,
which will be affected by prevailing economic conditions and financial, business
and other factors, some of which are beyond our control. We cannot assure you
that our future cash flow will be sufficient to meet our obligations and
commitments. If we are unable to generate sufficient cash flow from operations
in the future to service our indebtedness and to meet our other commitments, we
will be required to adopt one or more alternatives, such as refinancing or
restructuring our indebtedness, selling material assets or operations or seeking
to raise additional debt or equity capital. We cannot assure you that any of
these actions could be effected on a timely basis or on satisfactory terms or at
all, or that these actions would enable us to continue to satisfy our capital
requirements. In addition, the terms of existing or future debt agreements,
including the indenture and the credit facility, may prohibit us from adopting
any of these alternatives. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of the Credit Facility" and "Description of the Exchange Notes."
5
<PAGE>
OUR CREDIT FACILITY AND THE INDENTURE IMPOSE CERTAIN RESTRICTIONS--FAILURE TO
COMPLY WITH ANY OF THE RESTRICTIONS COULD RESULT IN ACCELERATION OF OUR DEBT.
Our credit facility requires us to maintain specified financial ratios and
tests, among other obligations, including interest coverage and total leverage
ratios. In addition, the credit facility restricts, among other things, our
ability to incur additional indebtedness and will restrict our ability to
dispose of assets, incur guarantee obligations, repay indebtedness or amend debt
instruments, pay dividends, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. A failure to comply with the restrictions
contained in the credit facility could lead to an event of default which could
result in an acceleration of the indebtedness. Such an acceleration would
constitute an event of default under the indenture governing the notes and the
existing notes. In addition, the indenture restricts, among other things, our
ability to incur additional indebtedness, make certain payments and dividends or
merge or consolidate. A failure to comply with the restrictions in the indenture
could result in an event of default under the indenture. See "Description of the
Credit Facility" and "Description of the Exchange Notes."
THE NOTES ARE UNSECURED AND EFFECTIVELY RANK BEHIND OUR SECURED INDEBTEDNESS--IN
THE EVENT OF A BANKRUPTCY OR SIMILAR PROCEEDING, OUR ASSETS WILL BE AVAILABLE
TO PAY OBLIGATIONS ON THE NOTES ONLY AFTER ALL OUR SECURED INDEBTEDNESS HAS
BEEN PAID IN FULL, AT WHICH POINT THERE MAY NOT BE SUFFICIENT ASSETS REMAINING
TO PAY AMOUNTS DUE ON ANY OR ALL OF THE NOTES THEN OUTSTANDING.
The notes will be general unsecured senior obligations and will rank equally
in right of payment with all our existing and future senior indebtedness,
including obligations under our credit facility and the existing notes. As of
March 31, 1999, on a pro forma basis after giving effect to the offering, we
would have had approximately $129.8 million of indebtedness outstanding,
excluding $2.0 million of outstanding standby letters of credit, and $23.0
million of secured indebtedness available under the credit facility. The notes
will be effectively subordinated to all of our secured indebtedness to the
extent of the value of the assets securing this indebtedness. Our indebtedness
under the credit facility is secured by liens upon real property and current
assets, including receivables, inventory, general intangibles and equipment. The
indenture permits us to incur additional indebtedness under the credit facility.
In the event of a bankruptcy, liquidation or reorganization of our company, our
assets will be available to pay obligations on the notes only after all our
secured indebtedness has been paid in full.
WE MAY BE UNABLE TO FINANCE A CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE
ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE REPURCHASE OPTION
CONTAINED IN THE INDENTURE.
If a change of control of our company occurs, we will be required to make an
offer for cash to purchase the notes and the existing notes at 100% of the face
amount of the notes and existing notes, plus the applicable premium plus accrued
and unpaid interest, if any, thereon to the purchase date. A change of control
would result in an event of default under our credit facility and may result in
a default under other of our indebtedness that may be incurred in the future.
The credit facility prohibits the purchase of outstanding notes prior to
repayment of the borrowings under the credit facility and any exercise by either
the holders of the notes or the existing notes of their right to require us to
repurchase the notes will cause an event of default under our credit facility.
Finally, we cannot assure you that we will have the financial resources
necessary to repurchase the notes upon a change of control. See "Description of
Exchange Notes--Change of Control."
TAX RISK RELATING TO ORIGINAL ISSUE DISCOUNT--THE IRS MAY CLAIM THAT THE NOTES
WERE DEEMED TO BE ISSUED WITH MORE THAN A DE MINIMIS AMOUNT OF ORIGINAL ISSUE
DISCOUNT, WITH THE RESULT THAT HOLDERS WOULD BE REQUIRED TO INCLUDE AMOUNTS IN
GROSS INCOME WITHOUT A CORRESPONDING RECEIPT OF CASH.
We intend to take the position that the notes are not issued with original
issue discount for federal income tax purposes. We cannot assure you, however,
that the Internal Revenue Service would not
6
<PAGE>
assert a contrary position. If the notes were deemed to be issued with more than
a DE MINIMIS amount of original issue discount, the holders of the notes would
be required to include the amount of original issue discount in gross income
over the term of the notes based on a constant yield method. This means that
holders would be required to include amounts in gross income without a
corresponding receipt of cash. We have not obtained any ruling from the IRS or
any opinion of counsel on this matter. Investors are urged to consult their own
advisors regarding the determination of the issue price of the notes and the
federal, state, and foreign tax consequences.
THERE IS NO PRIOR MARKET FOR THE NOTES--YOU CANNOT BE SURE THAT AN ACTIVE
TRADING MARKET WILL DEVELOP FOR THESE EXCHANGE NOTES WHICH COULD LIMIT THE
LIQUIDITY OF YOUR EXCHANGE NOTES.
The notes will be new securities for which there is no trading market at the
present time. We do not intend to apply for listing of the notes or, if issued,
the exchange notes, on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation, the "Nasdaq",
system. We expect that the notes will be eligible for trading in the PORTAL
market. The initial purchaser has informed us that it currently intends to make
a market in the exchange notes. However, the initial purchaser is not obligated
to do so and may discontinue any such market making at any time without notice.
The liquidity of any market for the notes will depend upon various factors,
including:
- the number of holders of the notes;
- the interest of securities dealers in making a market for the notes;
- the overall market for high yield securities;
- our financial performance or prospects; and
- the prospects for companies in our industry generally.
Accordingly, we cannot assure you that a market or liquidity will develop
for the exchange notes.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the notes. We cannot assure you that the market for the notes, if
any, will not be subject to similar disruptions. Any such disruptions may
adversely affect you as a holder of the notes.
RISK FACTORS RELATED TO OUR COMPANY
WE HAVE INCURRED RECENT NET LOSSES--RECENTLY INCURRED NET LOSSES WILL IMPACT
PROFITABILITY AND MAY RESULT IN NET LOSSES IN THE FUTURE.
We incurred net losses of $560,000, $936,000 and $733,000 during the
transition period ended December 31, 1998 and the years ended May 31, 1997 and
1995, respectively. These losses have resulted from a variety of costs
including, but not limited to, debt financing costs resulting from our growth
strategy and non-cash charges such as depreciation and amortization of goodwill.
In addition, we have historically experienced non-cash compensation expense in
connection with the issuance of stock options. Increased goodwill, amortization,
depreciation and financing costs associated with future acquisitions and
greenfield club openings will impact profitability and may result in net losses
in the future. Although we had net income in fiscal 1998, there can be no
assurance that we will generate net income in the future.
In addition, we recorded accreted dividends of $1.9 million, $2.1 million,
$2.4 million, $1.3 million and $400,000 for the three months ended March 31,
1999, the transition period ended December 31, 1998, the years ending May 31,
1998, 1997 and 1996, respectively. As a result of the accreted dividends on
preferred stock, we reported net losses attributable to common stockholders of
$1.5 million, $2.7 million, $2.1 million and $2.2 million for the three months
ended March 31, 1999, the transition period ended December 31, 1998, the years
ending May 31, 1998 and 1997, respectively.
7
<PAGE>
WE MAY BE UNABLE TO ACQUIRE ADDITIONAL CLUBS--OUR FAILURE TO ACQUIRE AND OPERATE
FITNESS CLUBS WILL ADVERSELY IMPACT OUR GROWTH STRATEGY.
Our growth strategy depends to a significant degree on our ability to
successfully acquire and operate fitness clubs in selected locations in large
metropolitan areas within the Northeast and Mid-Atlantic regions of the United
States. The successful acquisition and operation of fitness clubs will depend on
various factors, including our ability to:
- locate suitable acquisition targets;
- obtain financing to consummate such acquisitions;
- negotiate acceptable purchase agreements;
- obtain lease assignments on acceptable terms;
- effectively integrate acquired businesses with existing operations;
- expand our membership base at acquired locations;
- hire, train and retain qualified employees; and
- effectively address issues raised by other factors, some or all of which
may be beyond our control.
As a result of the foregoing, we cannot assure you that we will be able to
acquire clubs in areas in which we wish to expand, that any future acquisitions
will be successfully integrated into our operations, that competition for
acquisitions will not intensify or that we will be able to complete such
acquisitions on acceptable terms and conditions. Nor can we assure you that even
if we are able to expand our business, that such expansion will be profitable
for us.
WE MAY BE UNABLE TO DEVELOP NEW GREENFIELD CLUBS--OUR FAILURE TO SUCCESSFULLY
DEVELOP AND OPERATE NEW GREENFIELD CLUBS WILL ADVERSELY IMPACT OUR GROWTH
STRATEGY.
Our growth strategy depends to a significant degree on our ability to
successfully develop and operate new greenfield club locations. The successful
development of new clubs will depend on various factors, including our ability
to:
- obtain financing;
- locate suitable sites for clubs;
- successfully negotiate lease agreements and meet construction schedules
and budgets;
- resolve zoning, permitting or other regulatory issues relating to the
construction of new clubs;
- hire, train and retain qualified personnel;
- attract new members; and
- effectively address issues raised by other factors, some or all of which
may be beyond our control.
We have historically experienced delays in new club openings associated with
zoning, permitting and other regulatory approvals. As a result, we cannot assure
you that we will be able to implement our growth strategy, open new clubs on a
timely and cost-efficient basis or operate our new clubs profitably.
WE MAY EXPERIENCE LOSSES IN OUR NEWLY OPENED GREENFIELD CLUBS--WE TYPICALLY
EXPERIENCE AN INITIAL PERIOD OF CLUB OPERATING LOSSES ON OPENINGS OF
GREENFIELD CLUBS.
We have opened a total of 14 new greenfield clubs in the last forty-six
months. Upon opening a greenfield club, we typically experience an initial
period of club operating losses. Although we pre-sell memberships, such
enrollment typically generates insufficient revenue for the club to generate
positive earnings before interest, taxes, depreciation and amortization,
extraordinary charges, cumulative effect of changes in accounting policy and
corporate overhead ("Club EBITDA"). As a result, a greenfield
8
<PAGE>
club typically generates a Club EBITDA loss in its first full year of operation
and substantially lower Club EBITDA margins in its second full year of
operations than a mature club. These Club EBITDA losses and lower Club EBITDA
margins will negatively impact our future results of operations. This negative
impact will be increased by the initial expensing of pre-opening costs which
include legal and other costs associated with lease negotiations and permitting
and zoning requirements, as well as increased depreciation and amortization
expenses, which will further negatively impact net income. A greenfield club
typically reaches mature levels in three to four years and generates positive
cash flow much sooner than positive Club EBITDA contributions due to the rent
expense deferred for several months, in accordance with GAAP. We may, at our
discretion, accelerate or expand our plans to open new greenfield clubs, which
may adversely affect results from operations temporarily.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO FINANCE ANY FURTHER OR
ACCELERATED EXPANSION--OUR INABILITY TO ACQUIRE FINANCING ON ACCEPTABLE TERMS
WOULD ADVERSELY IMPACT OUR COMPETITIVE POSITION.
The opening of greenfield clubs and the acquisition of existing clubs
requires considerable capital. Although we believe that proceeds from the
offering, together with internally generated funds and available borrowings
under our credit facility, will be sufficient to finance our current operating
and growth plans through the end of calendar 2001, any material acceleration or
expansion of that plan through additional greenfields or acquisitions, to the
extent such acquisitions include cash payments, may require us to pursue
additional sources of financing prior to the end of calendar 2001. We cannot
assure you that financing will be available or that it will be available on
acceptable terms. The inability to finance further or accelerated expansion on
acceptable terms may negatively impact our competitive position and/or
materially adversely affect our business, results of operations or financial
condition.
WE MAY BE UNABLE TO ATTRACT AND RETAIN MEMBERS--A DECLINE IN MEMBERS COULD HAVE
A NEGATIVE EFFECT ON OUR BUSINESS.
The performance of our clubs is dependent on our ability to attract and
retain members, and we cannot assure you that we will be successful in these
efforts, or that the membership levels at one or more of our clubs will not
decline. Most of our members can cancel their club membership at any time upon
30 days notice. In addition, there are numerous factors that could lead to a
decline in membership levels at established clubs or that could prevent us from
increasing our membership at newer clubs, including our reputation, our ability
to deliver quality service at a competitive cost, the presence of direct and
indirect competition in the areas in which the clubs are located, the public's
interest in sports and fitness clubs and general economic conditions. As a
result of these factors, we cannot assure you that our membership levels will be
adequate to maintain or permit the expansion of our operations. In addition, a
decline in membership levels may have a material adverse effect on our
performance, financial condition and results of operations.
WE ARE REGIONALLY CONCENTRATED--OUR GEOGRAPHIC CONCENTRATION HEIGHTENS OUR
EXPOSURE TO ADVERSE REGIONAL DEVELOPMENTS.
As of March 31, 1999, we owned and/or managed 59 clubs in the New York
metropolitan market, eight fitness clubs in the Washington, D.C. market, four
fitness clubs in the Boston market, one fitness club in the Philadelphia market
and two fitness clubs in Switzerland. Our geographic concentration in the
Northeast and Mid-Atlantic regions and, in particular, the New York area,
heightens our exposure to adverse developments related to competition, as well
as, economic and demographic changes in these regions. We cannot assure you that
our geographic concentration will not result in a material adverse effect on our
business, financial condition or results of operations in the future.
9
<PAGE>
WE MAY FACE INTENSE COMPETITION--THE HIGH LEVEL OF COMPETITION IN THE FITNESS
CLUB INDUSTRY COULD MAKE IT DIFFICULT FOR US TO GENERATE SUFFICIENT CASH FLOW
TO SERVICE OUR DEBT.
The fitness club industry is highly competitive. We compete with other
fitness clubs, physical fitness and recreational facilities established by local
governments, hospitals and businesses for their employees, amenity and
condominium clubs, the YMCA and similar organizations and, to a certain extent,
with racquet and tennis and other athletic clubs, country clubs, weight reducing
salons and the home-use fitness equipment industry. We also compete with other
entertainment and retail businesses for the discretionary income of our target
markets. We cannot assure you that we will be able to compete effectively in the
future in the markets in which we operate. Competitors, which may include
companies which are larger and have greater resources than us, may enter these
markets to our detriment. These competitive conditions may limit our ability to
increase dues without a material loss in membership, attract new members and
attract and retain qualified personnel. Additionally, consolidation in the
fitness club industry could result in increased competition among participants,
particularly large multi-facility operators that are able to compete for
attractive acquisition candidates or greenfield locations, thereby increasing
costs associated with expansion through both acquisitions, and lease negotiation
and real estate availability for greenfields. See "Business--Competition."
FUTURE CLAIMS--WE COULD BE SUBJECT TO CLAIMS RELATED TO HEALTH RISKS AT OUR
CLUBS.
Use of our clubs poses some potential health risks to members or guests
through exertion and use of our services and facilities including exercise
equipment. We cannot assure you that a claim against us for death or injury
suffered by members or their guests while exercising at a club will not be
asserted, or that we would be able to successfully defend any such claim. We
currently maintain general liability coverage, but, we cannot assure you that we
will be able to maintain such liability insurance on acceptable terms in the
future or that such insurance will provide adequate coverage against potential
claims.
WE ARE DEPENDENT ON KEY PERSONNEL--LOSS OF KEY PERSONNEL AND/OR FAILURE TO
ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL COULD MAKE IT MORE DIFFICULT FOR
US TO GENERATE CASH FLOW FROM OPERATIONS AND SERVICE OUR DEBT.
We are dependent on the continued services of our senior management team,
particularly Mark Smith, Chief Executive Officer; Robert Giardina, President and
Chief Operating Officer; Richard Pyle, Executive Vice President and Chief
Financial Officer; Alexander Alimanestianu, Executive Vice President,
Development; Deborah Smith, Senior Vice President, Operations and Leslie
Kimerling, Senior Vice President, Information Management and Planning. We
believe the loss of such key personnel could have a material adverse effect on
us and our financial performance. Currently, we do not have any long-term
employment agreements with our executive officers, and we cannot assure you that
we can attract and retain sufficient qualified personnel to meet our business
needs. See "Management--Directors and Executive Officers."
CONTROLLING SHAREHOLDERS--THE INTERESTS OF OUR CONTROLLING INTEREST HOLDERS MAY
BE IN CONFLICT WITH YOUR INTERESTS AS A HOLDER OF EXCHANGE RATES.
Bruckmann, Rosser, Sherrill & Co., L.P. and Farallon Partners, L.L.C. own
approximately 60% of our common stock and collectively have the ability to elect
a majority of the board of directors and generally to control the affairs and
policies of our company. Circumstances may occur in which the interests of
Bruckmann, Rosser, Sherrill & Co., L.P. and Farallon Partners, L.L.C., as our
shareholders, in pursuing acquisitions or otherwise, could be in conflict with
the interests of the holders of the exchange notes. See "Security Ownership and
Certain Beneficial Owners" and "Certain Relationships and Related Transactions."
10
<PAGE>
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION--FUTURE CHANGES IN GOVERNMENT
REGULATIONS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION.
Our operations and business practices are subject to federal, state and
local government regulation in the various jurisdictions in which our clubs are
located, including: (1) general rules and regulations of the Federal Trade
Commission, state and local consumer protection agencies and state statutes that
prescribe certain forms and provisions of membership contracts and which govern
the advertising, sale, financing and collection of such memberships; (2) state
and local health regulations; (3) federal regulation of health and nutritional
supplements; and (4) regulation of rehabilitation service providers. Although we
are not aware of any proposed changes in any statutes, rules or regulations, any
changes in such laws could have a material adverse effect on our financial
condition and results of operations. See "Business--Government Regulation."
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT--IF WE, OR THIRD PARTIES WITH WHICH
WE DO BUSINESS, FAIL TO COMPLY WITH YEAR 2000 REMEDIATION REQUIREMENTS, WE
COULD HAVE OPERATIONAL DIFFICULTIES THAT COULD INCREASE OUR COSTS OF DOING
BUSINESS, DECREASE OUR CASH FLOWS FROM OPERATIONS AND MAKE IT MORE DIFFICULT
FOR US TO SERVICE OUR DEBT.
We have implemented a three phase program to identify and resolve Year 2000
issues related to the integrity and reliability of our computerized information
systems, computer systems embedded in the machinery and equipment used in our
operations, as well as third party or in-house developed software. Phase one of
our program involved an assessment of Year 2000 compliance and has been
completed. In phase two of the program, we are modifying, or replacing, and
testing all non-Year 2000 compliant hardware systems. Completion of phase two is
expected by August 1999. Phase three of the program involves upgrades, or
replacement, and testing all non-Year 2000 compliant software and is also
expected to be completed by August 1999.
As of March 31, 1999, we had spent approximately $300,000 in addition to our
normal internal information technology costs in connection with our Year 2000
program. We expect to incur additional costs of $350,000 to complete phases two
and three of the program.
We have requested documentation regarding Year 2000 compliance from all of
our suppliers and service providers. As of March 31, 1999, we received
confirmations from approximately 75% indicating that they are or will be Year
2000 compliant. We expect to have further communications with those who have not
responded or have indicated further work was required to achieve Year 2000
compliance.
Among other things, our operations depend on the availability of utility
services, principally electricity and reliable performance by telecommunication
services. A substantial disruption in any of these services due to providers of
these services failing to achieve Year 2000 compliance could have a significant
adverse impact on our financial results depending on the length and severity of
the disruption.
We will complete a contingency plan for each of our principal operations by
the summer of 1999. The purpose of the contingency plan is to identify possible
alternatives which could be used in the event of a disruption in the delivery of
essential goods or services and to minimize the effect of such a disruption.
We also rely directly and indirectly on external systems of business
enterprises such as third party suppliers, creditors and financial
organizations, and of governmental entities for accurate exchange of data. Even
if our internal systems are not materially affected by the Year 2000 issue, we
could be affected by disruptions in the operation of the enterprises with which
we interact. Despite our efforts to address the Year 2000 impact on our internal
systems and business operations, we cannot assure you that such impact will not
result in a material disruption of our business or have a material adverse
effect on our business, financial condition or results of operations.
11
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the old notes on June 10, 1999, after
deducting the estimated fees and expenses in connection with the offering, are
estimated to be $35.7 million. Such proceeds will be used to fund the expansion
of our club base and for general corporate purposes. Before applying the net
proceeds to these uses, the net proceeds will be invested in short-term,
interest-bearing, investment grade marketable securities. See "Capitalization"
below for a description of the capitalization of our company as of March 31,
1999, including cash and cash equivalents.
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of March 31, 1999 and as adjusted to give effect to the
offering and the application of the proceeds. This table should be read in
conjunction with the financial statements, and the related notes, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................ $ 16,817 $ 52,552
---------- -----------
---------- -----------
Long-term debt (including current installments):
Borrowings under our credit facility(1)................................................ $ -- $ --
Senior notes(2)........................................................................ 85,000 125,000
Notes payable for acquired businesses.................................................. 4,199 4,199
Capitalized lease obligations.......................................................... 630 630
---------- -----------
Total long-term debt..................................................................... 89,829 129,829
Redeemable senior preferred stock........................................................ 38,034 38,034
Total stockholders' deficit.............................................................. (3,018) (3,018)
---------- -----------
Total capitalization................................................................... $ 124,845 $ 164,845
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Represents a commitment of up to $25.0 million, of which $23.0 million was
available as of March 31, 1999.
(2) Includes the existing notes and is adjusted to reflect the notes included in
the offering of the old notes.
12
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated statement of operations
data, other operating data, balance sheet data and club and membership data of
Town Sports as of the dates and for the periods presented. The selected
historical consolidated statement of operations data and other data for the
years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998 and the selected historical consolidated balance sheet data as of May 31,
1997, 1998 and December 31, 1998 were derived from our audited consolidated
financial statements, which are included in this prospectus. The selected
historical consolidated statement of operations data and other data for the
seven months ended December 31, 1997 and the three months ended March 31, 1998
and 1999 and the consolidated balance sheet data as of March 31, 1999 were
derived from our unaudited consolidated financial statements which are also
included in this prospectus. The selected historical consolidated statement of
operations data and other data for the twelve months ended March 31, 1999 and
the selected historical consolidated balance sheet data as of December 31, 1997,
are derived from our unaudited consolidated financial statements which are not
included in this prospectus. In our opinion, all unaudited consolidated
statement of operations data, other operations data and balance sheet data,
reflect all normal and recurring adjustments necessary to present fairly the
financial position and results of operations of such periods. The selected
historical consolidated statement of operations data and other data for the
years ended May 31, 1994 and 1995 and the selected historical consolidated
balance sheet data as of May 31, 1994, 1995 and 1996 were derived from our
audited consolidated financial statements, which are not included in this
prospectus. The club and membership data, for all periods presented, was derived
from our unaudited books and records. The information contained in this table
and accompanying notes should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes appearing elsewhere
in this prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 24,890 $ 33,349 $ 43,755 $ 56,567 $ 82,350 $ 42,990 $ 71,662
Operating expenses:
Payroll and related...................... 10,799 16,105 18,626 23,321 33,309 17,621 28,001
Club operating........................... 8,115 11,740 14,542 18,044 25,858 13,258 24,261
General and administrative............... 2,359 3,321 3,562 3,774 5,825 2,742 5,828
Depreciation and amortization............ 1,514 2,168 2,929 4,219 7,736 3,944 8,818
Compensation expense in connection with
stock options(1)....................... -- 635 1,967 5,933 1,442 397 434
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................ 2,103 (620) 2,129 1,276 8,180 5,028 4,320
Interest expense, net...................... 342 654 952 2,455 5,902 3,270 5,279
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for
income tax (benefit)................. 1,761 (1,274) 1,177 (1,179) 2,278 1,758 (959)
Provision (benefit) for income tax......... 824 (541) 628 (243) 1,131 888 (399)
Extraordinary item(2)...................... -- -- -- -- (782) (782) --
Cumulative effect of change in accounting
policy(3)................................ -- -- -- -- (88) (88) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)...................... 937 (733) 549 (936) 277 -- (560)
Accreted dividends on preferred stock...... -- (258) (400) (1,286) (2,387) (1,485) (2,146)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to
common stockholders.................. $ 937 $ (991) $ 149 $ (2,222) $ (2,110) $ (1,485) $ (2,706)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
Adjusted EBITDA(4)......................... $ 4,634 $ 3,415 $ 8,302 $ 13,048 $ 20,029 $ 10,723 $ 15,065
Adjusted EBITDA margin(4).................. 18.6% 10.2% 19.0% 23.1% 24.3% 24.9% 21.0%
Deferred lease expense(5).................. $ 1,017 $ 1,232 $ 1,277 $ 1,620 $ 2,671 $ 1,354 $ 1,493
Cash provided by (used in):
Operating activities..................... 2,839 3,283 5,695 12,302 15,733 7,193 7,393
Investing activities..................... (5,648) (7,674) (5,487) (13,571) (36,040) (12,362) (47,352)
Financing activities..................... 2,910 4,244 144 2,809 40,836 42,361 36,116
Ratio of earnings to fixed charges(6)...... 1.7x -- 1.3x -- 1.2x 1.3x --
CLUB AND MEMBERSHIP DATA:
Total clubs operated at end of period(7)... 23 25 28 35 49 40 69
Members at end of period(8)................ 38,300 48,300 54,800 78,600 125,100 99,900 169,900
Comparable club revenue increase(9)........ 10.9% 14.7% 27.3% 17.7% 26.2% 24.1% 25.5%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
LAST
THREE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------------- -------------
<S> <C> <C> <C>
1998 1999 1999
--------- --------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................................... $ 22,553 $ 36,139 $ 124,608
Operating expenses:
Payroll and related........................................................ 8,822 13,790 48,657
Club operating............................................................. 6,958 12,532 42,435
General and administrative................................................. 1,689 2,261 9,483
Depreciation and amortization.............................................. 2,138 4,629 15,101
Compensation expense in connection with stock options(1)................... 184 190 1,485
--------- --------- -------------
Operating income......................................................... 2,762 2,737 7,447
Interest expense, net........................................................ 1,769 1,918 8,060
--------- --------- -------------
Income (loss) before provision for income tax (benefit).................. 993 819 (613)
Provision (benefit) for income tax........................................... 465 395 (226)
Extraordinary item(2)........................................................ -- -- --
Cumulative effect of change in accounting policy(3).......................... -- -- --
--------- --------- -------------
Net income (loss)........................................................ 528 424 (387)
Accreted dividends on preferred stock........................................ (627) (1,933) (4,354)
--------- --------- -------------
Net (loss) attributable to common stockholders............................... $ (99) $ (1,509) $(4,741)
--------- --------- -------------
--------- --------- -------------
OTHER DATA:
Adjusted EBITDA(4)........................................................... $ 5,799 $ 8,489 $ 27,061
Adjusted EBITDA margin(4).................................................... 25.7% 23.5% 21.7%
Deferred lease expense(5).................................................... $ 715 $ 933 $ 3,028
Cash provided by (used in):
Operating activities....................................................... 5,475 10,521 20,979
Investing activities....................................................... (8,969) (12,462) (74,523 )
Financing activities....................................................... (712) (396) 34,907
Ratio of earnings to fixed charges(6)........................................ 1.2x 1.1x --
CLUB AND MEMBERSHIP DATA:
Total clubs operated at end of period(7)..................................... 43 74 74
Members at end of period(8).................................................. 102,500 183,700 183,700
Comparable club revenue increase(9).......................................... 14.0% 18.3% 17.3%
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MAY 31, AS OF DECEMBER 31, MARCH 31,
------------------------------------------------------ ---------------------- ----------
1994 1995 1996 1997 1998 1997 1998 1999
--------- --------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................ $ (1,219) $ (2,329) $ (4,048) $ (8,436) $ 5,898 $ 26,772 $ 478 $ (9,623)
Total assets................... 18,421 27,274 34,805 52,923 111,977 104,948 157,416 168,227
Long-term debt, including
current installments......... 10,205 10,430 10,453 41,071 88,289 89,368 89,524 89,829
Redeemable senior preferred
stock........................ -- -- -- -- -- -- 36,735 38,034
Stockholders' equity
(accumulated deficit)........ $ 2,343 $ 1,987 $ 5,474 $ (6,951) $ (5,107) $ (6,342) $ (2,333) $ (3,018)
</TABLE>
15
<PAGE>
- ------------------------
(1) Represents non-cash charges related to the vesting of some stock options
issued to management and the accretion of preferred dividends related to
preferred stock underlying some of these options.
(2) Reflects the write-off of previously capitalized fees and expenses of
$782,000, net of taxes of $624,000, related to the repayment of certain
indebtedness. See Note 15 to our consolidated financial statements.
(3) Prior to fiscal 1998, we capitalized the direct costs incurred to obtain
leases for new clubs we constructed. During the quarter ended May 31, 1998,
we adopted the provisions of Statement of Position 98-5, REPORTING ON THE
COSTS OF START-UP ACTIVITIES, which requires that these costs be expensed as
incurred. In connection with the adoption of Statement of Position 98-5 we,
effective June 1, 1997, recorded a pre-tax charge of $88,000, net of $70,000
in taxes, as the cumulative effect of this accounting change. See Note 2(n)
to our consolidated financial statements.
(4) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, deferred lease expense, compensation expense in connection
with stock options, extraordinary charges and cumulative effect of changes
in accounting policy. Adjusted EBITDA is presented because we believe it
provides useful information regarding our ability to incur and/or service
debt. Adjusted EBITDA should not be considered in isolation or as a
substitute for net income, cash flows, or other consolidated income or cash
flow data prepared in accordance with GAAP or as a measure of our
profitability or liquidity. Adjusted EBITDA margin is defined as adjusted
EBITDA as a percentage of revenues.
(5) Deferred lease expense reflects the difference between accrued rent expense
in accordance with GAAP and cash rent expense actually paid in a given
period, which difference is typically positive in the early years of a lease
and negative in the later years of a lease.
(6) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income before provision for corporate income taxes and
fixed charges. "Fixed charges" consist of interest expense, which includes
the amortization of deferred debt issuance costs and the interest portion of
our rent expense, assumed to be one third of rent expense. For the years
ended May 31, 1995 and 1997, the seven months ended December 31, 1998 and
the last twelve months ended March 31, 1999, earnings were insufficient to
cover fixed charges by $1.5 million, $1.3 million, $1.3 million and $1.2
million, respectively.
(7) Includes all clubs whether wholly-owned or managed.
(8) Represents members at wholly-owned clubs only.
(9) We define comparable clubs as those clubs operated by us for at least 13
full months.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA," AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INCLUDE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. THE
FOLLOWING DISCUSSION MAKES REFERENCE TO ADJUSTED EBITDA WHICH IS DEFINED AS
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, DEFERRED LEASE
EXPENSE, COMPENSATION EXPENSE IN CONNECTION WITH STOCK OPTIONS, EXTRAORDINARY
CHARGES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING POLICY. INVESTORS SHOULD
BE AWARE THAT THE ITEMS EXCLUDED FROM THE CALCULATION OF ADJUSTED EBITDA, SUCH
AS DEPRECIATION AND AMORTIZATION, ARE SIGNIFICANT COMPONENTS IN AN ACCURATE
ASSESSMENT OF OUR FINANCIAL PERFORMANCE. ADJUSTED EBITDA IS PRESENTED BECAUSE
MANAGEMENT BELIEVES IT PROVIDES USEFUL INFORMATION REGARDING OUR ABILITY TO
INCUR AND/OR SERVICE DEBT. ADJUSTED EBITDA SHOULD NOT BE CONSIDERED IN ISOLATION
OR AS A SUBSTITUTE FOR NET INCOME, CASH FLOWS, OR OTHER CONSOLIDATED INCOME OR
CASH FLOW DATA PREPARED IN ACCORDANCE WITH GAAP OR AS A MEASURE OF A COMPANY'S
PROFITABILITY OR LIQUIDITY. ADDITIONALLY, INVESTORS SHOULD BE AWARE THAT
ADJUSTED EBITDA MAY NOT BE COMPARABLE TO SIMILARLY TITLED MEASURES PRESENTED BY
OTHER COMPANIES.
CHANGE OF FINANCIAL REPORTING PERIOD
We changed our fiscal year end from May 31 to December 31, which resulted in
a transition period of seven months ended December 31, 1998. The decision to
change the fiscal year was made for more convenience in both internal and
external communications. To aid comparative analysis, we have elected to present
the results of operations for the three months ended March 31, 1998 and 1999,
the seven month periods ended December 31, 1998 and 1997, along with the
previously reported results of operations for the fiscal years ended May 31,
1998 and 1997.
HISTORICAL CLUB GROWTH
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Clubs at beginning of period..................... 20 23 25 28 35
Greenfield clubs................................. 4 2 2 3 1
Acquired clubs................................... -- -- 1 5 13
Sold or relocated clubs.......................... (1) -- -- (1) --
-- -- -- -- --
Clubs at end of period........................... 23 25 28 35 49
-- -- -- -- --
-- -- -- -- --
Number of managed clubs included at the end of
period......................................... 7 5 5 7 4
<CAPTION>
SEVEN MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- -----------------
1998 1999
----------------- -----------------
<S> <C> <C>
Clubs at beginning of period..................... 49 69
Greenfield clubs................................. 4 4
Acquired clubs................................... 16 2
Sold or relocated clubs.......................... -- (1)
-- --
Clubs at end of period........................... 69 74
-- --
-- --
Number of managed clubs included at the end of
period......................................... 4 4
</TABLE>
INTRODUCTION
Our revenues are principally a function of the number of clubs in service
and the number of total members. As of March 31, 1999, we operated 74 clubs, of
which 70 were wholly-owned and consolidated for reporting purposes. Our clubs
collectively served in excess of 192,000 members, of which 184,000 were members
at wholly-owned and consolidated clubs. For the twelve months ended March 31,
1999, we generated approximately 80.1% of our revenue from membership dues,
approximately 7.1% of our revenue from one-time initiation fees and
approximately 12.8% from other sources of revenue, including management fees and
ancillary services. In no event are membership revenues recognized before
receipt of the underlying cash payment. Initiation fees, which are paid at
17
<PAGE>
the inception of a membership contract, are recognized on a pro rata basis over
the estimated period of the membership, currently 24 months. Initiation fees are
matched against sales commissions and other expenses incurred in deriving the
new membership sale. Dues and value-added service revenues are recognized as
income on a pro-rata basis over the period in which the services are provided.
We believe our emphasis on affordable monthly dues and the use of our electronic
funds transfer system provides us with stable and predictable cash flows and
makes us less dependent on new membership sales than certain of our competitors.
Our operating and selling expenses are comprised of both fixed and variable
costs. The fixed costs tend to include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commissions, advertising and supplies. As clubs mature and increase their
membership base, fixed costs are typically spread over an increasing revenue
base and operating margins tend to increase.
During the last several years, we have increased revenues and adjusted
EBITDA by expanding our club base in the New York, Washington, DC, Boston and
Philadelphia metropolitan areas. As a result of our expanding club base and
relatively fixed nature of our operating costs, our adjusted EBITDA has
increased from $3.4 million in fiscal 1995 to $27.1 million for the twelve month
period ended March 31, 1999, and adjusted EBITDA as a percentage of revenues has
more than doubled from 10.2% to 21.7% over the same period. At the same time net
loss decreased from $0.7 million for the year ended May 31, 1995 to $0.4 million
for the twelve months ended March 31, 1999. We expect the strong growth in
revenues, adjusted EBITDA and net income to continue as the 43 clubs opened or
acquired since the beginning of fiscal 1998 continue to mature. Based on our
historical experience, a new club tends to experience a significant increase in
revenues during its first three years of operation as it reaches maturity.
Because there is relatively little incremental cost associated with such
increasing revenue, there is a greater proportionate increase in profitability.
We believe that the revenues, adjusted EBITDA, before corporate overhead, and
operating income, before corporate overhead, of these 43 clubs will increase as
they mature. As a result of our accelerated expansion program, however, we
expect, adjusted EBITDA and operating income margins to be negatively impacted
in the near term, as further new clubs are added.
In addition, our goal is to strengthen our market position in the Northeast
and Mid-Atlantic regions and increase revenues and cash flow through the opening
of new clubs and the acquisition of existing clubs. As of March 31, 1999, we had
identified over 125 locations in our targeted markets which we believe possess
the criteria for a model club. We have opened or acquired 11 clubs since January
1, 1999 and expect to open or acquire at least an additional 7 clubs by the end
of calendar 1999.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
SEVEN MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED MAY 31, DECEMBER 31, MARCH 31,
--------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998 1998 1999
----- ----- ----- ----- ----- ----- -----
Revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Payroll and related................... 42.6 41.2 40.4 41.0 39.1 39.1 38.2
Club operating........................ 33.2 31.9 31.4 30.8 33.9 30.9 34.6
General and administrative............ 8.1 6.7 7.1 6.4 8.1 7.5 6.3
Depreciation and amortization......... 6.7 7.5 9.4 9.2 12.3 9.5 12.8
Compensation expense in connection
with stock options.................. 4.5 10.5 1.8 0.9 0.6 0.8 0.5
----- ----- ----- ----- ----- ----- -----
Operating income........................ 4.9 2.2 9.9 11.7 6.0 12.2 7.6
Interest expense, net of interest
income................................. 2.2 4.3 7.2 7.6 7.3 7.8 5.3
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income tax (benefit)................ 2.7 (2.1) 2.7 4.1 (1.3) 4.4 2.3
Provision for income tax (benefit)...... 1.4 (0.4) 1.4 2.1 (0.5) 2.1 1.1
Extraordinary item...................... -- -- (0.9) (1.8) -- -- --
Cumulative effect of change in
accounting policy...................... -- -- (0.1) (0.2) -- -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)..................... 1.3 (1.7) 0.3 0.0 (0.8) 2.3 1.2
Accreted dividends on preferred stock... 0.9 2.2 2.9 3.4 3.0 2.8 5.4
----- ----- ----- ----- ----- ----- -----
Net income (loss) attributable to
common stockholders................. 0.4% (3.9)% (2.6)% (3.4)% (3.8)% (0.5)% (4.2)%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues increased approximately $13.6 million, or 60.2%, to
$36.1 million during the quarter ended March 31, 1999 from $22.6 million in the
quarter ended March 31, 1998. This increase resulted primarily from the
continuing maturation of the 30 clubs opened or acquired during calendar 1998,
approximately $9.7 million, and the six clubs opened or acquired in the first
quarter of 1999, approximately $700,000. In addition, revenues increased during
the quarter by $3.2 million at mature clubs resulting from increased membership.
OPERATING EXPENSES. Operating expenses increased $13.6 million, or 68.8%,
to $33.4 million in the quarter ended March 31, 1999, from $19.8 million in the
quarter ended March 31, 1998. The increase was primarily due to a 75.0% increase
in total months of club operations, which is the aggregate number of full months
of operation during a given period for the clubs open at the end of such period,
to 200 in the quarter ended March 31, 1999 from 114 in the quarter ended March
31, 1998, in addition to the following factors:
Payroll and related increased by $5.0 million, or 56.3%, to $13.8
million in the quarter ended March 31, 1999, from $8.8 million in the
quarter ended March 31, 1998. This increase was attributable to the
acquisition or opening of 30 clubs in 1998 and six clubs in the first
quarter of 1999.
Club operating increased by $5.6 million, or 80.1%, to $12.5 million in
the quarter ended March 31, 1999, from $7.0 million, in the quarter ended
March 31, 1998. This increase is
19
<PAGE>
attributable to the acquisition or opening of 30 clubs in 1998 and six clubs
in the first quarter of 1999.
General and administrative increased by $600,000, or 33.9%, to $2.3
million in the quarter ended March 31, 1999, from $1.7 million, in the
quarter ended March 31, 1998. This increase is attributable to expenses
associated with our expansion, including the expansion of our corporate
office and upgrade of our management information systems. In March 1999 we
moved our membership billing processing center to a purpose-built location
separated from our corporate office.
Depreciation and amortization increased by $2.5 million, or 116.5%, to
$4.6 million in the quarter ended March 31, 1999, from $2.1 million in the
quarter ended March 31, 1998. This increase is attributable primarily to a
full period of depreciation and amortization for fixed asset additions,
acquisitions or openings since the quarter ended March 31, 1998 and the
increased fixed and intangible assets arising out of new club acquisitions
and openings during the first quarter of 1999.
Compensation expense in connection with stock options increased $6,000,
or 3.3%, to $190,000 for the quarter ended March 31, 1999 from $184,000 in
the quarter ended March 31, 1998 and relates to preferred stock options.
INTEREST EXPENSE. Interest expense decreased $100,000 to $2.2 million
during the quarter ended March 31, 1999, from $2.3 million in the quarter ended
March 31, 1998. This decrease was primarily due to reduced borrowings
attributable to operations as we capitalized interest in connection with various
construction projects.
INTEREST INCOME. Interest income decreased $249,000 to $250,000 during the
quarter ended March 31, 1999 from $499,000 in the quarter ended March 31, 1998.
The decreased level of interest income was primarily due to lower cash on hand
as we invested in acquisitions and new club construction.
PROVISION FOR INCOME TAX. The income tax provision for the quarter ended
March 31, 1999 was $395,000 compared to a tax provision of $465,000 for the
quarter ended March 31, 1998.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $1.3 million to $1.9 million during the quarter ended March 31,
1999, from $627,000 in the quarter ended March 31, 1998. This increase is
primarily a result of the accreted dividends on the redeemable senior preferred
stock which was issued in November 1998.
SEVEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SEVEN MONTHS ENDED DECEMBER 31,
1997
REVENUES. Revenues increased approximately $28.7 million, or 66.7%, to
$71.7 million during the seven months ended December 31, 1998 from $43.0 million
in the seven months ended December 31, 1997. This increase resulted primarily
from maturation of the 17 clubs opened or acquired during fiscal 1998 of
approximately $13.2 million, and the 20 clubs opened or acquired during the
seven months ended December 31, 1998 of approximately $8.0 million. In addition,
revenues increased during the period by $7.1 million at our mature clubs
resulting from increased membership and non membership revenues such as private
training.
OPERATING EXPENSES. Operating expenses increased $29.3 million, or 77.4%,
to $67.3 million in the seven months ended December 31, 1998, from $38.0 million
in the seven months ended December 31, 1997. The increase was primarily due to
an 89.5% increase in total months of club operations to 417 in the seven months
ended December 31, 1998 from 220 in the seven months ended December 31, 1997, as
highlighted by the following factors:
20
<PAGE>
Payroll and related increased by $10.4 million, or 58.9%, to $28.0
million in the seven months ended December 31, 1998, from $17.6 million in
the seven months ended December 31, 1997. This increase was attributable to
the acquisition or opening of 17 clubs in fiscal 1998 and 20 clubs during
the seven month period ended December 31, 1998.
Club operating increased by $11.0 million, or 83.0%, to $24.3 million in
the seven months ended December 31, 1998, from $13.3 million in the seven
months ended December 31, 1997. This increase is attributable to the
acquisition or opening of 17 clubs in fiscal 1998 and 20 clubs during the
seven month period ended December 31, 1998.
General and administrative increased by $3.1 million, or 112.5%, to $5.8
million in the seven months ended December 31, 1998, from $2.7 million, in
the seven months ended December 31, 1997. This increase is attributable to
expenses associated with our expansion, including the expansion of our
corporate office and upgrade of our management information systems. In
addition we wrote off $169,000 of expenses associated with the preparation
for an initial public offering, which has been postponed due to market
conditions.
Depreciation and amortization increased by $4.9 million, or 123.6%, to
$8.8 million in the seven months ended December 31, 1998, from $3.9 million
in the seven months ended December 31, 1997. This increase is attributable
primarily to the increased fixed and intangible assets arising out of new
club acquisitions and openings during the seven months ended December 31,
1998, and depreciation and amortization for fixed asset additions,
acquisitions or openings since December 31, 1997. Fixed and intangible
assets acquired during the last five months ended May 31, 1998 totaled $12.6
million and $9.8 million, respectively. Fixed and intangible assets acquired
during the seven months ended December 31, 1998 totaled $33.0 million and
$20.7 million respectively.
Compensation expense in connection with stock options increased $37,000,
or 9.3%, to $434,000 in the seven months ended December 31, 1998, from
$397,000 in the seven months ended December 31, 1997, as a result of a
compounding feature in the calculation of dividends on the Preferred stock
options.
INTEREST EXPENSE. Interest expense increased $1.8 million to $5.6 million
during the seven months ended December 31, 1998, from $3.8 million in the seven
months ended December 31, 1997. The increased level of interest expense was
primarily due to a full period of interest related to the Senior Notes drawn
down in October 1997, as well as drawings under the line of credit to fund
certain acquisitions during 1998.
INTEREST INCOME. Interest income decreased $254,000 to $272,000 during the
seven months ended December 31, 1998, from $526,000 in the seven months ended
December 31, 1997. The decreased level of interest income was primarily due to
lower cash on hand as we invested in acquisitions and new club construction.
PROVISION (BENEFIT) FOR INCOME TAX. The income tax benefit for the seven
months ended December 31, 1998 was $399,000 compared to a tax expense of
$888,000 for the seven months ended December 31, 1997. During the seven months
ended December 31, 1998, our effective tax rate was impacted by net operating
losses incurred by certain clubs located in states where such losses could not
currently be utilized and higher tax-exempt interest income.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5, ACCOUNTING FOR THE COSTS OF START-UP ACTIVITIES, we have expensed
all organizational costs capitalized in previous fiscal years. Accordingly,
$158,000 was written off, $88,000 net of a tax effect of $70,000
EXTRAORDINARY ITEM. During the seven months ended December 31, 1997, we
issued 9 3/4% Senior Notes due 2004 in accordance with which we repaid our
existing indebtedness. Accordingly, previously
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capitalized fees and expenses of $1.4 million relating to the former debt were
written off, $782,000 net of a tax effect of $624,000.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $0.6 million to $2.1 million in the seven months ended December
31, 1998, from $1.5 million in the seven months ended December 31, 1997. This
increase is a result of a compounding feature in the calculation of the
accretion of dividends on the Series A and B preferred stock, as well as
dividends subsequent to the issuance of redeemable senior preferred stock.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
REVENUES. Revenues increased approximately $25.8 million, or 45.6%, to
$82.4 million during fiscal 1998 from $56.6 million in fiscal 1997. This
increase resulted from the maturation of three clubs opened or acquired during
fiscal 1996 of approximately $3.0 million, the six clubs opened or acquired
during fiscal 1997 of approximately $8.1 million, and 17 clubs opened or
acquired during fiscal 1998 of approximately $10.1 million. In addition,
revenues increased during fiscal 1998 by $4.2 million at our mature clubs.
OPERATING EXPENSES. Operating expenses increased $18.9 million, or 34.1%,
to $74.2 million in fiscal 1998 from $55.3 million in fiscal 1997. This increase
was primarily due to a 40.4% increase in total club months to 417 in fiscal 1997
from 297 in fiscal 1996, as highlighted by the following factors:
Payroll and related increased by $10.0 million, or 42.8%, to $33.3
million in fiscal 1998, from $23.3 million in fiscal 1997. This increase was
attributable to the acquisition or opening of 17 clubs in fiscal 1998 and a
full year of operating the six clubs opened or acquired in fiscal 1997.
Club operating increased by $7.9 million, or 43.3%, to $25.9 million in
fiscal 1998, from $18.0 million in fiscal 1997. This increase is
attributable to the acquisition or opening of 17 clubs in fiscal 1998 and
the additional expenses attributable to operating the six clubs opened or
acquired in fiscal 1997.
General and administrative increased by $2.0 million, or 54.3%, to $5.8
million in fiscal 1998, from $3.8 million. This increase is attributable to
associated expenses as a result of our expansion, such as the expansion of
our corporate office, the change in accounting policy to expense certain
organizational costs in the period in which they are incurred rather than
capitalizing them.
Depreciation and amortization increased by $3.5 million, or 83.4%, to
$7.7 million in fiscal 1998, from $4.2 million in fiscal 1997. This increase
is attributable primarily to increased fixed assets and intangible assets
arising out of new club acquisitions and openings during fiscal 1998, and a
full year of depreciation and amortization for fixed asset additions,
acquisitions or openings during fiscal 1997. Intangible assets acquired in
fiscal 1997 and 1998 totaled $1.7 million and $14.5 million, respectively.
Compensation expense in connection with stock options decreased by $4.5
million, or 75.7%, to $1.4 million in fiscal 1998, from $5.9 million in
fiscal 1997. In 1997, this expense was attributable to the adjustment of our
company's stock options to fair market value in connection with the
Recapitalization.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense, net of interest
income, increased $3.4 million to $5.9 million during fiscal 1998 from $2.5
million in fiscal 1997. The increased level of interest expense was primarily
due to the issuance of the Senior Notes. See Note 6 to the Consolidated
Financial Statements.
PROVISION FOR INCOME TAX (BENEFIT). The income tax provision for fiscal
1998 was $1.1 million compared to a tax benefit of $243,000 for fiscal 1997. For
fiscal 1998, our effective tax rate was
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negatively impacted by high state and local tax rates combined with a tax rate
change. In fiscal 1997, the income tax benefit was reduced by adjustments to
expected tax refunds reduced in part by the reversal of a valuation allowance on
state net operating losses carryforward, which was no longer needed.
EXTRAORDINARY ITEM. During fiscal 1998, we issued 9 3/4% Senior Notes due
2004 after which we repaid certain of our existing indebtedness. Accordingly,
previously capitalized fees and expenses of $1.4 million relating to the former
debt were written off, $782,000 net of a tax effect of $624,000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
AICPA Statement of Position 98-5, ACCOUNTING FOR THE COSTS OF START-UP
ACTIVITIES, we have expensed all organizational costs capitalized in previous
fiscal years. Accordingly, $158,000 was written off, $88,000 net of a tax effect
of $70,000.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $1.1 million to $2.4 million during fiscal 1998, from $1.3
million in fiscal 1997. This increase is the result of the preferred stock being
outstanding for a full year in 1998 and for only five months in 1997.
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
REVENUES. Revenues increased $12.8 million, or 29.3%, to $56.6 million
during fiscal 1997 from $43.8 million in fiscal 1996. This increase resulted
from the maturation of four clubs opened or acquired during fiscal 1995 of
approximately $2.8 million, the three clubs opened or acquired in fiscal 1996 of
approximately $4.3 million, and the six clubs opened or acquired in fiscal 1997
of approximately $3.7 million. In addition, revenues increased during fiscal
1997 due to revenue growth at our mature clubs resulting from membership growth
of approximately $2.1 million.
OPERATING EXPENSES. Operating expenses increased $13.7 million, or 32.8%,
to $55.3 million in fiscal 1997, from $41.6 million in fiscal 1996. This
increase was primarily due to a 16.5% increase in total club months to 297 in
fiscal 1996 from 255 in fiscal 1995, as highlighted by the following factors:
Payroll and related increased by $4.7 million, or 25.2%, to $23.3
million in fiscal 1997, from $18.6 million in fiscal 1996. This increase was
attributable to the acquisition or opening of six clubs in fiscal 1997 and a
full year of operating the three clubs opened or acquired in fiscal 1996.
Club operating increased by $3.5 million, or 24.1%, to $18.0 million in
fiscal 1997, from $14.5 million in fiscal 1996. This increase is
attributable to the acquisition or opening of six clubs in fiscal 1997 and
the additional expenses attributable to operating three clubs that we opened
or acquired in fiscal 1996.
General and administrative increased by $212,000, or 6.0%, to $3.8
million in fiscal 1997, from $3.6 million in fiscal 1996.
Depreciation and amortization increased by $1.3 million, or 44.0%, to
$4.2 million in fiscal 1997, from $2.9 million in fiscal 1996. This increase
is attributable to the increased fixed assets placed in service and
intangible assets acquired arising out of acquisition or opening of new
clubs.
Compensation expense in connection with stock options increased by $3.9
million, or 201.6%, to $5.9 million in fiscal 1997, from $2.0 million in
fiscal 1996. In 1997, this expense was attributable to the adjustment of our
stock options to fair market value in connection with the Recapitalization.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense, net of interest
income, increased $1.5 million to $2.5 million in fiscal 1997 from $1.0 million
in fiscal 1996, primarily as a result of increased indebtedness due to the
Recapitalization during this period.
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PROVISION FOR INCOME TAX (BENEFIT). Provision for income tax (benefit)
changed by $871,000 to a benefit of $243,000 in fiscal 1997 from an expense of
$628,000 in fiscal 1996, as a result of the loss after interest expense in
fiscal 1997. Our effective tax rate in fiscal 1996 was negatively impacted by
losses at certain of our clubs, incurred in states where the net operating loss
could not be currently utilized. In fiscal 1997, the income tax benefit was
reduced by adjustments to expected tax refunds partially offset by a reduction
in the valuation allowance for the deferred tax assets.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $886,000 to $1.3 million during fiscal 1997, from $400,000 in
fiscal 1996. This increase reflects the issuance of the preferred stock in
connection with the recapitalization and redemption of formerly existing
preferred stock.
RECENT DEVELOPMENTS
From March 31, 1999 to April 30, 1999 our working capital deficit increased
from $9.6 million to $13.7 million or $4.1 million. This increase is principally
due to capital expenditures made over the period.
From March 31, 1999 to April 30, 1999 our Series A Preferred Stock and
Series B Preferred Stock increased from $21.1 million and $185,000 to $21.3
million and $187,000, respectively. These increases are due to the accretion of
dividends over the respective period.
From March 31, 1999 to April 30, 1999 our stockholders' deficit increased
from $3.0 million to $3.4 million or $400,000 principally due to the accretion
of redeemable senior stock dividends.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity needs through cash from
operations and various borrowing arrangements. Principal liquidity needs have
included the acquisition and development of new clubs, debt service requirements
and other capital expenditures necessary to maintain existing clubs.
OPERATING ACTIVITIES. Net cash provided by operating activities for the
quarter ended March 31, 1999 was $10.5 million compared to $5.5 million for the
quarter ended March 31, 1998, an increase of $5.0 million. Clubs opened prior to
1998 contributed to an increase in cash flow contribution of approximately $2.6
million. The balance of the increase is principally due to an increase in our
working capital deficit. Excluding cash and cash equivalents, we normally
operate with a working capital deficit because we receive dues or fees revenue
either (1) during the month services are rendered, or (2) when paid-in-full, 12
months in advance. As a result, we have no material accounts receivable. In
addition, because initiation fees are received at enrollment and are recognized
over the estimated average term of membership, we record a deferred revenue
liability. We believe that our working capital deficit is an important source of
cash flow from operating activities and that it will continue to grow as our
membership revenues increase.
INVESTING ACTIVITIES. We invested $11.4 million and $1.1 million in capital
expenditures and business acquisitions, respectively during the quarter ended
March 31, 1999. We currently estimate total capital expenditure and asset
acquisition requirements for the remaining three quarters of 1999 to approximate
$37.0 million. This includes $23.0 million related to new club openings and
acquisitions, $8.4 million used to renovate and expand certain existing clubs,
$4.1 million to maintain certain existing clubs and $1.5 million to further
upgrade our management information systems. These expenditures will be funded by
cash flow generated from operations, available cash and our credit facility.
FINANCING ACTIVITIES. We have a credit facility with our principal bank for
direct borrowings and letters of credit of up to $25.0 million. The credit
facility contains restrictive covenants, including a
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leverage ratio and interest coverage ratio and dividend payment restrictions and
is collateralized by all our assets. As of March 31, 1999, we had approximately
$23.0 million available under the credit facility, which matures in October
2002, and has no scheduled amortization requirements.
In November 1998, we sold $40.0 million of redeemable senior preferred
stock. After payment of fees and expenses of approximately $400,000 we received
net proceeds of $39.6 million. The senior stock is redeemable in November 2008,
and carries a cumulative 12% annual dividend which is added to the liquidation
value of such preferred shares, if not paid in cash, at our option.
Although we believe that we will be able to obtain or generate sufficient
funds to finance our current operating and growth plans for the next twelve
months, any material acceleration or expansion of that plan through additional
greenfields or acquisitions, to the extent such acquisitions include cash
payments, may require us to pursue additional sources of financing prior to the
end of 1999. We cannot assure you that such financing will be available or that
it will be available on acceptable terms. The inability to finance such further
or accelerated expansion on acceptable terms may negatively impact our
competitive position and or materially adversely affect our business, results of
operations or financial condition.
EFFECT OF RECENT CHANGES IN ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
Statement No. 133 is effective for fiscal years beginning after June 15, 1999.
Based on current estimates, management does not believe that Statement No.
133 will have a material effect on our financial statements.
INFLATION
We believe that inflation has not had a material impact on our results of
operations for the three year and seven month period ended December 31, 1998.
YEAR 2000 COMPLIANCE
We have implemented a three phase program to identify and resolve Year 2000
issues related to the integrity and reliability of our computerized information
systems, computer systems embedded in the machinery and equipment used in its
operations, as well as third party or in-house developed software. Phase one of
our program involved an assessment of Year 2000 compliance and has been
completed. In phase two of the program, we are modifying, or replacing, and
testing all non-Year 2000 compliant hardware systems. Completion of phase two is
expected by August 1999. Phase three of the program involves upgrades, or
replacement, and testing all non-Year 2000 compliant software and is also
expected to be completed by August 1999.
As of March 31, 1999 we spent approximately $300,000 in addition to our
normal internal information technology costs in connection with our Year 2000
program. We expect to incur additional costs of $350,000 to complete phases two
and three of the program.
We requested documentation regarding Year 2000 compliance from all of its
suppliers and service providers. As of March 31, 1999, our company received
confirmations from approximately 75% indicating that they are or will be Year
2000 compliant. We expect to have further communications with those who have not
responded or have indicated further work was required to achieve Year 2000
compliance.
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Among other things, our operations depend on the availability of utility
services, principally electricity and reliable performance by telecommunication
services. A substantial disruption in any of these services due to providers of
these services failing to achieve Year 2000 compliance could have a significant
adverse impact on our financial results depending on the length and severity of
the disruption.
We will complete a contingency plan for each of our principal operations by
the summer of 1999. The purpose of the contingency plan is to identify possible
alternatives which could be used in the event of a disruption in the delivery of
essential goods or services and to minimize the effect of such a disruption.
Despite our efforts to address the Year 2000 impact on our internal systems
and business operations, we cannot assure you that such impact will not result
in a material disruption of our business or have a material adverse effect on
our business, financial condition or results of operations.
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BUSINESS
GENERAL
We are one of two leading owners and operators of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States. Our goal is to develop
the premier health club network in each of the major metropolitan regions we
enter. We employ a regional clustering strategy providing members access to
clubs near both their work and home for a single membership fee. This strategy
allows us to maximize revenues by charging members slightly higher monthly dues
for the ability to use more than one club in the chain and to attract and retain
members by offering greater convenience and a broader range of facilities and
services than our smaller competitors. As of March 31, 1999, approximately half
of our members participated in a passport membership plan that allows unlimited
access to all of our clubs for a higher membership fee. In addition, our
emphasis on monthly dues and use of our electronic funds transfer system allows
us to generate stable and predictable cash flows and makes us less dependent on
new membership sales and price discounting than certain of our competitors.
Approximately 86% of our members pay their monthly dues through our electronic
funds transfer system, accounting for more than 70% of monthly revenues.
We have executed this strategy successfully in the New York region through
the network of clubs we operate under our New York Sports Clubs brand name. As
of March 31, 1999, we were the largest fitness club operator in Manhattan with
23 locations and operated a total of 59 clubs under the New York Sports Clubs
name within a defined radius of New York City. We are in the process of more
fully developing clusters within a smaller radius surrounding Washington, DC
under our Washington Sports Clubs brand name and have begun establishing similar
clusters surrounding Boston and Philadelphia under our Boston Sports Clubs and
Philadelphia Sports Clubs brand names, respectively. We employ localized brand
names for our clubs to create an image and atmosphere consistent with the local
community, and to foster the recognition as a local network of quality fitness
clubs rather than a national chain.
Over our 25-year operating history, we have developed and refined a model
club format that allows us to cost effectively construct and more efficiently
operate our fitness clubs. Our model club is 15,000 to 25,000 square feet and
features a wide variety of state-of-the-art cardiovascular and strength-training
equipment, as well as exercise studios offering extensive group fitness
programs. Many clubs also feature additional amenities, including swimming
pools, squash or tennis courts and physical therapy centers. We offer members a
variety of other value-added services for which we receive additional fees,
including personal training and child care. Our target member is
college-educated, typically between the ages of 20 and 44 and earns an annual
income of approximately $50,000.
We have experienced significant growth over the past several years through a
combination of:
- acquiring existing, privately owned, single and multi-club businesses; and
- developing and opening "greenfield" club locations.
From June 1, 1994 to March 31, 1999, we acquired 37 existing clubs, opened
16 greenfield clubs, and relocated two clubs to increase our total clubs under
operation from 23 to 74. We plan to acquire or open at least 12 more clubs prior
to December 31, 1999. We increased our revenue during the same period from $33.3
million to $124.6 million. This growth has been driven not only by the addition
of acquired and greenfield club locations, but also through comparable club
revenue growth, which has ranged from 14.7% to 27.3% for the four year and ten
month period ended December 31, 1998 and was 17.3% for the twelve months ended
March 31, 1999. Based on our historical experience, a new club tends to achieve
significant increases in revenues during its first three years of operation as
it reaches maturity. Because clubs experience little incremental cost associated
with such revenue increases, we realize a greater proportionate increase in
profitability. This operating leverage has
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allowed us to achieve adjusted EBITDA growth and operating income growth from
fiscal 1997 to the twelve month period ended March 31, 1999 of 48.9% and 161.7%,
respectively.
Our model club ranges in size from approximately 15,000 to 25,000 square
feet and averages approximately 21,000 square feet. Clubs typically have an open
space to accommodate cardiovascular and strength-training exercise, as well as
special purpose rooms to accommodate aerobic class instruction and other
exercise programs. Locker rooms generally include a sauna and steam room. We
provide a broad array of high quality exercise programs and equipment that is
both popular and effective, while reinforcing the quality exercise experience we
strive to make available to our members. While we do not generally build
locations with amenities such as swimming pools or racquet and basketball
courts, we do strive to establish at least one flagship club that has such
amenities in each of our markets. We believe that it is generally more
economical to acquire clubs with such amenities than to develop them as
greenfield clubs.
We engage in a detailed site analysis and selection process based upon
information provided by our proprietary development software to identify
potential target areas for additional clubs based upon population demographics,
traffic and commuting patterns, availability of sites and competitive market
information. In addition to our existing 74 clubs under operation as of March
31, 1999 and the 16 sites for which we had entered into lease commitments We
have identified over 125 locations in our targeted markets which we believe
possess the criteria for a model club.
Our company possesses an experienced management team, the top five
executives of which have been working together at Town Sports since 1990. We
believe that it has the depth, experience and motivation to manage our internal
and external growth, and that we have put in place the infrastructure and
systems to manage effectively our planned expansion for the next three years. We
believe that the presence of such infrastructure will enable us over time to
leverage certain fixed cost aspects of overhead to realize increased adjusted
EBITDA margins as we continue to expand our club base. This operating leverage
has already helped us to more than double our adjusted EBITDA margin to
approximately 21.7% for the twelve month period ended March 31, 1999 compared to
approximately 10.2% in fiscal 1995. At the same time operating income as a
percentage of revenue increased from (1.9%) in fiscal 1995 to 6.0% for the
twelve month period ended March 31, 1999.
INDUSTRY OVERVIEW
According to IHRSA, revenues generated by the United States fitness club
industry increased at a compound annual rate of 8.3% from $5.5 billion in 1991
to $9.6 billion in 1998. Over the same period, memberships in all clubs have
grown at a 5.0% compound annual growth rate, from 21.0 million to 29.5 million.
These statistics supplied by IHRSA imply that average revenue per member has
grown at a compound annual rate of 3.2% for the industry since 1991. Membership
and revenue growth have outpaced the growth in the number of fitness clubs,
which has grown at a compound annual rate of only 2.2% to approximately 14,100
in 1998 from approximately 12,150 in 1991. We believe that fitness clubs, on
average, have experienced significant excess capacity historically. Only more
recently has the industry as a whole experienced the level of membership and
revenue per club to realize the benefits of the inherent operating leverage in
the industry.
We believe that the growth in fitness club memberships is attributable to
several factors. Americans are focused on achieving a healthier, more active
lifestyle. Of the factors members consider very important in their decision to
join a fitness club, the most commonly mentioned is health, closely followed by
appearance related factors including muscle tone, looking better and weight
control. We believe that the increased emphasis on appearance and wellness in
the media has heightened the focus on self image and fitness and will continue
to do so. We also believe that fitness clubs provide a more convenient venue for
exercise than outdoor activities, particularly in densely populated metropolitan
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areas. According to published industry reports, convenience is an important
factor in choosing a fitness club.
According to industry sources, the four major trends that are driving
changes in the health and fitness industry include:
(1) an influx of institutional capital investment is leading a
transformation of club ownership from private to public;
(2) large operators are beginning to build regional and national platforms
to consolidate the industry and, in turn, are providing liquidity for
many small operators;
(3) the aging of the American population is creating an awareness of and a
need for healthy living and physical fitness; and
(4) insurers are beginning to partner with corporations to promote
preventative healthcare programs such as fitness clubs memberships.
Across the industry, monthly membership dues have averaged between $54.00
and $58.00 per month for a single adult from 1994 through 1997. Around this
average monthly fee, we believe the industry can be segregated into three tiers
based upon price, service and quality:
(1) an upper tier consisting of clubs with monthly membership dues averaging
in excess of $80.00 per month;
(2) a middle tier consisting of clubs with monthly membership dues averaging
between $80.00 and $40.00 per month; and
(3) a lower tier consisting of clubs with monthly membership dues averaging
less than $40.00 per month.
We compete in the middle tier in terms of pricing and are positioned toward
the upper end of this tier. Based upon the quality and service at our clubs, we
believe we provide an attractive value to our members.
The fitness club industry is highly fragmented. We believe that considerable
consolidation will occur in the industry since we believe that independent
operators have found it increasingly difficult to compete with multi-facility
operators. We expect to play a significant role as a consolidator on a regional
basis.
COMPETITIVE STRENGTHS
We attribute our opportunities for continued growth and increased
profitability to the following competitive strengths:
STRONG MARKET POSITION. We believe that we are among the four largest
fitness club operators in the United States, as measured by consolidated
revenues. We are the largest operator of fitness clubs in Manhattan with 23
clubs, making us twice as large as our nearest competitor. We are one of the two
leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic
regions of the United States and we believe that there are only four chains that
own and operate more than ten clubs in these markets. In these markets, we
attribute our leadership position to the success of our regional clustering
strategy, the consistency of facilities and services provided by our clubs, and
the ability to continue to attract new members by providing one of the most
attractive price/value combinations available in our markets.
SUCCESSFUL REGIONAL CLUSTERING STRATEGY. We believe our regional clustering
strategy allows us to maximize cash flows by providing higher quality,
conveniently located fitness facilities on a cost effective basis. By operating
a group of clubs in a concentrated geographic area, the value of our
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memberships is enhanced by our ability to offer members access to any of our
clubs. This membership appeals primarily to members who seek the convenience of
having a fitness club near their home and their workplace. Approximately half of
our members choose the Passport Membership plan. This membership offers broader
privileges, greater convenience and generates higher monthly dues than single
club memberships. Regional clustering also allows us to provide special
facilities within the market, such as squash, tennis, basketball, special
programs and swimming pools, without offering them at each location. We believe
our regional clustering strategy also allows us to achieve economies of scale
with regard to sales, marketing, purchasing and corporate administrative
expenses.
STABLE CASH FLOWS. We believe that our emphasis on affordable monthly dues
and our EFT system allows us to generate stable and predictable cash flows. We
charge a modest initiation fee, which is $102 on average, and monthly dues of
$39-$79, depending on the type of membership plan. We believe that our monthly
dues structure gives us a significant competitive advantage in terms of ease of
sale, collection and revenue collected per year, all of which make us less
dependent on new membership sales, and price discounting, than certain of our
competitors. We also believe our use of EFT, by which a member's credit card or
bank account is automatically debited for each month's dues, assures a more
stable cash flow, eliminates the traditional accounts receivable function and
minimizes bad-debt write-offs. Approximately 86% of our members pay their
monthly dues through EFT, accounting for more than 70% of monthly revenues.
PROVEN UNIT OPERATING PERFORMANCE. We have established a track record of
consistent growth in revenue and cash flow across our club base. Our 20
wholly-owned clubs in operation at the end of fiscal 1995 generated revenues,
operating income before corporate expenses and adjusted EBITDA, before corporate
expenses, of $53.5 million, $18.1 million and $21.4 million, respectively,
during the twelve month period ending March 31, 1999 as compared to $32.2
million, $6.9 million and $9.5 million, respectively, during fiscal 1995. We
believe that the track record of our mature clubs provides a sound basis for
improved performance in our recently opened clubs as well as continued
investment in new clubs.
EXPERIENCED MANAGEMENT TEAM. We believe that our management team is one of
the most experienced management teams in the industry. Our five senior
executives have over 70 years of combined experience in the fitness club
industry and have been working together at Town Sports since 1990. We believe
that it has the depth, experience and motivation to manage our internal and
external growth. This management team has opened or acquired 62 clubs over the
course of the past 70 months. In the aggregate, our management team owns
approximately 25% of our common stock, on a fully-diluted basis.
BUSINESS STRATEGY
We intend to significantly continue to increase revenue and cash flow using
the following strategies:
MATURATION OF RECENTLY OPENED CLUBS. From June 1, 1997 to March 31, 1999,
we opened or acquired 43 clubs. We believe that our recent financial performance
does not yet fully reflect the benefit of these new clubs. Based on our
historical experience, a new club tends to achieve significant increases in
revenues during its first three years of operation as it reaches maturity.
Because there is relatively little incremental cost associated with such
increasing revenues, there is a greater proportionate increase in profitability.
In the aggregate, these 43 clubs generated revenues, operating income (loss)
before corporate expenses and adjusted EBITDA before corporate expenses, of
$42.5 million, $(5.3) million and $4.9 million, respectively, during the twelve
months ended March 31, 1999, as compared to $80.1 million, $25.9 million and
$32.1 million, respectively, for the 27 clubs opened prior to June 1, 1997. We
believe that the revenues, operating income and adjusted EBITDA, before
corporate expenses, of these 43 clubs will significantly increase as the clubs
reach maturity.
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EXPANSION OF CLUB BASE. We intend to strengthen our market position in the
Northeast and Mid-Atlantic regions and increase revenues and cash flow through
the opening of new clubs and the acquisition of existing clubs. Before opening
or acquiring a new club, we undertake a rigorous process involving site
selection, demographic and competitive analysis, negotiation of lease and
acquisition terms and financial modeling to ensure that a location meets our
criteria for a model club. As of March 31, 1999, we had identified over 125
locations in our targeted markets which we believe possess the criteria for a
model club. We have opened or acquired 14 clubs since January 1, 1999, and
expect to open or acquire at least an additional 4 clubs by the end of calendar
1999.
INCREASED VALUE-ADDED SERVICES. In addition to our regional clustering
strategy, we have continued to focus on increasing the additional services
available to our members. The increased emphasis on value-added services and
programs, such as physical training, child care, wellness clinics, swimming and
racquet sports has contributed to our growth, as non-membership club revenues
have increased from $2.4 million, or 7.1% of revenues in fiscal 1995, to $13.3
million, or 10.7% of revenues in the twelve months ended March 31, 1999. These
services generate incremental revenues with minimal capital investment and
assist us in the process of attracting and retaining members.
FACILITIES AND SERVICES
Approximately 50 of our existing clubs are based on our model club format,
which will serve as a basis for new clubs that we develop or acquire. This model
draws on our historical experience and has been refined through the operation
and results of recently opened clubs. However, because we typically build new
clubs in existing buildings designed for office, retail or other uses, our model
club is tailored for each space.
The main characteristics of the model club include:
LOCATION: Our clubs are typically located in well-established, higher-income
residential, commercial or mixed urban neighborhoods within major metropolitan
areas capable of supporting the development of a cluster of clubs. Clubs must
have relatively high "retail" visibility and should be close to transportation
hubs.
CLUB SIZE: Our clubs range from 15,000 to 25,000 square feet. The optimal
size is determined based on expected membership size, peak member usage at
maturity and occupancy costs. Membership for each club ranges from 2,500 to
4,500 in more mature clubs.
DEMOGRAPHICS: Although club members represent a cross-section of the
population in a given geographic market, our typical member is between the ages
of 20 and 44, college educated and earns approximately $50,000 per annum.
FACILITIES/SERVICES: Our facilities typically include state-of-the-art
cardiovascular equipment, including Lifecycles, StairMasters, treadmills, and
elliptical motion machines; strength equipment and free weights, including
Nautilus, Cybex, Icarian and Hammer Strength machines; group exercise and
cycling studio(s); Cardio-Theater entertainment systems; locker rooms, including
shower facilities, towel service, other amenities such as saunas and steamrooms;
and a small retail shop. Personal training services are offered at all locations
and massage is offered at most clubs, each at an additional charge. Additional
services and facilities such as physical therapy programs, child care, wellness
clinics, swimming pools, tennis courts, racquetball courts, squash courts,
basketball courts and climbing walls are available in certain locations.
CAPITAL INVESTMENT: The initial development of a new club typically costs
between $110 and $130 per square foot. This includes all hard and soft
construction costs, fitness equipment and furniture and fixtures. In general,
approximately 65% of the costs are for construction, 25% for fitness equipment,
furniture and fixtures, and the remainder for miscellaneous costs.
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MARKETING
Our marketing campaign is directed by our in-house media department which is
headed by the Chief Operating Officer. This team develops advertising strategies
to convey each of our regionally branded networks as the premier network of
fitness clubs in that region. Advertisements are designed to highlight the
consistent quality and high value-to-price ratio we believe we provide through a
combination of our membership programs, club facilities and personnel. The media
team's goal is to achieve broad awareness of our regional brand names primarily
through newspaper, billboard, radio, television and direct mail advertising. We
believe that our clustering of clubs creates economies of scale in our marketing
and advertising strategy that increase the efficiency and effectiveness of these
campaigns.
Advertisements generally feature creative slogans that communicate the
serious approach we take toward fitness in a provocative and/or humorous tone,
rather than pictures of our clubs or members exercising. Promotional marketing
campaigns will typically feature opportunities to participate in value-added
services such as personal training for a limited time at a discount to the
standard rate. We will also offer reduced initiation fees to encourage
enrollment. Additionally, we frequently sponsor member referral incentive
programs. Approximately one-third of our new members cite a referral from an
existing member as a reason for joining. Such incentive programs include a free
month of membership, personal training sessions, sports equipment such as a free
gym bag or a gift certificate for other in-club purchases.
We also engage in public relations and special events to promote our image
in the local communities. We believe that these public relations efforts enhance
our image and the image of our local brand names in the communities in which we
operate. We also seek to build our community image through co-operative
advertising campaigns with local sporting goods retailers.
We maintain the following internet web sites: www.nysc.com,
www.bostonsportsclubs.com, www.philadelphiasportsclubs.com,
www.washingtonsports.com and www.tsag.com that provide information about club
locations, program offerings and on-line promotions.
SALES
Sales of new memberships are generally handled at the club level. We employ
approximately 190 "in-club" full-time membership consultants who are responsible
for new membership sales. Each club generally has two full-time and one
part-time membership consultants. These consultants report both to the general
manager of the club as well as to one of our seven area sales managers, who in
turn report to our Vice President of Sales. Membership consultants' compensation
consists of a base salary plus commission. Sales commissions range from $45.00
to $65.00 per new member enrolled. We provide additional incentive-based
compensation in the form of bonuses contingent upon individual, club and
company-wide enrollment goals. Membership consultants must successfully complete
a three-month, in-house training program through which they learn our sales
strategy. In making a sales presentation, membership consultants emphasize:
(1) the proximity of our clubs to concentrated commercial and residential
areas convenient to where target members live and work;
(2) the lack of a long-term obligation on the part of the enrollee;
(3) the price-value relationship of a Town Sports membership; and
(4) access to value-added services.
All of our area sales managers have been promoted from within our company to
their current positions. We believe that providing employees with opportunities
for career advancement is essential to our ability to attract and retain
qualified sales personnel. We also employ a full-time corporate sales
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manager whose sole responsibility is to solicit group memberships through senior
level corporate contacts.
We believe that clustering clubs allows us to sell memberships based upon
the opportunity for members to utilize multiple club locations to differing
degrees. We have streamlined our membership structure to simplify the sales
process. In addition, the proprietary centralized computer software we utilize
ensures consistency of pricing and controls enrollment processing at the club
level. We offer three principal types of memberships:
(1) The Passport Membership, priced from $65.00 to $79.00 per month, is
our highest priced membership and entitles members to use any of our clubs
at any time. This membership is held by approximately 50.0% of members.
(2) The Gold Membership, priced from $39.00 to $73.00 per month based
on the market area of enrollment, enables members to use a specific club, or
a group of specific clubs, at any time and any of our clubs during off-peak
times. This membership is held by over 48.8% of members.
(3) The Off-Peak Membership, priced from $39.00 to $66.00 per month, is
the least expensive membership, and allows members to use any Town Sports
club only during off-peak times. This membership is held by approximately
1.2% of members.
We believe the popularity of the Passport Membership results from the
broader privileges and greater convenience this membership plan provides through
the opportunity for members to access club facilities near to both their homes
and offices. We also believe that the number of Passport Memberships will
increase as a percentage of total memberships as we continue to build our
clusters in the Washington, DC, Boston and Philadelphia regions. The Boston and
Philadelphia regions, in particular, have not yet developed the critical mass to
support substantial sales of Passport Memberships. Our clustering strategy also
allows us to provide access to special facilities such as squash, tennis,
basketball and racquetball courts and swimming pools through flagship locations
strategically located in key target areas without offering such facilities in
every location.
In joining a club, a new member signs a membership agreement which obligates
the member to pay a one-time initiation fee, averaging $102.00 over the last
twelve months ended March 31, 1999 and monthly dues on an ongoing basis,
averaging approximately $63.48 per month during that same period. Annually we
raise our monthly dues by between 1% and 3%. Based upon detailed statistical
studies of the membership base at our mature clubs, the average length of our
memberships is approximately two years. Approximately 86% of our members pay
their membership dues through EFT. Substantially all other monthly membership
dues are paid in advance. Members that pay dues through EFT can generally cancel
their memberships at any time upon 30 days notice. The membership agreement
calls for monthly dues to be collected by EFT based on credit card or bank
account debit authorization contained in the agreement. We believe that our EFT
program of monthly dues collection provides a predictable and stable cash flow
for us, eliminates the traditional accounts receivable function, and minimizes
bad-debt write-offs while providing a significant competitive advantage in terms
of the sales process, dues collection, working capital management and membership
retention. During the first week of each month, we receive the EFT dues for that
month by wire transfers initiated by our billing processor. Discrepancies and
insufficient funds incidents are researched and resolved by an in-house staff.
For the twelve months ended March 31, 1999, we experienced an average of
uncollected EFT receivables of less than 1.0%.
Our total EFT revenue has increased by $7.0 million per month from $2.4
million in May 1995 to over $9.4 million in May 1999. While we strongly
encourage monthly EFT memberships, approximately 14.3% of our members, often
corporate group members, purchase paid-in-full memberships for a one year term.
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CLUB OPERATIONS
We emphasize consistency and quality in all of our club operations,
including:
MANAGEMENT. We believe that our success is largely dependent on the
selection and training of our staff and management. Our management structure is
designed, therefore, to support the professional development of highly motivated
managers who will execute our directives and support growth.
Corporate departments are responsible for each area of club services, such
as exercise classes, fitness programming, personal training, facility and
equipment maintenance, housekeeping and laundry. This centralization allows
local general managers at each club to focus on customer service, club staffing
and providing a high quality exercise experience. General managers are
responsible for the day-to-day management of each club, and directly report to
area managers, who liaise with corporate staff ensuring consistent service at
all locations.
We provide performance-based incentives to our management. Senior management
compensation, for example, is tied to overall company performance. Departmental
directors, area managers and general managers have bonuses tied to financial and
member retention targets for a particular club or group of clubs.
PERSONAL TRAINING. All of our fitness clubs offer one-on-one personal
training, which is sold by the single session or in multi-session packages, to
assist our members with their daily workouts. Personal trainers are divided into
three tiers: House Trainers, Professional Trainers and Master Trainers. House
Trainers are stationed on a club's fitness floor to provide orientations to new
members and to assist with the operation of equipment. House Trainers who
exhibit superior skills receive a commission on personal training sessions.
House Trainers become Professional Trainers once they have completed our
company's advanced certification program. As a Professional Trainer, the
employee is entitled to a higher commission on personal training. Finally,
trainers, who have obtained national certification and have developed an
established client base, are permitted to collect the highest commission and to
move from club to club to service club members as a Master Trainer. We believe
that our personal training programs provide valuable guidance to our members and
a significant source of incremental revenue from value-added services for us.
GROUP FITNESS. Our commitment to providing a quality workout experience to
our members extends to the employment of program instructors, who teach
aerobics, cycling, strength conditioning, boxing, yoga and step aerobics
classes, among others. Our clustering strategy enables us to staff program
instructors and professional personal trainers at more than one club. As a
result, we can vary a given club's instructors, while providing instructors
sufficient classes to effectively and economically treat these instructors as
full-time employees. We offer our employees various benefits including: health,
dental, disability and a 401(k) plan. We believe the availability of employee
benefits provides us with a strategic advantage in attracting and retaining
quality program instructors and professional personal trainers and that this
strategic advantage in turn translates into a more consistent and higher quality
workout experience for those members who utilize such services. All program
instructors report to a centralized management structure, headed by the Director
of Programming who is responsible for overseeing auditions and providing
in-house training to keep instructors current in the latest training techniques
and program offerings.
PROPRIETARY CENTRALIZED INFORMATION SYSTEMS.
We have developed a proprietary system to track and analyze sales, leads,
and membership statistics which, in conjunction with our other systems, allows
us to track the frequency of member workouts, multi-club utilization,
value-added services and demographic profiles by member, which enables us to
develop targeted direct marketing programs and to modify our broadcast and print
34
<PAGE>
advertising to improve consumer response. These systems also assist us in
evaluating staffing needs and program offerings. In addition, we rely on certain
data gathered through our information systems to assist in the identification of
new markets for clubs and site selection within those markets.
PROPRIETARY SOFTWARE AND INTELLECTUAL PROPERTY
We use information technology in virtually every area of the business,
including business development, sales and marketing, staffing and other
operational systems. We have begun a multi-year information technology project
through which we have implemented, among other things:
(1) a multi-site online contracting system designed to control membership
pricing and streamline the creation, processing and management of our
sales contracts for new members;
(2) a sales compensation system;
(3) a system that automatically updates existing member records;
(4) extensive club site development databases;
(5) a class exercise scheduling and payroll system; and
(6) a personal training revenue tracking and payroll system, as part of a
larger fitness programming project.
Other elements of this project will include the development and implementation
of:
(1) a computerized photo and card-swipe system for member check-in; and
(2) a kiosk system to be deployed throughout our network, which will provide
a range of information and content centered around fitness and services
provided.
We believe that our information management systems, which are proprietary in
many respects, produce a substantial competitive advantage.
We have registered, and are in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office,
including NEW YORK SPORTS CLUBS, WASHINGTON SPORTS CLUBS, BOSTON SPORTS CLUBS,
PHILADELPHIA SPORTS CLUBS, TSI and TOWN SPORTS INTERNATIONAL, INC.
COMPETITION
We are one of the largest fitness club operators in the country and the
largest in the New York Tri-State area as measured by number of clubs. We
believe our clustering strategy results in our strong position in the New York
and Washington, DC markets. Our clubs compete with numerous regional and local
club operators, as well as with physical fitness and recreational facilities
established by government and businesses for our employees, amenity and
condominium clubs, the YMCA and similar organization and to a certain extent,
racquet clubs and tennis and other athletic clubs, weight reducing salons, and
the home-use fitness equipment industry. Neither of the two largest fitness club
operators in the United States, Bally Total Fitness and Fitness Holdings, have a
significant presence in our targeted market segments.
We believe that our market leadership, experience and operating efficiencies
enable us to provide the member with a superior product in terms of convenience,
quality and affordability. We believe that there are significant barriers to
entry in our urban markets, including restrictive zoning laws, lengthy permit
processes and a shortage of appropriate real estate, which could discourage any
large competitor from attempting to open a chain of clubs in these markets.
However, such a competitor could enter these markets more easily through
acquisitions.
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<PAGE>
EMPLOYEES
At March 31, 1999, we had over 3,800 employees, of which approximately 1,300
were employed full-time. Approximately 195 employees were corporate personnel
working in the Manhattan or the Washington, DC offices. We are not a party to
any collective bargaining agreement with our employees. We have never
experienced any significant labor shortages nor had any difficulty in obtaining
adequate replacements for departing employees and considers our relations with
our employees to be good. We believe that we offer our employees benefits,
including health, dental, disability and a 401(k) plan, that are superior to
those generally offered by our competitors.
GOVERNMENT REGULATION
Our operations and business practices are subject to regulation at the
federal, state and, in some cases, local levels. State and local consumer
protection laws and regulations govern our advertising, sales and other trade
practices.
Statutes and regulations affecting the fitness industry have been enacted in
states in which we conduct business; many other states into which we may expand
have adopted or likely will adopt similar legislation. Typically, these statutes
and regulations prescribe certain forms and provisions of membership contracts,
afford members the right to cancel the contract within a specified time period
after signing, require an escrow of funds received from pre-opening sales or the
posting of a bond or proof of financial responsibility, and may establish
maximum prices for membership contracts and limitations on the term of
contracts. In addition, we are subject to numerous other types of federal and
state regulations governing the sale of memberships. These laws and regulations
are subject to varying interpretations by a number of state and federal
enforcement agencies and the courts. We maintain internal review procedures in
order to comply with these requirements, and believe that our activities are in
substantial compliance with all applicable statutes, rules and decisions.
Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days, depending on the
applicable state law, and, in such event, is entitled to a refund of any
initiation fee paid. In addition, our membership contracts provide that a member
may cancel his or her membership at any time for medical reasons or relocation a
certain distance from our nearest club. The specific procedures for cancellation
in these circumstances vary due to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to us upon cancellation and we
may offset such amount against any refunds owed.
PROPERTIES AND FACILITIES
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
----------------------------------------- ----------------------------------------- ---------------------
<C> <S> <C> <C>
NEW YORK SPORTS CLUBS:
1. Manhattan 404 Fifth Avenue January 1974
2. Manhattan 151 East 86th Street January 1977
3. Manhattan 61 West 62nd Street July 1983
4. Manhattan 614 Second Avenue July 1986
5. Manhattan 380 Madison Avenue January 1990
6. Manhattan 151 Reade Street January 1990
7. Manhattan 1601 Broadway September 1991
8. Manhattan 50 West 34th Street August 1992
9. Manhattan 349 East 76th Street April 1994
10. Manhattan 248 West 80th Street May 1994
11. Manhattan 502 Park Avenue February 1995
12. Manhattan 117 Seventh Avenue South March 1995
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
----------------------------------------- ----------------------------------------- ---------------------
<C> <S> <C> <C>
13. Manhattan 303 Park Avenue South December 1995
14. Manhattan 30 Wall Street May 1996
15. Manhattan 1635 Third Avenue October 1996
16. Manhattan 575 Lexington Avenue November 1996
17. Manhattan 278 Eighth Avenue December 1996
18. Manhattan 200 Madison Avenue February 1997
19. Manhattan 131 East 31st Street February 1997
20. Manhattan 2162 Broadway November 1997
21. Manhattan 633 Third Avenue April 1998
22. Manhattan 1657 Broadway July 1998
23. Manhattan 217 Broadway March 1999
24. Manhattan 23 West 73rd Street April 1999
25. Manhattan 34 West 14th Street July 1999
26. Manhattan 503-511 Broadway July 1999
27. Manhattan+ West 38th Street Opening 1999
28. Manhattan* 300 West 125th Street Opening 1999
29. Manhattan* Battery Park City Opening 2000
30. Brooklyn,NY 110 Boerum Place October 1985
31. Brooklyn, NY 1736 Shore Parkway June 1998
32. Queens, NY 69-33 Austin Street, Forest Hills April 1997
33. Queens, NY 153-67 A Cross Island Parkway June 1998
34. Staten Island, NY 300 West Service Road June 1998
35. Great Neck, NY 15 Barstow Road July 1989
36. Scarsdale, NY 696 White Plains Road October 1995
37. Mamaroneck, NY 124 Palmer Avenue January 1997
38. White Plains, NY 1 North Broadway September 1997
39. Croton-on-Hudson, NY 420 South Riverside Drive January 1998
40. Nanuet, NY 58 Demarest Mill Road May 1998
41. Larchmont, NY 15 Madison Avenue December 1998
42. Commack, NY 6136 Jericho Turnpike January 1999
43. East Meadow, NY 625 Merrick Avenue January 1999
44. Oceanside, NY 2909 Lincoln Avenue May 1999
45. Syossett, NY* 49 Ira Road Opening 2000
46. Stamford, CT 6 Landmark Square December 1997
47. Stamford, CT 106 Commerce Road January 1998
48. Danbury, CT 38 Mill Plain Road January 1998
49. Stamford, CT 1063 Hope Street November 1998
50. Norwalk, CT 250 Westport Avenue March 1999
51. Greenwich, CT 6 Liberty Street May 1999
52. East Brunswick, NJ 8 Cornwall Court January 1990
53. Princeton, NJ 301 North Harrison Street May 1997
54. Freehold, NJ 200 Daniels Way April 1998
55. Matawan, NJ 163 Route 34 April 1998
56. Old Bridge, NJ Gaub Road and Route 516 April 1998
57. Marlboro, NJ 34 Route 9 North April 1998
58. Fort Lee, NJ 1355 15th Street June 1998
59. Ramsey, NJ 1100 Route 17 North June, 1998
60. Mahwah, NJ 7 Leighton Place June 1998
61. Parsippany, NJ 2651 Route 10 August 1998
62. Springfield, NJ 215 Morris Avenue August 1998
</TABLE>
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<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
----------------------------------------- ----------------------------------------- ---------------------
<C> <S> <C> <C>
63. Colonia, NJ 1250 Route 27 August 1998
64. Franklin Park, NJ 3911 Route 27 August 1998
65. Plainsboro, NJ 10 Schalks Crossing August 1998
66. Somerset, NJ 120 Cedar Grove Lane August 1998
67. Hoboken, NJ 221 Washington Street October 1998
68. West Caldwell, NJ Essex Mall, Bloomfield Avenue March 1999
WASHINGTON SPORTS CLUBS:
69. Washington, DC 214 D Street, S.E. January 1980
70. Washington, DC 1835 Connecticut Avenue, N.W. January 1990
71. Washington, DC 1990 M Street, N.W. February 1993
72. Washington, DC 2251 Wisconsin Avenue, N.W. May 1994
73. Bethesda, MD 4903 Elm Street May 1994
74. North Bethesda, MD 10400 Old Georgetown Road June 1998
75. Germantown, MD 12623 Wisteria Drive July 1998
76. Centreville, VA Old Centreville Crossing December 1997
77. Alexandria, VA 3654 King Street May 1999
78. Fairfax, VA+ Lee Highway Opening 1999
79. Sterling, VA+ Dranesville Road Opening 1999
BOSTON SPORTS CLUBS:
80. Boston, MA 561 Boylston Street November 1991
81. Allston, MA 15 Gorham Street July 1997
82. Boston, MA 1 Bulfinch Place August 1998
83. Framingham, MA Sherwood Plaza, 124 Worcester Rd September 1998
84. Weymouth, MA 553 Washington Street May 1999
85. Boston, MA* 201 Brookline Avenue Opening 2000
PHILADELPHIA SPORTS CLUBS:
86. Philadelphia, PA 220 South 5th Street January 1999
87. Philadelphia, PA 2000 Hamilton Street July 1999
88. Cherry Hill, NJ* Marlton Pike Opening 2000
SWISS SPORTS CLUBS:
89. Basel, Switzerland St. Johanns-Vorstadt 41 August 1987
90. Zurich, Switzerland Glarnischstrasse 35 August 1987
</TABLE>
- ------------------------
+ Under construction, club in "pre-sales."
* Signed leases for greenfield club development.
We own the 151 East 86th Street location, which houses our club and a retail
tenant that generated approximately $500,000 of rental income for us during
fiscal 1998. All other clubs occupy leased space pursuant to long-term leases,
generally 15 to 25 years, including options. In the next five years, ending
December 31, 2004, only two of our club leases will expire without any renewal
option.
We lease approximately 35,000 square feet of office space in New York City,
and 3,000 square feet of office space in Washington, DC, for administrative,
accounting and general corporate purposes. We also lease warehouse and
commercial space in Long Island City, New York, for storage purposes and for the
operation of a centralized laundry facility for certain New York clubs.
As of March 31, 1999, 70 existing clubs were wholly-owned by us and four
were managed and/or partly-owned by us. We control the managed clubs, where we
act as either general partner or managing
38
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agent. These clubs are operated in the same manner as wholly owned clubs,
subject to certain rights held by our partners or the club owners, according to
the applicable partnership or management agreements. As partner or manager, we
receive a share of club cash flow, which varies from club to club, but is
typically 40.0%. These amounts appear on our operating statements as "Management
fees and other". However, the gross revenue generated by the managed clubs,
approximately $7.5 million per year, is not reflected in the financial
statements, because the managed clubs are not consolidated. We acquired two
managed clubs during fiscal 1995 and three managed clubs during fiscal 1998
which were originally party to management agreements with us. In the future, we
may seek to acquire managed clubs, if such opportunities arise.
LEGAL PROCEEDINGS
We are a party to various lawsuits arising in the normal course of business.
We believe that the ultimate outcome of these matters will not have a material
adverse effect on our business, results of operations or financial condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of May 26, 1999, and a
brief account of the business experience of each person who is a director or
executive officer of Town Sports.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark Smith........................................... 40 Chief Executive Officer and Director
Robert Giardina...................................... 41 President and Chief Operating Officer
Alexander Alimanestianu.............................. 40 Executive Vice President, Development
Richard Pyle......................................... 40 Executive Vice President and Chief Financial Officer
Deborah Smith........................................ 39 Senior Vice President, Operations
Leslie Kimerling..................................... 37 Senior Vice President, Information Management and
Planning
Keith Alessi......................................... 43 Director
Paul Arnold.......................................... 52 Director
Bruce Bruckmann...................................... 45 Director
Stephen Edwards...................................... 36 Director
Jason M. Fish........................................ 41 Director
</TABLE>
MARK SMITH joined us in 1985 and was appointed our Chief Executive Officer
in 1995. Prior to this appointment, he held the position of Executive Vice
President of Development and International Operations. Mr. Smith has also served
as a director of Town Sports since September 1995. Mr. Smith has had primary
responsibility for the development and/or acquisition of clubs since 1990, as
well as responsibility for Town Sports Managed Clubs in Switzerland. Before
joining us, Mr. Smith was a chartered accountant with Coopers & Lybrand in New
York City, London and New Zealand, and a professional squash player.
ROBERT GIARDINA has served as our President and Chief Operating Officer
since 1992. Mr. Giardina joined us in 1981 after six years of employment with
other fitness club companies. With over 20 years of experience in the club
industry, Mr. Giardina has expertise in virtually every aspect of facility
management and club operations. In addition to operations, Mr. Giardina has
primary responsibility for sales and marketing.
ALEXANDER ALIMANESTIANU joined us in 1990, and became Executive Vice
President, Development in 1995. From 1990 to 1995, Mr. Alimanestianu served as
Vice President and Senior Vice President. Before joining us, he worked as a
corporate attorney for six years with one of our outside law firms. Mr.
Alimanestianu has been involved in the development or acquisition of over 50 of
our clubs.
RICHARD PYLE joined us in 1987 and has been chiefly responsible for our
financial matters since that time, as a Vice President in 1988, Senior Vice
President and Chief Financial Officer in 1992 and Executive Vice President in
1995, successively. Before joining us, Mr. Pyle worked in public accounting in
the United States, Bermuda, Spain and in England specializing in the hospitality
industry, and as the corporate controller for a British public company in the
leisure industry. Mr. Pyle is a British chartered accountant.
DEBORAH SMITH joined us in 1987, and served as a Vice President before her
appointment as a Senior Vice President of Operations in 1995. Ms. Smith has been
responsible for the startup and operation of our clubs in New York, Switzerland,
Maryland and Washington, DC. She oversees club operations in all U.S. geographic
areas.
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<PAGE>
LESLIE KIMERLING joined us in 1994 and became a Senior Vice President in
1995 with responsibility for the development of Town Sports' information
management and planning capabilities. Prior to joining us, Ms. Kimerling was a
management consultant for four years.
KEITH ALESSI has served as a director of Town Sports since April, 1997. Mr.
Alessi is President, Chief Executive Officer and a director of Telespectrum
Worldwide, Inc., a position he has held since March 1998. From May 1996 to March
1998, Mr. Alessi served as Chairman, President and Chief Executive Officer of
Jackson Hewitt, Inc. Prior to that, Mr. Alessi held various positions with Farm
Fresh, Inc. including Chief Financial Officer and President. Mr. Alessi is also
a director of Cort Business Services, Inc. and WLR Foods.
PAUL ARNOLD has served as a director of Town Sports since April, 1997. Mr.
Arnold has served as President and Chief Executive Officer of Cort Business
Services, Inc., a leading national supplier of high end rental furniture since
1992.
BRUCE BRUCKMANN has served as a director of Town Sports since December,
1996. Since 1994, Mr. Bruckmann has served as a principal of BRS. From 1983
until 1994, Mr. Bruckmann served as an officer and subsequently a Managing
Director of Citicorp Venture Capital, Ltd. ("CVC"). Mr. Bruckmann is currently a
director of Mediq Inc., Penhall International, Inc., Jitney Jungle Stores of
America, Inc., Mohawk Industries, Inc., AmeriSource Health Corporation,
Chromcraft Revington Corporation, Cort Business Services, Inc., California Pizza
Kitchen, Inc., Acapulco Restaurants, Inc., and Anvil Knitwear, Inc. and a
director of several private companies.
STEPHEN EDWARDS has served as a director of Town Sports since December,
1996. Since 1994, Mr. Edwards has served as a principal of BRS. From 1993 until
1994, Mr. Edwards served as an officer of CVC. From 1988 through 1991, he was an
associate of CVC. Prior to joining CVC, Mr. Edwards worked with
Citicorp/Citibank in various corporate finance positions. Mr. Edwards is
currently a director of Anvil Knitwear, Inc. and a director of several private
companies.
JASON M. FISH has been a director of Town Sports since December, 1996. Mr.
Fish has been a Managing Member of Farallon Capital Management, L.L.C. and
Farallon Partners, L.L.C., Farallon's two management entities, since April 1996.
Mr. Fish was a General Partner of the Farallon investment partnerships and a
Managing Director of Farallon Capital Management, L.L.C.'s predecessor, Farallon
Capital Management, Inc., from 1990 to 1996. Mr. Fish is currently a director of
Rubio's Restaurants, Inc. and Garden Burger, Inc.
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SUMMARY COMPENSATION TABLE
EXECUTIVE COMPENSATION
The following summarizes, for the periods indicated, the principal
components of compensation for our Chief Executive Officer and the four highest
compensated executive officers. The compensation set forth below fully reflects
compensation for work performed on our behalf.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL LONG-TERM COMPENSATION
SALARY BONUS(1) COMPENSATION AWARDS COMMON STOCK
NAME AND PRINCIPAL POSITION PERIOD ($) ($) ($) UNDERLYING OPTIONS/SARS (#)
- ------------------------------------ ----------- ---------- ---------- ----------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Mark Smith, Chief Executive 1998(2) 216,600 167,367 -- --
Officer........................... 1998(3) 360,500 330,000 -- --
1997(3) 350,000 176,000 -- 8,830
Robert Giardina, President and Chief 1998(2) 205,429 127,402 -- --
Operating Officer................. 1998(3) 341,906 250,000 -- --
1997(3) 331,948 118,000 -- 8,829
Richard Pyle, Executive Vice 1998(2) 112,596 97,143 -- --
President and Chief Financial 1998(3) 187,399 187,500 -- --
Officer........................... 1997(3) 181,941 85,000 -- 8,828
Alexander Alimanestianu, Executive 1998(2) 112,596 97,143 -- --
Vice President, Development....... 1998(3) 187,399 187,500 -- --
1997(3) 178,711 85,000 -- 8,828
Deborah Smith, Senior Vice 1998(2) 90,539 64,539 -- --
President, Operations............. 1998(3) 141,100 125,000 -- 400
1997(3) 136,990 63,475 -- 5,350
</TABLE>
- ------------------------
(1) Includes annual bonus payments under our annual bonus plan for fiscal 1998
and 1997, and our estimates of annual pro-rated amounts for the seven month
period ended December 31, 1998.
(2) Includes the seven months ended December 31, 1998.
(3) Includes the twelve month period ended May 31.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1998
AND 1998 YEAR-END OPTION/SAR VALUES
The following summarizes exercises of stock options granted in prior years
by the named executive officers during the seven months ended December 31, 1998
as well as the number and value of all unexercised options held by the named
executive officers as of December 31, 1998.
<TABLE>
<CAPTION>
EXERCISABLE/
UNEXERCISABLE
----------------------- EXERCISABLE/UNEXERCISABLE
-------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED OPTIONS/SARS AT FY-END VALUE OF UNEXERCISED IN-THE-
ON VALUE (#) MONEY OPTIONS/SARS AT
EXERCISE REALIZED UNDERLYING UNEXERCISED FY-END($)(1)
(#) ($) ----------------------- -------------------------------
NAME COMMON COMMON COMMON PREFERRED COMMON PREFERRED
- ---------------------------------------- ----------- --------- ------------ --------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mark Smith.............................. -- -- 3,532/5,298 42,812/0 187,196/280,794 1,418,793/0
Robert Giardina......................... -- -- 3,532/5,297 32,793/0 187,196/280,741 1,086,763/0
Richard Pyle............................ -- -- 3,532/5,296 27,569/0 187,196/280,688 913,639/0
Alexander Alimanestianu................. -- -- 3,532/5,296 27,199/0 187,196/280,688 901,377/0
Deborah Smith........................... -- -- 2,220/3,530 9,530/0 116,260/181,490 315,825/0
</TABLE>
- ------------------------
(1) Value realized is based upon the fair market value of the stock at the
exercise date minus the exercise price. Fair market value was determined in
good faith by the board of directors and was based upon the historical and
projected financial performance of Town Sports.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee are Bruce Bruckmann,
Stephen Edwards and Mark Smith. Messrs. Bruckmann and Edwards are our
non-employee directors.
MANAGEMENT EQUITY AGREEMENTS
Simultaneously with the recapitalization, we entered into executive stock
agreements with certain of our officers and other key employees. In accordance
with the executive stock agreements, the executives each have purchased shares
of common stock and/or shares of our series B preferred at a purchase price of
$1.00 per share of common stock and $35.00 per share of series B preferred
stock.
EQUITY INCENTIVE PLAN
We intend to adopt the long-term equity incentive plan, designed to provide
incentives to present and future executive, managerial, marketing, technical and
other key employees, and consultants and advisors of our company and its
subsidiaries as may be selected in the sole discretion of our board of
directors. The equity incentive plan will provide for the granting to
participants of the following types of incentive awards: stock options, stock
appreciation rights, restricted stock, performance units, performance grants and
other types of awards that the compensation committee of the board deems to be
consistent with the purposes of the equity incentive plan. An aggregate amount
of shares of common stock, which amount represents approximately 5.0% of our
authorized common stock, are reserved for issuance under the equity incentive
plan. The equity incentive plan affords us latitude in tailoring incentive
compensation for the retention of key personnel, to support corporate and
business objectives, and to anticipate and respond to a changing business
environment and competitive compensation practices.
The compensation committee will have exclusive discretion to select the
participants and to determine the type, size and terms of each award, to modify
the terms of awards, to determine when awards will be granted and paid, and to
make all other determinations which it deems necessary or
43
<PAGE>
desirable in the interpretation and administration of the equity incentive plan.
The equity incentive plan will terminate ten years from the date that is
approved and adopted by our stockholders, unless extended for up to an
additional five years by action of the board of directors. With limited
exceptions, including termination of employment as a result of death, disability
or retirement, or except as otherwise determined by the compensation committee,
rights to these forms of contingent compensation will be forfeited if a
recipient's employment or performance of services terminates within a specified
period following the award. Generally, a participant's rights and interest under
the equity incentive plan will not be transferable except by will or by the laws
of descent and distribution or pursuant to a qualified domestic relations order.
Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of common stock at
a price fixed by the compensation committee. The option price may be less than,
equal to or greater than the fair market value of the underlying shares of
common stock, but in no event shall the exercise price of an incentive stock
option be less than the fair market value on the date of grant. Options
generally will expire no later than ten years after the date on which they are
granted. Options will become exercisable at such times and in such installments
as the compensation committee shall determine. Payment of the option price must
be made in full at the time of exercise in such form as the compensation
committee may determine.
The equity incentive plan will provide that an SAR may be granted alone, or
in connection with the grant of an option, either at the time of grant of the
related option or by amendment thereafter to an outstanding option. SARs granted
in connection with options shall be exercisable only when, to the extent and on
the condition that, any related option is exercisable. The exercise of an option
shall result in an immediate forfeiture of any related SAR to the extent the
option is exercised, and the exercise of an SAR shall cause an immediate
forfeiture of any related option to the extent the SAR is exercised.
Upon the exercise of stock appreciation rights, the participant shall be
entitled to a distribution in an amount equal to the difference between the fair
market value of a share of common stock on the date of exercise and the exercise
price of the SAR or, in the case of SARs granted in tandem with options, any
option to which the SAR is related, multiplied by the number of shares of common
stock as to which the SAR is exercised. The compensation committee shall decide
whether such distribution shall be in cash, in shares of common stock having a
fair market value equal to such amount, in other securities having a fair market
value equal to such amount or in a combination thereof.
A restricted stock award will be an award of a given number of shares of
common stock which are subject to a restriction against transfer and to a risk
of forfeiture, during a period set by the compensation committee. During the
restriction period, the participant generally will have the right to vote and
receive dividends on the shares. Dividends received while under restriction will
be treated as compensation.
The equity incentive plan will provide that performance awards are those
whose final value, if any, is determined by the degree to which specified
performance objectives have been achieved during an award period set by the
compensation committee, subject to such adjustments as the compensation
committee may approve based on relevant factors. Performance objectives will be
based on measures of company, unit or participant performance, or any
combination of these and other factors, as the compensation committee may
determine. The compensation committee will make such adjustments in the
computation of any performance measure as it deems appropriate. The compensation
committee shall determine the portion of each performance award that has been
earned by a participant on the basis of our performance over the performance
cycle in relation to the performance goals for such cycle. The earned portion of
a performance award may be paid out in shares of common stock, cash, our other
securities or any combination thereof, as the compensation committee may
determine.
44
<PAGE>
The equity incentive plan will also provide that, upon our liquidation or
dissolution, all outstanding awards under the equity incentive plan shall
terminate immediately prior to the consummation of such liquidation or
dissolution, unless otherwise provided by the compensation committee. In the
event of a reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation, distribution of assets, or any
other change in the corporate structure or shares of Town Sports, the
compensation committee shall make such adjustment as it deems appropriate in the
number and kind of shares or other property reserved for issuance under the
equity incentive plan, in the number and kind of shares or other property
covered by grants previously made under the equity incentive plan, and in the
exercise price of outstanding options and SARs. In the event of any merger,
consolidation or other reorganization in which we are not the surviving or
continuing entity or in which a change in control is to occur, all of our
obligations regarding options, SARs performance awards, and restricted stock
that were granted hereunder and that are outstanding on the date of such event
shall, on such terms as may be approved by the committee prior to such event, be
assumed by the surviving or continuing entity or canceled in exchange for
property, including cash.
COMPANY BENEFIT PLANS
In April 1996, we implemented a 401(k) salary deferral plan which is
available to eligible employees, as defined in the plan. The 401(k) Plan
provides for us to make discretionary contributions. We, however, elected not to
make contributions for the seven months ended December 31, 1998 and fiscal 1998,
1997 or 1996.
45
<PAGE>
SECURITY OWNERSHIP AND BENEFICIAL OWNERS
The following table sets forth as of December 31, 1998 material information
with respect to the beneficial ownership of the common stock and preferred stock
by: (1) each person or entity who owns of record or beneficially more than 5% or
more of any class of our voting securities; (2) each of our named executive
officers and directors; and (3) all of our directors and named executive
officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK PERCENTAGE REDEEMABLE SERIES A SERIES B
BENEFICIALLY OF COMMON SENIOR PREFERRED PREFERRED
NAME: OWNED(1) STOCK OUTSTANDING(1) PREFERRED STOCK STOCK STOCK
- ---------------------------- -------------------- --------------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BRS (2)
126 East 56th Street, 29th
Floor
New York, New York 10022.. 504,456 38.60% -- 104,330 --
The Farallon Entities (3)
One Maritime Plaza, Suite
1325
San Francisco, California
94111..................... 270,091 20.70% 20,000 41,045 --
The Canterbury Entities(4)
600 Fifth Avenue, 23rd
Floor
New York, New York 10020.. 139,437 10.70% 15,000 -- --
Rosewood Capital LP (5)
One Maritime Plaza, Suite
1330
San Francisco, California
94111..................... 17,908 1.40% 5,000 -- --
EXECUTIVE OFFICERS AND
DIRECTORS:
Mark Smith (6).............. 56,432 4.30% -- -- 42,812
Robert Giardina (6)......... 44,052 3.40% -- -- 32,793
Richard Pyle (6)............ 37,597 2.90% -- -- 27,569
Alexander Alimanestianu
(6)....................... 37,140 2.80% -- -- 27,199
Deborah Smith (6)........... 14,946 1.10% -- -- 10,080
Bruce C. Bruckmann (7)...... 517,642 39.60% -- 107,057 --
Stehpen Edwards (8)......... 504,456 38.60% -- 104,330 --
Jason Fish (9).............. 270,091 20.70% 20,000 41,045 --
Paul Arnold................. * * -- 591 --
Keith Alessi................ * * -- 591 --
EXECUTIVE OFFICERS AND
DIRECTORS AS A GROUP:
10 Persons (10)............. 983,614 75.30% 20,000 149,284 140,453
</TABLE>
- ------------------------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of common stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of March 15, 1999 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of any other person.
(2) Excludes shares held individually by Mr. Bruckmann and other individuals and
affiliates and family members thereof, each of whom are employed by BRS.
(3) Includes shares held by each of Farallon Capital Partners, L.P., Farallon
Capital Institutional Partners, L.P., Farallon Capital Institutional
Partners II, L.P. and R.R. Capital Partners, L.P. (the "Farallon Entities").
Farallon Partners, L.L.C. is the general partner of each of the Farallon
Entities. Farallon Partners, L.L.C. disclaims beneficial ownership of such
shares. Also
46
<PAGE>
includes warrants to purchase 71,360 shares of common stock with an exercise
price of $.01 per share and an expiration date of November 30, 2008.
(4) Includes shares and warrants held by Canterbury Mezzanine Capital, LP and
Canterbury Detroit Partners, LP (the "Canterbury Entities"). Also includes a
warrant to purchase 75,714 shares of common stock with an exercise price of
$.01 per share and an expiration date of December 10, 2006 and warrants to
purchase 53,723 shares of common stock with an exercise price of $.01 and an
expiration date of November 15, 2008.
(5) Includes warrants to purchase 17,908 shares of common stock with an exercise
price of $.01 per share and an expiration date of November 30, 2008.
(6) Includes options to acquire, exercisable within 60 days, common stock, and
Series B preferred stock options, exercisable within 60 days, pursuant to
the old option plan and the preferred option plan, respectively. Messrs.
Smith, Giardina, Pyle, Alimanestianu and Ms. Smith each hold such options on
8,830, 8,829, 8,828, 8,828 and 5,430 shares of common stock, respectively.
All shares of series B preferred stock beneficially owned by such persons
are in the form of series B options, except with respect to Ms. Smith only,
9,530 shares are in the form of series B options. The address for each of
these named executive officers is the same as the address of our principal
executive offices.
(7) Includes 504,456 shares held by BRS, and approximately 2,276 shares held by
certain other family members of Mr. Bruckmann. Mr. Bruckmann disclaims
beneficial ownership of such shares held by BRS.
(8) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
such shares.
(9) Includes shares held by each of the Farallon Entities. Mr. Fish is a
managing member of Farallon Partners, L.L.C., which is the general partner
of each of the Farallon Entities. Mr. Fish disclaims beneficial ownership of
such shares.
(10) Includes (1) shares held by BRS, which may be deemed to be owned
beneficially by Messrs. Bruckmann and Edwards, and (2) shares held by the
Farallon Entities, which may be deemed to be owned beneficially by Mr. Fish.
Excluding the shares beneficially owned by BRS and the Farallon Entities,
the directors and named executive offices as a group beneficially own (1)
209,067 shares of common stock, which represents approximately 16.0% of the
common stock on a fully diluted basis, (2) no shares of redeemable senior
preferred stock, (3) 3,909 shares of series A preferred stock, and (4)
140,453 shares of series B preferred stock.
47
<PAGE>
RELATIONSHIPS AND RELATED TRANSACTIONS
THE RECAPITALIZATION
In December 1996, we consummated a recapitalization pursuant to which, among
other things:
- all shares of our preferred stock outstanding prior to the
recapitalization were redeemed or converted into shares of our then
authorized common stock;
- all shares of old common stock, other than shares held by several members
of our management team, were exchanged for cash; and
- BRS and the Farallon Entities acquired shares of our common stock and
series A preferred stock, representing approximately 73.0% of our voting
equity interests on a fully-diluted basis. In addition, members of our
management acquired shares of our common stock and series B preferred
stock representing approximately 27.0% of our voting equity interests on a
fully-diluted basis. In addition, pursuant to the recapitalization, we
instituted the old option plan and the preferred option plan, which
granted certain members of our management options to acquire our common
stock and series B options, respectively.
REDEEMABLE SENIOR PREFERRED STOCK
In November 1998, we issued 40,000 shares of redeemable senior preferred
stock. After the payment of fees and expenses of approximately $400,000 we
received net proceeds of approximately $39.6 million. The senior stock is
redeemable in November 2008 and may, at the option of the holder, be converted
into common stock upon an initial registered public offering of our common
stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the recapitalization, we, BRS, the Farallon Entities,
Canterbury Mezzanine Capital, L.P. ("CMC"), certain members of management and
other shareholders of our company entered into a registration rights agreement,
dated December 10, 1996, as amended on November 13, 1998, in connection with the
issuance of senior preferred stock. Pursuant to the terms of the registration
rights agreement, BRS, the Farallon Entities and CMC have the right to require
us, at our expense and subject to certain limitations, to register under the
Securities Act all or part of the shares of common stock held by them. BRS is
entitled to demand up to three long-form registrations at any time and unlimited
short-form registrations. Farallon is entitled to demand one long-form
registration, but only one year after we have consummated an initial registered
public offering of our common stock, and up to three short-form registrations.
CMC is entitled to demand up to two short-form registrations.
All holders of registrable securities are entitled to an unlimited number of
"piggyback" registrations, with us paying all expenses of the offering, whenever
we propose to register our common stock under the Securities Act. Each such
holder is subject to certain pro rata limitations on its ability to participate
in such a "piggyback" registration. In addition, pursuant to the registration
rights agreement, we have agreed to indemnify all holders of registrable
securities against certain liabilities, including certain liabilities under the
Securities Act.
PROFESSIONAL SERVICES AGREEMENT AND TRANSACTION FEES
In connection with the recapitalization, Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS Co."), an affiliate of BRS, and we entered into a professional
services agreement, whereby BRS Co. agreed to provide certain advisory and
consulting services to us. In exchange for such services, BRS Co. receives an
annual fee of $250,000 per calendar year while they own at least 20.0% of our
outstanding common stock. We also paid BRS Co. and the Farallon Entities
transaction fees of $584,000 and $216,000, respectively, for investment banking
advisory services rendered to us in connection with the recapitalization. We
also paid the Farallon Entities transaction fees of $33,000 for investment
banking advisory services rendered to us in connection with our offering of the
senior stock.
48
<PAGE>
DESCRIPTION OF THE CREDIT FACILITY
The following is a summary description of the principal terms of the credit
facility and is subject to, and qualified in its entirety by reference to, the
credit facility, copies of which are available from us upon request. The credit
facility allows for maximum borrowings of $25.0 million. As of March 31, 1999,
we had approximately $23.0 million available under the credit facility.
STRUCTURE. The credit facility provides for, subject to terms and
conditions, a $25.0 million revolving credit facility. The credit facility has a
final scheduled maturity date of October 15, 2002 and does not require scheduled
interim reductions. The credit facility requires us, under certain
circumstances, to make mandatory prepayments and commitment reductions. In
addition, we may make optional prepayments and commitment reductions pursuant to
the terms of the credit facility.
SECURITY. The credit facility is collateralized by a pledge of all the
capital stock of our subsidiaries and a first priority security interest in
certain of our property including receivables, equipment, owned real estate,
inventory, trademark and copyrights.
INTEREST RATES. Borrowings under the credit facility accrue interest at
either the Alternate Base Rate, as defined therein, plus 1.5% or a rate equal to
the Eurodollar borrowing rate plus 2.5% at our option.
COVENANTS. The credit facility contains covenants that, among other things,
restrict our and our subsidiaries, ability to dispose of assets, incur
additional indebtedness, incur guarantee obligations, repay indebtedness or
amend debt instruments, pay dividends, create liens on assets, make investments,
make acquisitions, engage in recapitalizations or consolidations, or engage in
certain transactions with subsidiaries and affiliates and otherwise restrict
corporate activities. In addition, the credit facility requires us to comply
with certain financial ratios and coverage tests.
EVENTS OF DEFAULT. The credit facility also includes customary events of
default. The occurrence of any such events of default could result in
acceleration of our obligations under the credit facility and foreclosure on the
collateral securing such obligations, which could have a material adverse effect
on our business.
49
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The notes were issued under an indenture, dated as of October 16, 1997,
between us and United States Trust Company of New York, as trustee. The
following summary of certain provisions of the indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended, and to all of the provisions of the
indenture, including the definitions of certain terms therein and those terms
made a part of the indenture by reference to the TIA as in effect on the date of
the indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions."
We will issue the notes in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the trustee
will act as paying agent and registrar for the notes. The notes may be presented
for registration or transfer and exchange at the offices of the registrar, which
initially will be the trustee's corporate trust office. We may change any paying
agent and registrar without notice to holders of the notes. We will pay
principal, and premium, if any, on the notes at the trustee's corporate office
in New York, New York. At our option, interest may be paid at the trustee's
corporate trust office or by check mailed to the registered address of holders.
Any notes that remain outstanding after the completion of the exchange offer,
together with the exchange notes issued in connection with the exchange offer,
will be treated as a single class of securities under the indenture.
PRINCIPAL, MATURITY AND INTEREST
The notes are unsecured senior obligations of our company and are limited in
aggregate principal amount to $125,000,000, of which $30,000,000 will be issued
in this offering. Notes in the aggregate principal amount of $85,000,000 were
previously issued under the indenture. The notes and the outstanding notes will
be considered collectively to be a single class for all purposes under the
indenture, including, without limitation, waivers, amendments, redemptions and
offers to purchase, as described below. Unless and until the notes are
registered under the Securities Act, however, the notes will not trade
interchangeably with the outstanding notes in the secondary market. The notes
will mature on October 15, 2004. Interest on the notes will accrue at the rate
of 9 3/4% per annum and will be payable semiannually in cash on each April 15
and October 15 to the persons who are registered holders at the close of
business on the April 1 and October 1 immediately preceding the applicable
interest payment date. Interest on the notes being issued in this offering will
first be payable on October 15, 1999. Interest on the notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The notes are redeemable, at our option, in whole at
any time or in part from time to time, on and after October 15, 2001, upon not
less than 30 nor more than 60 days' notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if redeemed during
the twelve-month period commencing on October 15 of the year set forth below,
plus, in each case, accrued and unpaid interest thereon, if any, to the date of
redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 104.875%
2002.............................................................................. 102.438%
2003 and thereafter............................................................... 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to October 15, 2000, we may, at our option, use the net
cash proceeds of one or more Public Equity Offerings, as defined below, to
redeem up to 35% of the notes issued under the indenture at a
50
<PAGE>
redemption price equal to 109.750% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption; PROVIDED that:
(1) at least 65% of the principal amount of notes issued under the indenture
remains outstanding immediately after any such redemption; and
(2) we shall make such redemption not more than 120 days after the consummation
of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of our Qualified Capital Stock pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act.
At any time on or prior to October 15, 2002, the notes may also be redeemed
as a whole but not in part at our option upon the occurrence of a Change of
Control, upon not less than 30 nor more than 60 days' prior notice (but in no
event more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as of,
and accrued but unpaid interest, if any, to, the date of redemption (the
"Redemption Date"), subject to the rights of holders on the relevant record date
to receive interest due on the relevant interest payment date.
"Applicable Premium" means, with respect to a note at any Redemption Date,
the greater of:
(1) 1.0% of the principal amount of such note; and
(2) the excess of
(a) the present value at such time of:
(x) the redemption price of such note at October 15, 2002, as described
under "--Optional Redemption", plus
(y) all required interest payments, excluding accrued but unpaid
interest, due on such Note through October 15, 2002, computed using a
discount rate equal to the Treasury Rate plus 75 basis points, over
(b) the principal amount of such note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to October 15, 2002, PROVIDED, HOWEVER, that if
the period from the Redemption Date to October 15, 2002 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation, calculated to the nearest one-twelfth of a year, from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to October 15, 2002 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any time,
selection of such notes for redemption will be made by the trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such notes are listed or, if such notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
trustee shall deem fair and appropriate; PROVIDED, HOWEVER:
(1) that no notes of a principal amount of $1,000 or less shall be redeemed in
part; and
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<PAGE>
(2) that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the notes or portions thereof for redemption shall be
made by the trustee only on a PRO RATA basis or on as nearly a PRO RATA
basis as is practicable, subject to DTC procedures, unless such method is
otherwise prohibited.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. If any note is to be redeemed in part only,
the notice of redemption that relates to such note shall state the portion of
the principal amount thereof to be redeemed. A new note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original note. On and after the redemption
date, interest will cease to accrue on notes or portions thereof called for
redemption as long as we have deposited with the paying agent funds in
satisfaction of the applicable redemption price pursuant to the indenture.
CHANGE OF CONTROL
The indenture provides that upon the occurrence of a Change of Control, each
holder will have the right to require that we purchase all or a portion of such
holder's notes pursuant to the offer described below, the "Change of Control
Offer", at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
we must send, by first class mail, a notice to each holder, with a copy to the
trustee, which notice shall govern the terms of the Change of Control Offer.
Such notice will state, among other things, the purchase date, which must be no
earlier than 30 days nor later than 45 days from the date such notice is mailed,
other than as may be required by law, the "Change of Control Payment Date".
Holders electing to have a note purchased pursuant to a Change of Control Offer
will be required to surrender the note, with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the note completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that we will
have available funds sufficient to pay the Change of Control purchase price for
all the notes that might be delivered by holders seeking to accept the Change of
Control Offer. In the event we are required to purchase outstanding Notes
pursuant to a Change of Control Offer, we expect that we would seek third party
financing to the extent we do not have available funds to meet our purchase
obligations. However, there can be no assurance that we would be able to obtain
such financing.
Neither our board of directors nor the trustee may waive the covenant
relating to a holder's right to redemption upon a Change of Control.
Restrictions in the indenture described herein on our ability and the ability of
our Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
our property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of our company, whether favored or
opposed by our management. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the notes, and there can
be no assurance that we or the acquiring party will have sufficient financial
resources to effect such redemption or repurchase. Such restrictions and the
restrictions on transactions with Affiliates may, in certain circumstances, make
more difficult or discourage any leveraged buyout of our company or any of our
subsidiaries by our management. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the indenture may not afford the holders of notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of notes
pursuant to a Change of Control Offer. To the extent that the
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provisions of any securities laws or regulations conflict with the "Change of
Control" provisions of the indenture, we shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Change of Control" provisions of the indenture by virtue
thereof.
CERTAIN COVENANTS
The indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. We will not, and will
not permit any of the Restricted Subsidiaries to, directly or indirectly,
create, incur, assume, guarantee, acquire, become liable, contingently or
otherwise, with respect to, or otherwise become responsible for payment of,
collectively "incur", any Indebtedness, other than Permitted Indebtedness;
PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred
and be continuing at the time of or as a consequence of the incurrence of any
such Indebtedness, we may incur Indebtedness, including, without limitation,
Acquired Indebtedness if on the date of the incurrence of such Indebtedness,
after giving effect to the incurrence thereof, our Consolidated Fixed Charge
Coverage Ratio is greater than 2.00 to 1.00.
We will not, directly or indirectly, in any event incur any Indebtedness
which by its terms, or by the terms of any agreement governing such
Indebtedness, is subordinated to any of our other Indebtedness unless such
Indebtedness is also by its terms, or by the terms of any agreement governing
such Indebtedness made expressly subordinate to the notes to the same extent and
in the same manner as such Indebtedness is subordinated pursuant to
subordination provisions that are most favorable to the holders of any of our
other Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS. We will not, and will not cause or
permit any of the Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution, other than
dividends or distributions payable in our Qualified Capital Stock on or
in respect of shares of our Capital Stock to holders of such Capital
Stock,
(2) purchase, redeem or otherwise acquire or retire for value any of our
Capital Stock or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock,
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to:
(a) any scheduled maturity,
(b) scheduled or mandatory repayment or
(c) scheduled sinking fund payment, any of our Indebtedness or of our
Subsidiaries that is subordinate or junior in right of payment to the
Notes; or
(4) make any Investment, other than Permitted Investments. Each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being
referred to as a "Restricted Payment";
if at the time of such Restricted Payment or immediately after giving effect
thereto:
(1) a Default or an Event of Default shall have occurred and be continuing;
or
(2) we are not able to incur at least $1.00 of additional Indebtedness,
other than Permitted Indebtedness, in compliance with the covenant
described under "--Limitation on Incurrence of Additional Indebtedness";
or
(3) the aggregate amount of Restricted Payments, including such proposed
Restricted Payment made subsequent to the Issue Date, I.E. October 16,
1997, (the amount expended for such purposes, if other than in cash,
being the fair market value of such property as determined reasonably and
in good faith by our Board of Directors) will exceed the sum of, without
duplication:
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(a) 50% of our cumulative Consolidated Net Income, or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss
earned subsequent to the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date"), treating such
period as a single accounting period, plus
(b) 100% of the aggregate net cash proceeds received by us from any
Person, other than any of our subsidiaries from the issuance and sale
subsequent to the Issue Date and on or prior to the Reference Date of
our Qualified Capital Stock, plus
(c) without duplication of any amounts included in clause (3)(b) above,
100% of the aggregate net cash proceeds of any equity contribution
received by us from a holder of our Capital Stock, plus
(d) an amount equal to the sum of
(x) the net reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances or
other transfers of assets by any Unrestricted Subsidiary to us or
to any Restricted Subsidiary or the receipt of proceeds by us or
any Restricted Subsidiary from the sale or other disposition of
any portion of the Capital Stock of any Unrestricted Subsidiary,
in each case occurring subsequent to the Issue Date and
(y) the consolidated net Investments on the date of Revocation made
by us or any of the Restricted Subsidiaries in any of our
Subsidiaries that has been designated an Unrestricted Subsidiary
after the Issue Date upon its redesignation as a Restricted
Subsidiary in accordance with the covenant described under
"--Limitation on Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend or redemption payment within 60 days after
the date of declaration of such dividend if the dividend or redemption
payment, as the case may be, would have been permitted on the date of
declaration;
(2) if no Default or Event of Default shall have occurred and be continuing,
the acquisition of any shares of our Capital Stock, either
(a) solely in exchange for shares of our Qualified Capital Stock or
(b) through the application of net proceeds of a substantially concurrent
sale for cash, other than to any of our Restricted Subsidiaries of
shares of our Qualified Capital Stock;
(3) if no Default or Event of Default shall have occurred and be continuing,
the acquisition of any of our Indebtedness or any of our subsidiary that
is subordinate or junior in right of payment to the notes either
(a) solely in exchange for shares of our Qualified Capital Stock, or
(b) through the application of net proceeds of a substantially concurrent
sale for cash, other than to any of our Restricted Subsidiaries, of
(x) shares of our Qualified Capital Stock or
(y) Refinancing Indebtedness; and
(4) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by us of our Capital Stock or options to purchase
our Capital Stock, stock appreciation rights or any similar equity
interest in us from our directors and employees or those of any of our
subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such employees, in an
aggregate amount not to exceed $500,000 in any calendar year; and
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(5) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by us of shares of our series B preferred stock
held by our directors and employees pursuant to provisions thereof
requiring the redemption thereof at the election of the holders thereof
at any time following an initial public offering of our company.
In determining the aggregate amount of Restricted Payments made subsequent to
the Issue Date in accordance with clause (3) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(b), (3)(b)(x), (4) and
(5) above shall be included in such calculation.
Not later than the date of making any Restricted Payment, we will deliver to
the trustee an officers' certificate stating that such Restricted Payment
complies with the indenture and setting forth in reasonable detail the basis
upon which the required calculations were computed, which calculations may be
based upon our latest available internal quarterly financial statements.
LIMITATION ON ASSET SALES. We will not, and will not permit any of the
Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) we or the applicable Restricted Subsidiary, as the case may be, receive
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of, as determined
in good faith by our Board of Directors;
(2) at least 80% of the consideration received by us or the Restricted
Subsidiary, as the case may be, from such Asset Sale shall be in the form
of cash or Cash Equivalents and is received at the time of such
disposition; PROVIDED, HOWEVER, that the amount of:
(a) any liabilities, as shown on our or such Restricted Subsidiary's, as
the case may be, most recent balance sheet or the notes thereto, of
us or any Restricted Subsidiary, other than liabilities that are by
their terms subordinated to the notes, that are assumed by the
transferee in such Asset Sale and from which we or such Restricted
Subsidiary are released and
(b) any notes or other obligations received by us or by any such
Restricted Subsidiary from such transferee that are immediately
converted by us or by such Restricted Subsidiary into cash or Cash
Equivalents, to the extent of the cash or Cash Equivalents received,
shall be deemed to be cash for the purposes of this provision; and
(3) upon the consummation of an Asset Sale, we will apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such
Asset Sale within 360 days of receipt thereof either:
(a) to prepay any Indebtedness ranking at least PARI PASSU with the
notes, including amounts under the Credit Facility, and, in the case
of any such Indebtedness under any revolving credit facility, effect
a permanent reduction in the availability under such revolving credit
facility,
(b) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in
properties and assets that will be used in the business of us and the
Restricted Subsidiaries as existing on the Issue Date or in
businesses reasonably related thereto, "Replacement Assets", or
(c) a combination of prepayment and investment permitted by the foregoing
clauses (3)(a) and (3)(b).
On the 361st day after an Asset Sale or such earlier date, if any, as our
Board of Directors or the Board of Directors of such Restricted Subsidiary as
the case may be determines not to apply the Net Cash Proceeds relating to such
Asset Sale as set forth in clauses (3)(a), (3)(b) and (3)(c) of the next
preceding paragraph, each a "Net Proceeds Offer Trigger Date", such aggregate
amount of Net Cash Proceeds which have not been applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (3)(a), (3)(b) and (3)(c) of
the next preceding paragraph, each a "Net Proceeds Offer
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Amount", shall be applied by us or such Restricted Subsidiary to make an offer
to purchase, the "Net Proceeds Offer", on a date, the "Net Proceeds Offer
Payment Date", not less than 45 nor more than 60 days following the applicable
Net Proceeds Offer Trigger Date, from all holders on a PRO RATA basis, that
amount of notes equal to the Net Proceeds Offer Amount at a price equal to 100%
of the principal amount of the notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; PROVIDED, HOWEVER,that if at
any time any non-cash consideration received by us or by any Restricted
Subsidiary, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash, other than interest received
with respect to any such non-cash consideration, then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant.
We may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $5 million resulting from one
or more Asset Sales. At which time, the entire unutilized Net Proceeds Offer
Amount, not just the amount in excess of $5 million, shall be applied as
required pursuant to the preceding paragraph.
In the event of the transfer of substantially all, but not all, of our
property and assets and those of our Restricted Subsidiaries as an entirety to a
person in a transaction permitted under "--Merger, Consolidation and Sale of
Assets," the successor corporation shall be deemed to have sold our properties
and assets and those of our Restricted Subsidiaries not so transferred for
purposes of this covenant, and shall comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale. In addition, the
fair market value of our properties and assets or those of our Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Notwithstanding the four immediately preceding paragraphs, we and the
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent:
(1) at least 80% of the consideration for such Asset Sale constitutes
Replacement Assets; and
(2) such Asset Sale is for fair market value;
PROVIDED that any consideration not constituting Replacement Assets received by
us or any of the Restricted Subsidiaries in connection with any Asset Sale
permitted to be consummated under this paragraph shall constitute Net Cash
Proceeds subject to the provisions of the four preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record holders as shown on the
register of holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the trustee, and will comply with the procedures set forth
in the indenture. Upon receiving notice of the Net Proceeds Offer, holders may
elect to tender their notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent holders properly tender notes in an amount
exceeding the Net Proceeds Offer Amount, notes of tendering holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
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We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Asset Sale" provisions of the
indenture, we will comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the "Asset Sale"
provisions of the indenture by virtue thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. We will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions on or in respect of capital
stock;
(2) make loans or advances or to pay any Indebtedness or other obligation owed
to us or any other Restricted Subsidiary; or
(3) transfer any of its property or assets to us or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or
by reason of:
(a) applicable law,
(b) the indenture and the notes,
(c) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary,
(d) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any person, or the properties or assets
of any person, other than the person or the properties or assets of the
person so acquired, including, but not limited to, such person's direct
and indirect subsidiaries,
(e) agreements existing on the Issue Date to the extent and in the manner
such agreements are in effect on the Issue Date, or
(f) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (b), (d) or (e) above; PROVIDED, HOWEVER, that the
provisions relating to such encumbrance or restriction contained in any
such Indebtedness are no less favorable to us in any material respect as
determined by our Board of Directors in its reasonable and good faith
judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (b), (d) or (e).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. We will not permit
any of the Restricted Subsidiaries to issue any preferred stock, other than to
us or to a Wholly Owned Restricted Subsidiary, or permit any person, other than
us or a Wholly Owned Restricted Subsidiary, to own any preferred stock of any
Restricted Subsidiary.
LIMITATION ON LIENS. We will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
permit or suffer to exist any liens upon any of our property or assets or those
of any of the Restricted Subsidiaries whether owned on the Issue Date or
acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise
convey any right to receive income or profits therefrom unless:
(1) in the case of liens securing Indebtedness that is expressly subordinate or
junior in right of payment to the notes, the notes are secured by a lien on
such property, assets or proceeds that is senior in priority to such liens;
and
(2) in all other cases, the notes are secured on an equal and ratable basis,
except for
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(a) liens existing as of the Issue Date to the extent and in the manner such
Liens are in effect on the Issue Date,
(b) liens securing Indebtedness under the credit facility,
(c) liens securing the notes,
(d) liens of our company or a Restricted Subsidiary on our assets or on the
assets of any Restricted Subsidiary,
(e) liens securing Refinancing Indebtedness which is incurred to refinance
any Indebtedness which has been secured by a lien permitted under the
indenture and which has been incurred in accordance with the provisions
of the indenture; PROVIDED, HOWEVER, that such liens
(x) are no less favorable to the holders and are not more favorable to
the lienholders with respect to such liens than the liens in respect
of the Indebtedness being Refinanced and
(y) do not extend to or cover any of our property or assets or the
property or assets of any of the Restricted Subsidiaries not securing
the Indebtedness so Refinanced,
(f) liens in favor of our company and
(g) Permitted Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. We will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any person, or sell, assign, transfer, lease, convey or otherwise dispose of, or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of, all or substantially all of our assets,
determined on a consolidated basis for us and the Restricted Subsidiaries,
whether as an entirety or substantially as an entirety to any person unless:
(1) either:
(a) we will be the surviving or continuing corporation, or
(b) the person, if other than us, formed by such consolidation or into which
we are merged or the person which acquires by sale, assignment, transfer,
lease, conveyance or other disposition of our properties and assets and
the properties and assets of the Restricted Subsidiaries substantially as
an entirety, the "Surviving Entity",
(x) will be a corporation organized and validly existing under the laws
of the United States or any State thereof or the District of Columbia
and
(y) will expressly assume, by supplemental indenture, in form and
substance satisfactory to the trustee, executed and delivered to the
trustee, the due and punctual payment of the principal of, and
premium, if any, and interest on all of the notes and the performance
of every covenant of the notes, the indenture and the registration
rights agreement on our part to be performed or observed;
(2) immediately after giving effect to such transaction and the assumption
contemplated by clause (1) (b) (y) above, including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction, we or such
Surviving Entity, as the case may be,
(a) will have a Consolidated Net Worth equal to or greater than our
Consolidated Net Worth immediately prior to such transaction, and
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(b) will be able to incur at least $1.00 of additional Indebtedness, other
than Permitted Indebtedness, pursuant to the covenant described under
"--Limitation on Incurrence of Additional Indebtedness";
(3) immediately before and immediately after giving effect to such transaction
and the assumption contemplated by clause (1)(b)(y) above, including,
without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any lien granted in
connection with or in respect of the transaction, no Default or Event of
Default will have occurred or be continuing; and
(4) we or the Surviving Entity will have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, sale, assignment, transfer, lease, conveyance or other disposition
and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture complies with the applicable
provisions of the indenture and that all conditions precedent in the
indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer, by lease, assignment, sale or
otherwise, in a single transaction or series of transactions, of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the capital stock of which constitutes all or substantially all of
our properties and assets, will be deemed to be the transfer of all or
substantially all of our properties and assets.
The indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of our assets in accordance with the
foregoing, in which we are not the continuing corporation, the Surviving Entity
will succeed to, and be substituted for, and may exercise every right and power
of, us under the indenture and the notes with the same effect as if such
Surviving Entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.
(1) We will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction or
series of related transactions, including, without limitation, the purchase,
sale, lease or exchange of any property or the rendering of any service,
with, or for the benefit of, any of its Affiliates, each an "Affiliate
Transaction", other than:
(a) Affiliate Transactions permitted under paragraph (2) below and
(b) Affiliate Transactions on terms that are no less favorable than those
that might reasonably have been obtained in a comparable transaction at
such time on an arm's-length basis from a person that is not our
affiliate or such Restricted Subsidiary.
All Affiliate Transactions, and each series of related Affiliate
Transactions which are similar or part of a common plan, involving aggregate
payments or other property with a fair market value in excess of $2,500,000 will
be approved by our Board of Directors or that of such Restricted Subsidiary, as
the case may be, such approval to be evidenced by a board resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If we or any Restricted Subsidiary enters into an
Affiliate Transaction, or a series of related Affiliate Transactions related to
a common plan, that involves an aggregate fair market value of more than
$10,000,000, we or such Restricted Subsidiary, as the case may be, will, prior
to the consummation thereof, obtain an opinion stating that such transaction or
series of related transactions are fair to us or to the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor.
(2) The restrictions set forth in clause (1) shall not apply to:
(a) reasonable fees and compensation paid to and indemnity provided on
behalf of, our officers, directors, employees or consultants or those of
any Restricted Subsidiary as determined in good faith by our Board of
Directors,
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(b) transactions exclusively between or among us and any of the Restricted
Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by
the indenture,
(c) Restricted Payments permitted by the indenture, and
(d) advisory fees pursuant to the Professional Services Agreement between us
and BRS Group in effect on the Issue Date.
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. We will not permit any
Restricted Subsidiary, directly or indirectly, by way of the pledge of any
intercompany note or otherwise, to assume, guarantee or in any other manner
become liable with respect to any of our Indebtedness, other than Indebtedness
incurred under the credit facility, unless, in any such case:
(1) such Restricted Subsidiary executes and delivers a supplemental indenture to
the indenture, providing a guarantee of payment of the notes by such
Restricted Subsidiary in the form required by the indenture, the
"Guarantee"; and
(2) if such assumption, guarantee or other liability of such Restricted
Subsidiary is provided in respect of Indebtedness that is expressly
subordinated to the notes, the guarantee or other instrument provided by
such Restricted Subsidiary in respect of such subordinate Indebtedness shall
be subordinated to the Guarantee pursuant to subordination provisions not
less favorable to the holders of the notes than those contained in the
indenture or similar document governing such subordinated Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the notes will provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the trustee or any holder, upon:
(1) the unconditional release of such Restricted Subsidiary from its liability
in respect of the Indebtedness in connection with which such Guarantee was
executed and delivered pursuant to the preceding paragraph; or
(2) any sale or other disposition, by merger or otherwise, to any person which
is not our Restricted Subsidiary of all of our capital stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; PROVIDED,
HOWEVER, that:
(a) such sale or disposition of such capital stock or assets is otherwise in
compliance with the terms of the indenture, and
(b) such assumption, guarantee or other liability of such Restricted
Subsidiary has been released by the holders of the other Indebtedness so
guaranteed.
REPORTS TO HOLDERS. We will deliver to the trustee within 15 days after the
filing of the same with the Securities and Exchange Commission, copies of the
quarterly and annual reports and of the information, documents and other
reports, if any, which we are required to file with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Exchange Act. The indenture
further provides that, notwithstanding that we may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, we will file
with the Securities and Exchange Commission, upon the earlier of the
effectiveness of the Exchange Offer Registration Statement and 150 days
following the Issue Date, and provide the trustee and holders with such annual
reports and such information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act. We will also comply with the other provisions
of TIA Section 314(a).
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LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. We may designate
any of our subsidiaries, other than any of our subsidiaries which owns Capital
Stock of a Restricted Subsidiary, as an "Unrestricted Subsidiary" under the
Indenture, a "Designation", only if:
(1) no Default shall have occurred and be continuing at the time of or after
giving effect to such Designation; and
(2) we would be permitted under the indenture to make an Investment at the time
of Designation, assuming the effectiveness of such Designation, in an
amount, the "Designation Amount", equal to the sum of:
(a) fair market value of the Capital Stock of such subsidiary owned by us
and the Restricted Subsidiaries on such date, and
(b) the aggregate amount of other Investments of us and the Restricted
Subsidiaries in such Subsidiary on such date; and
(3) we would be permitted to incur $1.00 of additional Indebtedness, other than
Permitted Indebtedness, pursuant to the covenant described under
"--Limitation on Incurrence of Additional Indebtedness" at the time of
Designation, assuming the effectiveness of such Designation.
In the event of any such Designation, we will be deemed to have made an
Investment constituting a Restricted Payment pursuant to the covenant described
under "-- Limitation on Restricted Payments" for all purposes of the indenture
in the Designation Amount. The indenture will further provide that we will not,
and will not permit any Restricted Subsidiary to, at any time:
(1) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary, including of any undertaking,
agreement or instrument evidencing such Indebtedness;
(2) be directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary; or
(3) be directly or indirectly liable for any Indebtedness which provides that
the holder thereof may, upon notice or lapse of time or both, declare a
default thereon or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity upon the occurrence of a default with
respect to any Indebtedness of any Unrestricted Subsidiary, including any
right to take enforcement action against such Unrestricted Subsidiary,
except, in the case of clause (1) or (2), to the extent permitted under the
covenant described under "--Limitation on Restricted Payments."
The indenture further provides that we may revoke any Designation of a
subsidiary as an Unrestricted Subsidiary, a "Revocation", whereupon such
subsidiary shall then constitute a Restricted Subsidiary, if:
(1) no Default shall have occurred and be continuing at the time of and after
giving effect to such Revocation; and
(2) all liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have
been permitted to be incurred for all purposes of the indenture.
All Designations and Revocations must be evidenced by our board resolutions
of our Board of Directors certifying compliance with the foregoing provisions.
EVENTS OF DEFAULT
The following events are defined in the indenture as "Events of Default":
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(1) the failure to pay interest on any notes when the same becomes due and
payable and the default continues for a period of 30 days;
(2) the failure to pay the principal on any notes, when such principal becomes
due and payable, at maturity, upon redemption or otherwise, including the
failure to make a payment to purchase notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer;
(3) a default in the observance or performance of any other covenant or
agreement contained in the indenture which default continues for a period of
30 days after we receive written notice specifying the default, and
demanding that such default be remedied, from the trustee or the holders of
at least 25% of the outstanding principal amount of the notes, except in the
case of a default with respect to the covenant described under "--Certain
Covenants--Merger, Consolidation and Sale of Assets," which will constitute
an Event of Default with such notice requirement but without such passage of
time requirement;
(4) the failure to pay at final maturity, giving effect to any applicable grace
periods and any extensions thereof, the principal amount of any of our
Indebtedness or that of any Restricted Subsidiary, or the acceleration of
the final stated maturity of any such Indebtedness if the aggregate
principal amount of such Indebtedness, together with the principal amount of
any other such Indebtedness in default for failure to pay principal at final
maturity or which has been accelerated, aggregates $2,500,000 or more at any
time;
(5) one or more judgments in an aggregate amount in excess of $2,500,000 will
have been rendered against us or any of the Restricted Subsidiaries and such
judgments remain undischarged, unpaid or unstayed for a period of 60 days
after such judgment or judgments become final and non-appealable; or
(6) certain events of bankruptcy affecting us or any of our Significant
Subsidiaries.
If an Event of Default, other than an Event of Default specified in clause
(6) above relating to us, will occur and be continuing, the trustee or the
holders of at least 25% in principal amount of outstanding notes may declare the
principal of and accrued interest on all the notes to be due and payable by
notice in writing to us and the trustee specifying the respective Event of
Default, and the same shall become immediately due and payable. If an Event of
Default specified in clause (6) above relating to us occurs and is continuing,
then all unpaid principal of, and premium, if any, and accrued and unpaid
interest on all of the outstanding notes shall IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
the trustee or any holder.
The indenture provides that, at any time after a declaration of acceleration
with respect to the notes as described in the preceding paragraph, the holders
of a majority in principal amount of the notes may rescind and cancel such
declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(4) if we have paid the trustee its reasonable compensation and reimbursed the
trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the description above of Events of Default, the
trustee shall have received an officers' certificate and
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an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The holders of a majority in principal amount of the notes may waive any
existing Default or Event of Default under the indenture, and its consequences,
except a default in the payment of the principal of or interest on any notes.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture and under the TIA. Subject to the provisions of the
indenture relating to the duties of the trustee, the trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless such holders have
offered to the trustee reasonable indemnity. Subject to all provisions of the
indenture and applicable law, the holders of a majority in aggregate principal
amount of the then outstanding notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee.
Under the indenture, we are required to provide an officers' certificate to
the trustee promptly upon any such officer obtaining knowledge of any Default or
Event of Default that has occurred and, if applicable, describe such Default or
Event of Default and the status thereof; PROVIDED that such officers shall
provide such certification at least annually whether or not they know of any
Default or Event of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have our obligations
discharged with respect to the outstanding notes, "Legal Defeasance". Such Legal
Defeasance means that we will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding notes, except for:
(1) the rights of holders to receive payments in respect of the principal of,
premium, if any, and interest on the notes when such payments are due;
(2) our obligations with respect to the notes concerning
- issuing temporary notes,
- registration of notes,
- mutilated, destroyed, lost or stolen notes and
- the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the trustee and our
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants that are described in the
indenture, "Covenant Defeasance", and thereafter any omission to comply with
such obligations will not constitute a Default or Event of Default with respect
to the notes. In the event Covenant Defeasance occurs, other events, not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events, described under "Events of Default" will no longer constitute an Event
of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) we must irrevocably deposit with the trustee, in trust, for the benefit of
the holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants,
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to pay the principal of, premium, if any, and interest on the notes on the
stated date for payment thereof or on the applicable redemption date, as the
case may be;
(2) in the case of Legal Defeasance, we will have delivered to the trustee an
opinion of counsel in the United States reasonably acceptable to the trustee
confirming that
(a) we have received from, or there has been published by, the Internal
Revenue Service a ruling, or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders
will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we will have delivered to the trustee an
opinion of counsel in the United States reasonably acceptable to the trustee
confirming that the holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance
had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the indenture or any other
material agreement or instrument to which we or any of our subsidiaries are
a party or by which we or any of our subsidiaries are bound;
(6) we will have delivered to the trustee an officers' certificate stating that
the deposit was not made by us with the intent of preferring the holders
over any of our other creditors or with the intent of defeating, hindering,
delaying or defrauding any of our other creditors or others;
(7) we will have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
or relating to the Legal Defeasance or the Covenant Defeasance have been
complied with;
(8) we will have delivered to the trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clauses
(2)(a) and (3) above need not be delivered if all the notes not theretofore
delivered to the trustee for cancellation:
(1) have become due and payable;
(2) will become due and payable on the maturity date within one year; or
(3) are to be called for redemption within one year under arrangements
satisfactory to the trustee for the giving of notice of redemption by such
trustee in our name, and at our expense.
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SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect,
except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture, as to all notes then
outstanding when:
(1) either
(a) all the notes theretofore authenticated and delivered have been
delivered to the trustee for cancellation, except lost, stolen or
destroyed notes which have been replaced or paid and notes for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by us and thereafter repaid to us or discharged from such
trust, or
(b) all notes not theretofore delivered to the trustee for cancellation have
become due and payable and we have irrevocably deposited or caused to be
deposited with the trustee funds in an amount sufficient to pay and
discharge the entire Indebtedness on the notes not theretofore delivered
to the trustee for cancellation, for principal of, premium, if any, and
interest on the notes to the date of deposit together with irrevocable
instructions from us directing the trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be;
(2) we have paid all other sums payable by us under the indenture; and
(3) we have delivered to the trustee an officers' certificate and an opinion of
counsel stating that all conditions precedent under the indenture relating
to the satisfaction and discharge of the indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, we and the trustee, without the consent of the holders,
may amend the indenture for certain specified purposes, including curing
ambiguities, defects or inconsistencies, so long as such change does not, in the
opinion of the trustee, adversely affect the rights of any of the holders in any
material respect. In formulating its opinion on such matters, the trustee will
be entitled to rely on such evidence as it deems appropriate, including, without
limitation, solely on an opinion of counsel. Other modifications and amendments
of the indenture may be made with the consent of the holders of a majority in
principal amount of the then outstanding notes issued under the indenture,
except that, without the consent of each holder affected thereby, no amendment
may:
(1) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing the fixed
maturity of any notes, or change the date on which any notes may be subject
to redemption or repurchase, or reduce the redemption or repurchase price
therefor;
(4) make any notes payable in money other than that stated in the notes;
(5) make any change in provisions of the indenture protecting the right of each
holder to receive payment of principal of and interest on such note on or
after the due date thereof or to bring suit to enforce such payment, or
permitting holders of a majority in principal amount of notes to waive
Defaults or Events of Default;
(6) amend, change or modify in any material respect our obligation to make and
consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net
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Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto; or
(7) modify or change any provision of the indenture or the related definitions
affecting the ranking of the notes in a manner which adversely affects the
holders.
GOVERNING LAW
The indenture provides that it is, and the notes will be, governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an Event of Default, the trustee will
exercise such rights and powers vested in it by the indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The indenture and the provisions of the TIA contain certain limitations on
the rights of the trustee, should it become our creditor or a creditor of our
subsidiary, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the trustee will be permitted to engage in other
transactions; PROVIDED that if the trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a person or any of its
subsidiaries existing at the time such person becomes a Restricted Subsidiary or
at the time it merges or consolidates with us or any of the Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
person and in each case not incurred by such person in connection with, or in
anticipation or contemplation of, such person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified person, any other person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"Asset Acquisition" means
(1) an Investment by us or any Restricted Subsidiary in any other person
pursuant to which such person shall become a Restricted Subsidiary or shall
be merged with or into our company or any Restricted Subsidiary; or
(2) the acquisition by us or by any Restricted Subsidiary of the assets of any
person, other than a Restricted Subsidiary, which constitute all or
substantially all of the assets of such person or comprises any division or
line of business of such person or any other properties or assets of such
Person other than in the ordinary course of business.
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"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, other than operating leases entered into in the ordinary course
of business, assignment or other transfer for value by us or any of the
Restricted Subsidiaries, including any Sale and Leaseback Transaction, to any
person other than us or a Restricted Subsidiary of:
(1) any Capital Stock of any Restricted Subsidiary; or
(2) any of our other property or assets or property or assets of any
Restricted Subsidiary other than in the ordinary course of business;
PROVIDED, HOWEVER, that Asset Sales shall not include
(a) a transaction or series of related transactions for which we or
the Restricted Subsidiaries receive aggregate consideration of less than
$1,000,000,
(b) the sale, lease, conveyance, disposition or other transfer of
all or substantially all of our assets as permitted under "--Certain
Covenants--Merger, Consolidation and Sale of Assets,"
(c) disposals or replacements of obsolete equipment in the ordinary
course of business,
(d) the sale, lease, conveyance, disposition or other transfer by us
or by any Restricted Subsidiary of assets or property to us or one or
more Restricted Subsidiaries, and
(e) any Restricted Payment.
"Board of Directors" means, as to any person, the board of directors of such
person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such person to have been
duly adopted by the Board of Directors of such person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"BRS Group" means, Bruckmann, Rosser, Sherill & Co., Inc. and its
Affiliates.
"Business Day" means a day other than a Saturday, Sunday or other day in
which commercial banking institutions (including, without limitation, the
Federal Reserve System) are authorized or required by law to close in New York
City.
"Capitalized Lease Obligation" means, as to any person, the obligations of
such person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means:
(1) with respect to any person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
common stock and preferred stock of such person; and
(2) with respect to any person that is not a corporation, any and all
partnership or other equity interests of such person.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
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highest ratings obtainable from either Standard & Poor's Corporation ("S&P")
or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250,000,000;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through (5)
above.
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of our assets to
any person or group of related persons for purposes of Section 13(d) of the
Exchange Act (a "Group"), together with any affiliates thereof whether or
not otherwise in compliance with the provisions of the indenture;
(2) the approval by the holders of our capital stock of any plan or
proposal for the liquidation or dissolution of our company (whether or not
otherwise in compliance with the provisions of the indenture);
(3) any person or group, other than a permitted holder, shall become the
owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power
represented by our issued and outstanding capital stock; or
(4) the replacement of a majority of our Board of Directors over a two-
year period from the directors who constituted our Board of Directors at the
beginning of such period, and such replacement shall not have been approved
by a vote of at least a majority of our Board of Directors then still in
office who either were members of any such Board of Directors at the
beginning of such period or whose election as a member of any such Board of
Directors was previously so approved.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "--Change
of Control."
"Common Stock" of any person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum (without duplication)
of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby,
(a) all income taxes of our company and of the Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or
nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business),
(b) Consolidated Interest Expense, and
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(c) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a
consolidated basis for us and the Restricted Subsidiaries in accordance
with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of Consolidated
EBITDA during the four full fiscal quarters (the "Four Quarter Period") ending
on or prior to the date of the transaction giving rise to the need to calculate
the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to
Consolidated Fixed Charges for the four quarter period. In addition to and
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a pro forma (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of our company or of
any of the Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any incurrence
or repayment of other Indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the four quarter period or at any time
subsequent to the last day of the four quarter period and on or prior to the
transaction date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the four quarter period; and
(2) any Asset Sales or Asset Acquisitions including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as a
result of us or one of the Restricted Subsidiaries including any person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition
incurring, assuming or otherwise being liable for Acquired Indebtedness and
also including any Consolidated EBITDA attributable to the assets which are
the subject of the Asset Acquisition or Asset Sale during the four quarter
period) occurring during the four quarter period or at any time subsequent
to the last day of the four quarter period and on or prior to the
transaction date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the four quarter period. If we or any of the
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third person, the preceding sentence shall give effect to the incurrence of
such guaranteed Indebtedness as if we or any such Restricted Subsidiary had
directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator, but not the numerator, of this "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the transaction date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the transaction
date;
(2) if interest on any Indebtedness actually incurred on the transaction
date may optionally be determined at an interest rate based upon a factor of
a prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the transaction date will be
deemed to have been in effect during the four quarter period; and
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to accrue
at the rate per annum resulting after giving effect to the operation of such
agreements.
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"Consolidated Fixed Charges" means, with respect to our company for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of:
(a) the amount of all dividend payments on any series of our
preferred stock, other than dividends paid in Qualified Capital Stock,
paid, accrued or scheduled to be paid or accrued during such period
times, and
(b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal, state
and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, for any period, the sum of, without
duplication:
(1) the aggregate of our company interest expense of and the Restricted
Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, including without limitation,
(a) any amortization of debt discount,
(b) the net costs under Interest Swap Obligations,
(c) all capitalized interest, and
(d) the interest portion of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by us and by the Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to our company for any period,
the aggregate net income (or loss) of our company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom:
(1) after-tax gains or losses from Asset Sales or abandonments or
reserves relating thereto;
(2) after-tax items classified as extraordinary or nonrecurring gains or
losses;
(3) the net income (or loss) of any person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a Restricted
Subsidiary or is merged or consolidated with us or with any Restricted
Subsidiary;
(4) the net income (but not loss) of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by a contract, operation
of law or otherwise;
(5) the net income of any person, other than us or a Restricted
Subsidiary, except to the extent of cash dividends or distributions paid to
us or to a Restricted Subsidiary by such person;
(6) income or loss attributable to discontinued operations, including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued; and
(7) in the case of a successor of our company by consolidation or merger
or as a transferee of our assets, any net income of the successor
corporation prior to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any person means the consolidated stockholders'
equity of such person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such person; PROVIDED that the Consolidated Net Worth of any person
shall exclude the effect of any non-cash charges relating to the acceleration of
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stock options or similar securities of such person or another person with which
such Person is merged or consolidated.
"Consolidated Non-cash Charges" means, for any period, our aggregate
depreciation, amortization and other non-cash expenses and of the Restricted
Subsidiaries reducing our Consolidated Net Income for such period, determined on
a consolidated basis in accordance with GAAP including deferred rent but
excluding any such charge which requires an accrual of or a reserve for cash
charges for any future period.
"Covenant Defeasance" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"Credit Facility" means the amended and restated Credit Agreement dated as
of October 20, 1997 by and among us, Bankers Trust Company and certain lenders
from time to time a party thereto, together with the related documents thereto
including, without limitation, any guarantee agreements and security documents,
as amended by the first amendment dated as of August 5, 1998 in each case as
such agreements may be amended including any amendment and restatement thereof,
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, refinancing, replacing or otherwise restructuring
including increasing the amount of available borrowings thereunder or adding our
subsidiaries as additional borrowers or guarantors thereunder all or any portion
of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect us or
any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms or by the terms of any security into which it is convertible or for
which it is exchangeable, or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Exchange Offer Registration Statement" means the registration statement
filed by us pursuant to the Registration Rights Agreement.
"Farallon" means Farallon Partners, L.L.C. and affiliates.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by our Board of Directors acting reasonably and in good
faith and shall be evidenced by a board resolution of our Board of Directors.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in
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such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States, which are in effect
as of the Issue Date. All ratios and computations based on GAAP contained in the
indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the indenture shall be
made without giving effect to:
(1) the deduction or amortization of any premiums, fees and expenses
incurred in connection with any financings or any other permitted incurrence
of Indebtedness; and
(2) depreciation, amortization or other expenses recorded as a result of
the application of purchase accounting in accordance with Accounting
Principles Board Opinion Nos. 16 and 17.
"incur" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any person, without duplication:
(1) all obligations of such person for borrowed money;
(2) all obligations of such person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all Capitalized Lease Obligations of such person;
(4) all obligations of such person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 160 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted);
(5) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
(7) all obligations of any other person of the type referred to in
clauses (1) through (6) which are secured by any lien on any property or
asset of such person, the amount of such obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of
the obligation so secured;
(8) all obligations under currency agreements and interest swap
agreements of such person; and
(9) all Disqualified Capital Stock issued by such person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by our Board of Directors. The amount of Indebtedness of any person at any
date shall be the outstanding balance on such date of all unconditional
obligations as described above, and the maximum liability upon the occurrence of
the contingency giving rise to the obligation, on any contingent obligations at
such date; PROVIDED, HOWEVER, that the amount outstanding at any time of any
Indebtedness incurred with original issue discount is
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the face amount of such Indebtedness less the remaining unamortized portion of
the original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
"Independent Financial Advisor" means a firm:
(1) which does not, and whose directors, officers and employees or
affiliates do not, have a direct or indirect financial interest in us and;
(2) which, in the judgment of our Board of Directors, is otherwise
independent and qualified to perform the task for which it is to be engaged.
"Initial Purchaser" means Deutsche Bank Alex. Brown.
"Interest Swap Obligations" means the obligations of any person pursuant to
any arrangement with any other person, whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any person, any direct or indirect loan
or other extension of credit, including, without limitation, a guarantee, or
capital contribution to by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of others,
or any purchase or acquisition by such person of any capital stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued by,
any person. "Investment" shall exclude extensions of trade credit by us and by
the Restricted Subsidiaries on commercially reasonable terms in accordance with
normal trade practices of our company of such Restricted Subsidiary, as the case
may be. If we or any Restricted Subsidiary sell or otherwise dispose of any
common stock of any direct or indirect Restricted Subsidiary such that, after
giving effect to any such sale or disposition, it ceases to be our Subsidiary we
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the common stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means October 16, 1997, the date of original issuance of the
Outstanding Notes.
"Legal Defeasance" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents, other
than the portion of any such deferred payment constituting interest, received by
us or by any of the Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale including, without limitation, legal, accounting and investment banking
fees and sales commissions;
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements;
(3) repayment of Indebtedness that is required to be repaid in
connection with such Asset Sale; and
(4) appropriate amounts to be provided by us or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by us
or any Restricted Subsidiary, as the case may be, after such Asset Sale,
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including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Outstanding Notes" means the $40 million aggregate principal amount of our
9 3/4% Senior Notes due 2004 originally issued on June 21, 1999 upon
consummation of our registered exchange offer.
"Permitted Holder" means any of BRS Group, Farallon and their respective
affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the notes and the indenture incurred as of the
Issue Date;
(2) Indebtedness incurred pursuant to the credit facility in an
aggregate principal amount at any time outstanding not to exceed $25
million, less any required permanent repayments under all revolving credit
facilities in accordance with the provisions set forth under "Certain
Covenants-- Limitation on Asset Sales" which are accompanied by a
corresponding permanent commitment reduction thereunder;
(3) other Indebtedness, including Capitalized Lease Obligations, of our
company and of the Restricted Subsidiaries outstanding on the Issue Date;
(4) Purchase Money Indebtedness and Capitalized Lease Obligations of our
company and, to the extent constituting Acquired Indebtedness, of the
Restricted Subsidiaries in an aggregate amount for all Indebtedness incurred
pursuant to this subclause (4) not to exceed $20 million outstanding at any
one time;
(5) Our Interest Swap Obligations covering Indebtedness of our company
or any of the Restricted Subsidiaries; PROVIDED, HOWEVER, that such Interest
Swap Obligations are entered into to protect us and the Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness incurred in
accordance with the indenture to the extent the notional principal amount of
such Interest Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(6) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of our company and of the Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(7) Indebtedness of a Restricted Subsidiary to us or to a Restricted
Subsidiary for so long as such Indebtedness is held by us or by a Restricted
Subsidiary, in each case subject to no lien held by a person other than us
or a Restricted Subsidiary; PROVIDED that if as of any date any person other
than us or a Restricted Subsidiary owns or holds any such Indebtedness or
holds a lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
issuer of such Indebtedness;
(8) Our Indebtedness to a Restricted Subsidiary for so long as such
Indebtedness is held by a Restricted Subsidiary, in each case subject to no
lien; PROVIDED that:
(a) any Indebtedness of our company to any Restricted Subsidiary is
unsecured and subordinated, pursuant to a written agreement, to our
obligations under the indenture and the notes and
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(b) if as of any date any person other than a Restricted Subsidiary
owns or holds any such Indebtedness or any person holds a lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by us;
(9) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently, except in
the case of daylight overdrafts, drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within two business days of incurrence;
(10) Indebtedness of our company or of any of the Restricted
Subsidiaries represented by letters of credit for the account of our company
or of such Restricted Subsidiary, as the case may be, in order to provide
security for workers' compensation claims, payment obligations in connection
with self-insurance or similar requirements in the ordinary course of
business;
(11) Refinancing Indebtedness; and
(12) additional Indebtedness of our company in an aggregate principal
amount not to exceed $10 million at any one time outstanding.
"Permitted Investments" means:
(1) Investments by us or by any Restricted Subsidiary in any person that
is or will become immediately after such Investment a Restricted Subsidiary
or that will merge or consolidate into us or a Restricted Subsidiary;
(2) Investments in our company by any Restricted Subsidiary; PROVIDED
that any Indebtedness incurred by us evidencing such investment by a
Restricted Subsidiary is unsecured and subordinated, pursuant to a written
agreement, to our obligations under the notes and the indenture;
(3) investments in cash and Cash Equivalents;
(4) loans and advances to our employees and officers and those of the
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $5,000,000 at any one time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of our company's or a Restricted Subsidiary's businesses
and otherwise in compliance with the Indenture;
(6) other investments, including investments in Unrestricted
Subsidiaries not to exceed $5,000,000 at any one time outstanding;
(7) investments in securities of trade creditors or members received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or members; and
(8) investments made by us or by the Restricted Subsidiaries as a result
of consideration received in connection with an Asset Sale made in
compliance with the covenant described under "--Certain
Covenants--Limitation on Asset Sales."
"Permitted Liens" means the following types of liens:
(1) liens for taxes, assessments or governmental charges or claims
either
(a) not delinquent, or
(b) contested in good faith by appropriate proceedings and as to
which we or the Restricted Subsidiaries shall have set aside on its books
such reserves as may be required pursuant to GAAP;
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(2) statutory liens of landlords and liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
exclusive of obligations for the payment of borrowed money;
(4) judgment liens not giving rise to an Event of Default;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of our business or the business
of any of the Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation; PROVIDED that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(7) purchase money liens to finance the property or assets of our
company or any Restricted Subsidiary acquired after the Issue Date;
PROVIDED, HOWEVER, that
(a) the related purchase money Indebtedness shall not exceed the cost
of such property or assets and shall not be secured by any the property
or assets of our company or any Restricted Subsidiary other than the
property and assets so acquired, and
(b) the lien securing such Indebtedness shall be created within 90
days of such acquisition;
(8) liens upon specific items of inventory or other goods and proceeds
of any person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(10) liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of our company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(11) liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(12) liens securing Indebtedness under Currency Agreements; and
(13) liens securing Acquired Indebtedness incurred in accordance with
the covenant described under "--Certain Covenants--Limitation on Incurrence
of Additional Indebtedness"; PROVIDED that
(a) such liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by us or a
Restricted Subsidiary and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by us or a
Restricted Subsidiary, and
(b) such liens do not extend to or cover any property or assets of
our company or of any of the Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of our company or a
Restricted Subsidiary and are no more favorable to the lienholders than
those
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securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by us or a Restricted Subsidiary.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any person means any Capital Stock of such person that
has preferential rights to any other Capital Stock of such person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of us or of our Restricted
Subsidiaries incurred for the purpose of financing all or any part of the
purchase price or the cost of installation, construction or improvement of any
property.
"Public Equity Offering" has the meaning set forth under
"--Redemption--Optional Redemption Upon Public Equity Offerings."
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by us or any Restricted
Subsidiary of Indebtedness incurred in accordance with the covenant described
under "--Certain Covenants-- Limitation on Incurrence of Additional
Indebtedness" other than pursuant to clause (2), (4), (5), (6), (7), (8), (9),
(10) or (12) of the definition of Permitted Indebtedness, in each case that does
not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such person as of the date of such proposed Refinancing plus
the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by us or any Restricted Subsidiary in connection with such
Refinancing; or
(2) create Indebtedness with
(a) a Weighted Average Life to Maturity that is less than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced,
or
(b) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; PROVIDED that
(x) if such Indebtedness being Refinanced is Indebtedness of our
company or a Guarantor, then such Refinancing Indebtedness shall be
Indebtedness solely of our company or such Guarantor, as the case may
be, and
(y) if such Indebtedness being Refinanced is subordinate or
junior to the notes, then such Refinancing Indebtedness shall be
subordinate to the notes at least to the same extent and in the same
manner as the Indebtedness being Refinanced.
"Replacement Assets" means assets of a kind used or usable in the business
of our company and our Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale.
"Restricted Subsidiary" means any Subsidiary of our company that has not
been designated by our Board of Directors, by our Board Resolution delivered to
the trustee, as an Unrestricted Subsidiary pursuant to and in compliance with
the covenant described under "--Certain Covenants--Limitation
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on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a board resolution of our company delivered to the trustee, subject
to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any person or to which any such person is a party, providing for the
leasing to us or a Restricted Subsidiary of any property, whether owned by us or
any Restricted Subsidiary at the Issue Date or later acquired, which has been or
is to be sold or transferred by us or by such Restricted Subsidiary to such
person or to any other person from whom funds have been or are to be advanced by
such person on the security of such Property.
"Significant Subsidiary" will have the meaning set forth in Rule 1.02(w) of
Regulation S- X under the Securities Act.
"Subsidiary", with respect to any person, means:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned, directly
or indirectly, by such person; or
(2) any other person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly, owned
by such person.
"Surviving Entity" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"Unrestricted Subsidiary" means any subsidiary of our company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a board resolution of our company delivered to the
trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such
Indebtedness into
(2) the sum of the total of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth,
which will elapse between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities, other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other persons pursuant to applicable law, are
owned by us or another Wholly Owned Restricted Subsidiary.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We originally sold the notes to DBAB on June 10, 1999 in accordance with a
purchase agreement. DBAB subsequently resold the notes to qualified
institutional buyers in reliance on Rule 144A under the Securities Act and to a
limited number of institutional accredited investors that agreed to comply with
transfer restrictions and other conditions. As a condition to the purchase
agreement, we entered into the registration rights agreement with DBAB pursuant
to which we have agreed to:
(1) file a registration statement within 45 days after the date on which the
notes were issued with respect to registered offers to exchange the notes
for the exchange notes. The exchange notes will have terms substantially
identical in all material respects to the original notes, except that the
exchange notes will not contain terms with respect to transfer
restrictions; and
(2) cause the exchange offer registration statement to be declared effective
under the Securities Act within 150 days after the date on which the
notes were originally issued.
Upon the exchange offer registration statement being declared effective, we
will offer the exchange notes in exchange for surrender of the notes. We will
keep the exchange offer open for not less than 20 business days after the date
the notice of the exchange offer is mailed to the holders. For each of the notes
surrendered to us in accordance with the exchange offer, the holder who
surrendered such notes will receive the exchange notes having a principal amount
equal to that of the surrendered notes. Interest on each exchange note will
accrue from the later of:
(1) the last interest payment date on which interest was paid on the note
surrendered; or
(2) if the note is surrendered for exchange on a date in a period which
includes the record date for an interest payment date to occur on or
after the date of such exchange and as to which interest will be paid,
the date of such interest payment date or if no interest has been paid on
the notes, from the date on which the notes were originally issued.
Under existing interpretations of the commission contained in several
no-action letters to third parties, the exchange notes will be freely
transferable by holders that are not our affiliates after the exchange offer
without further registration under the Securities Act. We have based this belief
on several interpretive letters issued by the staff of the commission in
connection with other offerings by other parties. These letters are Exxon
Capital Holdings Corporation, available as of May 13, 1988, Morgan Stanley & Co.
Incorporated, available as of June 5, 1991, Mary Kay Cosmetics, Inc., available
as of June 5, 1991, Warnaco, Inc., available as of October 11, 1991 and Shearman
& Sterling, available as of July 2, 1993. However, in order for the exchange
notes to be freely transferable in accordance with the commission's no-action
letters, each holder that wishes to exchange its notes for exchange notes will
be required to represent the following:
(1) that any exchange note to be received by it will be acquired in the
ordinary course of its business;
(2) that at the time of the commencement of the exchange offer it has no
arrangement or understanding with any person to participate in the
distribution of the exchange notes in violation of the Securities Act;
(3) that it is not our "affiliate" as that term is defined in Rule 405
promulgated under the Securities Act;
(4) if such holder is not a broker-dealer, that it is not engaged in, and
does not intend to engage in, the distribution of exchange notes; and
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(5) if such holder is a broker-dealer that will receive exchange notes for
its own account in exchange for notes that were acquired as a result of
market-making or other trading activities, that it will deliver a
prospectus in connection with any resale of such exchange notes
Upon written notice within 30 days following the completion of the exchange
offer that a broker-dealer has received exchange notes in the exchange offer, we
will agree to make available, during the period required by the Securities Act,
a prospectus meeting the requirements of the Securities Act for use by
broker-dealers and other persons, if any, with similar prospectus delivery
requirements.
Should any of the following circumstances occur:
(1) because of any change in law or in currently prevailing interpretations
of the staff of the commission, we are not permitted to effect the
exchange offer;
(2) the exchange offer is not consummated within 30 days from the effective
date of the exchange offer registration statement;
(3) in certain circumstances, certain holders of unregistered exchange notes
so request; or
(4) in the case of any holder that participates in the exchange offer, such
holder does not receive exchange notes on the date of the exchange that
may be sold without restriction under state and federal securities laws
other than due solely to the status of such holder as our affiliate,
we will, at our expense,
(1) promptly deliver to the holders and the trustee written notice;
(2) as promptly as practicable file shelf registration statements covering
resales of the notes;
(3) use our best efforts to cause the shelf registration statements to be
declared effective under the Securities Act; and
(4) use our best efforts to keep effective the shelf registration statements
until the earlier of two years after the date on which the notes were
originally issued or such time as all of the applicable notes covered by
the shelf registration statements have been sold.
We will, in the event that shelf registration statements are filed, provide
to each holder copies of the prospectus that is a part of the shelf registration
statement, notify each such holder when the shelf registration statement for the
notes has become effective and take certain other actions as are required to
permit unrestricted resales of the notes. A holder that sells notes pursuant to
the shelf registration statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the registration rights agreement that are applicable to such a
holder including certain indemnification rights and obligations.
If we fail to comply with the above provisions or if the exchange offer
registration statement or the shelf registration statement fails to become
effective, then, as liquidated damages, additional interest in accordance with
the provisions of the notes shall become payable in respect of the notes as
follows:
(1) if neither an exchange offer registration statement nor a shelf
registration statement is filed with the commission on or prior to 45
days after the date on which the notes were originally issued; or
(2) notwithstanding that we have consummated or will consummate an exchange
offer, we are required to file a shelf registration statement which is
not filed on or prior to the date required by the registration rights
agreement,
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then commencing on the day after either such required filing date, additional
interest shall accrue on the principal amount of the notes at a rate of .50% per
annum for the first 90 days immediately following each such filing date, such
additional interest increasing by an additional .50% per annum at the beginning
of each subsequent 90-day period.
If:
(1) neither an exchange offer registration statement nor a shelf
registration statement is declared effective by the commission on or
prior to 150 days after the date on which the notes were originally
issued; or
(2) notwithstanding that we have consummated or will consummate an exchange
offer, we are required to file a shelf registration statement which is
not declared effective by the commission on or prior to the 60th day
following the date it was filed,
then commencing on the day after either such required effective date, as the
case may be, additional interest shall accrue on the principal amount of the
notes at a rate of .50% per annum for the first 90 days immediately following
each such filing date and will increase by an additional .50% per annum at the
beginning of each subsequent 90-day period.
If:
(1) we have not exchanged the applicable exchange notes for all notes
validly tendered in accordance with the terms of the exchange offer on or
prior to the 30th day after the date on which the exchange offer
registration statement was declared effective; or
(2) if applicable, a shelf registration statement has been declared
effective and such shelf registration statement ceases to be effective at
any time prior to the second anniversary of the date on which the notes
were originally issued, other than after such time as all of the
applicable notes have been disposed of,
then additional interest shall accrue on the principal amount of the notes at a
rate of .50% per annum for the first 90 days commencing on the 31st day after
such effective date or the day such shelf registration statement ceases to be
effective, as the case may be, such additional interest increasing by an
additional .50% per annum at the beginning of each subsequent 90-day period;
provided, however, that the rate of additional interest that shall accrue on the
notes may not exceed in the aggregate 2.0% per annum; PROVIDED, FURTHER,
HOWEVER, that
(1) upon the filing of the applicable exchange offer registration statement
or a shelf registration statement;
(2) upon the effectiveness of the applicable exchange offer registration
statement or a shelf registration statement;
(3) upon the exchange of applicable exchange notes for all applicable notes
tendered; or
(4) upon the effectiveness of a shelf registration statement which had
ceased to remain effective,
additional interest on the applicable notes, as the case may be, shall cease to
accrue or accumulate.
Any amounts of additional interest due will be payable in cash, on the same
original interest payment dates as the notes. The amount of additional interest
will be determined by multiplying the applicable rate of additional interest by
the principal amount of the senior subordinated notes multiplied by a fraction,
the numerator of which is the number of days such rate of additional interest
was applicable during such period determined on the basis of a 360-day year
comprised of twelve 30-day months, and the denominator of which is 360.
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We shall:
(1) make available a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any
such exchange notes;
(2) pay all expenses incident to the exchange offer including the expense of
one counsel to the holders covered thereby; and
(3) indemnify holders of the notes including any broker-dealer against
certain liabilities, including liabilities under the Securities Act.
A broker-dealer which delivers such a prospectus to purchasers in connection
with such resales will be subject to the civil liability provisions under the
Securities Act and will be bound by the provisions of the registration rights
agreement, including indemnification rights and obligations.
Each holder of notes who wishes to exchange such notes for exchange notes in
the exchange offer will be required to make the following representations in the
letter of transmittal:
(1) that it is not our "affiliate" within the meaning of Rule 405 of the
Securities Act;
(2) that it is not engaged in and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the exchange notes to be issued in the exchange offer;
(3) that it is acquiring the exchange notes in the ordinary course of its
business; and
(4) that if it is a broker-dealer holding notes acquired for its own account
as a result of market-making activities or other trading activities, that
it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of
exchange notes received in respect of such exchange notes in accordance
with the exchange offer.
The commission has taken the position and we believe that broker-dealers may
fulfill their prospectus delivery requirements with respect to the exchange
notes, other than a resale of an unsold allotment from the original sale of the
notes, with the prospectus contained in the exchange offer registration
statement. Under the exchange and registration rights agreement, we are required
to allow broker-dealers and other persons, if any, subject to similar prospectus
delivery requirements to use the prospectus contained in the exchange offer
registration statement in connection with the resale of the exchange notes.
If the holder is a broker-dealer, it will be required to include a
representation in its letter of transmittal with respect to the exchange offer
that it has not entered into any arrangement or understanding with us or any of
our affiliates to distribute the exchange notes.
Holders of notes will be required to make certain representations to us in
order to participate in the exchange offer and will be required to deliver
information to be used in connection with the shelf registration statement in
order to have their notes included in the shelf registration statement and
benefit from the provisions regarding liquidated damages. A holder who sells
notes pursuant to the shelf registration statement generally will be required to
be named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the registration rights agreement which are
applicable to such a holder, including certain indemnification obligations.
For so long as the notes are outstanding, we will continue to provide to
holders of notes and to prospective purchasers of notes the information required
by Rule 144A(d)(4) under the Securities Act.
The foregoing description of the registration rights agreement contains a
discussion of all material elements but does not purport to be complete and is
qualified in its entirety by reference to all provisions of the registration
rights agreement. We will provide a copy of the registration rights agreement to
holders of notes identified to us by DBAB upon request.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding notes accepted in the
exchange offer. Holders may tender some or all of their notes. However, notes
may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the notes except that:
(1) the exchange notes have been registered under the Securities Act and
hence will not bear legends restricting their transfer thereof; and
(2) the holders of the exchange notes will not be entitled to some of their
rights under the registration rights agreement, including the provisions
providing for an increase in the interest rate on the notes in
circumstances relating to the timing of the exchange offer, all of which
will terminate when the exchange offer is terminated. The exchange notes
will evidence the same debt as the notes and will be entitled to the
benefits of the indenture.
As of the date of this prospectus, $40.00 million aggregate principal amount
of notes were outstanding. We have fixed the close of business on , 1999
as the record date for the exchange offer for purposes of determining the
persons to whom this prospectus and the letter of transmittal will be mailed
initially.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the commission
thereunder.
We shall be deemed to have accepted validly tendered notes when, as and if
we have given oral or written notice to the exchange agent. The exchange agent
will act as agent for the tendering holders for the purpose of receiving the
exchange notes from the issuers.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events described herein or otherwise, the
certificates for any such unaccepted notes will be returned, without expense, to
the tendering holder thereof as promptly as practicable after the expiration
date.
Holders who tender notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of notes. We will pay
all charges and expenses, other than transfer taxes in certain circumstances, in
connection with the exchange offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" shall mean 5:00 p.m., New York City time, on
, 1999, unless we, in our sole discretion, extend the exchange offer, in
which case the term "expiration date" shall mean the latest date and time to
which the exchange offer is extended. Notwithstanding the foregoing, we will not
extend the expiration date beyond , 1999.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will mail to the registered holders
an announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
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We reserve the right, in our sole discretion, to:
(1) delay accepting any notes, to extend the exchange offer or to terminate
the exchange offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the exchange agent; or
(2) amend the terms of the exchange offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the
registered holders.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from their date of issuance. Holders
of notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the exchange notes. Such
interest will be paid semi-annually on each April 15 and October 15, with the
first interest payment on the exchange notes on October 15, 1999. Interest on
the notes accepted for exchange will cease to accrue upon issuance of the
exchange notes.
PROCEDURES FOR TENDERING
Only a holder of notes may tender such notes in the exchange offer. To
tender in the exchange offer, a holder must complete, sign and date the letter
of transmittal, or a facsimile thereof, have the signatures guaranteed if
required by the letter of transmittal, and mail or otherwise deliver such letter
of transmittal or such facsimile, together with the notes and any other required
documents, to the exchange agent prior to 5:00 p.m., New York City time, on the
expiration date. To be tendered effectively, the notes, letter of transmittal
and other required documents must be completed and received by the exchange
agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m.,
New York City time, on the expiration date. Delivery of the notes may be made by
book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the exchange agent
prior to the expiration date.
By executing the letter of transmittal, each holder will make us the
representations set forth above in the eighth paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance of the tender by us will
constitute agreement between such holder and us in accordance with the terms and
subject to the conditions set forth in this prospectus and in the letter of
transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE
HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO US. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. See "Instruction to
Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the letter of transmittal.
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Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an institution that is a member firm of the
Medallion system unless the notes are tendered as follows:
(1) by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
(2) for the account of member firm of the Medallion system.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the registered
holder of any notes listed therein, such notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such notes with the signature guaranteed by
an institution that is a member firm of the Medallion system.
If the letter of transmittal or any notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the notes at the
book-entry transfer facility, The Depository Trust Company (DTC), for the
purpose of facilitating the exchange offer, and subject to the establishment
thereof, any financial institution that is a participant in DTC's system may
make book-entry delivery of notes by causing the book-entry transfer facility to
transfer such notes into the exchange agent's account with respect to the notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of the notes may be effected through book-entry
transfer into the exchange agent's account at the book-entry transfer facility,
an appropriate letter of transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the exchange agent at its
address set forth below on or prior to the expiration date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the
book-entry transfer facility does not constitute delivery to the exchange agent.
The depositary and DTC have confirmed that the exchange offer is eligible
for the DTC Automated Tender Offer Program (ATOP). Accordingly, DTC participants
may electronically transmit their acceptance of the exchange offer by causing
DTC to transfer notes to the depositary in accordance with DTC's ATOP procedures
for transfer. DTC will then send an "agent's message" to the depositary.
The term "agent's message" means a message transmitted by DTC, received by
the depositary and forming part of the confirmation of a book-entry transfer,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering notes which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the letter of transmittal and that we may enforce such agreement
against such participant. In the case of an agent's message relating to
guaranteed delivery, the term means a message transmitted by DTC and received by
the depositary, which states that DTC has received an express acknowledgment
from the participant in DTC tendering notes that such participant has received
and agrees to be bound by the notice of guaranteed delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to securities transferred pursuant to ATOP, a DTC participant
using ATOP must also properly complete
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and duly execute the applicable letter of transmittal and deliver it to the
depositary. Pursuant to authority granted by DTC, any DTC participant which has
notes credited to its DTC account at any time and held of record by DTC's
nominee may directly provide a tender as though it were the registered holder by
so completing, executing and delivering the applicable letter of transmittal to
the depositary. Delivery of documents to DTC does not constitute delivery to the
depositary.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered notes and withdrawal of tendered notes will be
determined by us in our sole discretion, which determination will be final and
binding. We reserve the absolute right to reject any and all notes not properly
tendered or any notes which, if accepted, would, in the opinion of our counsel,
be unlawful. We also reserve the right in our sole discretion to waive any
defects, irregularities or conditions of tender as to particular notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of notes must be cured within such time as we shall determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
notes, neither us, the exchange agent nor any other person shall incur any
liability for failure to give such notification. Tenders of notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any notes received by the exchange agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their notes and:
(1) whose notes are not immediately available;
(2) who cannot deliver their notes, the letter of transmittal or any other
required documents to the exchange agent; or
(3) who cannot complete the procedures for book-entry transfer, prior to the
expiration date,
may effect a tender if:
(1) the tender is made through an institution that is a member firm of the
Medallion system;
(2) prior to the expiration date, the exchange agent receives by fax, mail
or hand delivery from such firm a properly completed and duly executed
notice of guaranteed delivery setting forth the name and address of the
holder, the certificate number(s) of such notes and the principal amount
of notes tendered, stating that the tender is being made and guaranteeing
that, within five New York Stock Exchange trading days after the
expiration date, the letter of transmittal together with the
certificate(s) representing the notes, and any other documents required
by the letter of transmittal will be deposited by the firm with the
exchange agent; and
(3) such properly completed and executed letter of transmittal, as well as
the certificate(s) representing all tendered notes in proper form for
transfer, and all other documents required by the letter of transmittal
are received by the exchange agent upon five New York Stock Exchange
trading days after the expiration date.
In (2) and (3) above, the certificate(s) representing the notes may be
substituted by a confirmation of book-entry transfer of such notes into the
exchange agent's account at the book-entry transfer facility. Upon request to
the exchange agent, a notice of guaranteed delivery will be sent to holders who
wish to tender their notes according to the guaranteed delivery procedures set
forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the expiration date. To
withdraw a tender of notes in the exchange offer, a telegram, telex, letter or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the expiration date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the notes to be
withdrawn;
(2) identify the notes to be withdrawn. This identification must include the
certificate number(s) and principal amount of such notes, or, in the case
of notes transferred by book-entry transfer, the name and number of the
account at the book-entry transfer facility to be credited;
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such notes were tendered or be
accompanied by documents of transfer sufficient to have the trustee with
respect to the notes register the transfer of such notes into the name of
the person withdrawing the tender. Any required signature guarantees must
also be included; and
(4) specify the name in which any such notes are to be registered, if
different from that of the person who deposited the notes.
We will determine all questions as to the validity, form and eligibility and
the time of receipt of such notices and our determination shall be final and
binding on all parties. Any notes so withdrawn will be deemed not to have been
validly tendered for purposes of the exchange offer and no exchange notes will
be issued with respect thereto unless the notes so withdrawn are validly
retendered. Any notes which have been tendered but which are not accepted for
exchange will be returned to the holder thereof without cost to such holder as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn notes may be retendered by following one of
the procedures described above under "--Procedures for Tendering" at any time
prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange exchange notes for, any notes, and
may terminate or amend the exchange offer as provided herein before the
acceptance of such notes, if:
(1) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or any material adverse development has
occurred in any existing action or proceeding with respect to us or any
of our subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of the
commission is proposed, adopted or enacted, which, in our sole judgment,
might materially impair our ability to proceed with the exchange offer or
materially impair the contemplated benefits of the exchange offer to us;
or
(3) any governmental approval has not been obtained, which approval we
shall, in our sole discretion, deem necessary for the consummation of the
exchange.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may:
(1) refuse to accept any notes and return all tendered notes to the
tendering holders;
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(2) extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such notes; or
(3) waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as exchange agent
for the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notice of guaranteed delivery should be directed to the exchange
agent addressed as follows:
United States Trust Company of New York
114 West 47th Street
New York, New York 10036
Via facsimile: (212) 852-1626
Confirm by telephone: (212) 852-1614
Delivery other than as set forth above will not constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by us. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telecopy, telephone or in person by our officers and regular
employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange
offer. Such expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the notes,
which is face value, as reflected in our accounting records on the date of
exchange. Accordingly, we will recognize no gain or loss for accounting
purposes. The expenses of the exchange offer will be expensed over the term of
the exchange notes.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct us
to register exchange notes in the name of, or request that old notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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CONSEQUENCES OF FAILURE TO EXCHANGE
The notes that are not exchanged for exchange notes pursuant to the exchange
offer will remain restricted securities. Accordingly, such notes may be resold
only:
(1) to us upon redemption thereof or otherwise;
(2) so long as the notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act. Any
such transaction is to be based upon an opinion of counsel reasonably
acceptable to us;
(3) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act; or
(4) pursuant to an effective registration statement under the Securities
Act, in each case in accordance with any applicable securities laws of
any state of the United States.
RESALES OF THE EXCHANGE NOTES
With respect to resales of exchange notes, based on interpretations by the
staff of the commission set forth in no-action letters issued to third parties,
we believe that a holder or other person who receives exchange notes, whether or
not such person is the holder who receives exchange notes in exchange for notes
in the ordinary course of business and who is not participating, does not intend
to participate, and has no arrangement or understanding with any person to
participate, in the distribution of the exchange notes, will be allowed to
resell the exchange notes to the public without further registration under the
Securities Act and without delivering a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires exchange notes in the exchange offer for the purpose of distributing or
participating in a distribution of the exchange notes, such holder cannot rely
on the position of the staff of the commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each broker-dealer that receives exchange notes
for its own account in exchange for notes, where such notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in
accordance with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired as a result of
market-making activities or other trading activities. We have agreed that, for a
period of 180 days after the expiration date, we will make this prospectus, as
amended or supplemented, available to any broker-dealer to use in connection
with any such resale. In addition, until , 1999, all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on such resale of exchange notes
and any commissions or concessions received by any such person may be deemed to
be underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to a broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the old notes against certain liabilities, including
liabilities under the Securities Act.
90
<PAGE>
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for us by
Kirkland & Ellis, New York, New York. Certain matters in connection with the
offering will be passed upon for the Initial Purchaser by Cahill Gordon &
Reindel, New York, New York.
EXPERTS
The consolidated balance sheets as of May 31, 1997, 1998 and December 31,
1998, the consolidated statements of operations, stockholders' equity (deficit)
and cash flows, and the financial statement schedule for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and
will be required to file reports and other information with the Commission. The
Registration Statement filed by us with the Commission with respect to the
existing notes and the exhibits thereto, as well as reports and other
information filed or to be filed by us with the Commission, may be inspected,
without charge, at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the
regional offices of the Commission at the Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such documents can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission maintains
a World Wide Web site, located at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants.......................................................................... F-2
Consolidated balance sheets at May 31, 1997, 1998, December 31, 1998 and March 31, 1999 (Unaudited)........ F-3
Consolidated statements of operations for the years ended May 31, 1996, 1997, 1998, the seven months ended
December 31, 1997 (Unaudited) and 1998 and the three months ended March 31, 1998 (Unaudited) and 1999
(Unaudited).............................................................................................. F-4
Consolidated statements of stockholders' equity (deficit) for the year ended May 31, 1996, 1997, 1998, the
seven months ended December 31, 1998, and the three months ended March 31, 1999 (Unaudited).............. F-6
Consolidated statements of cash flows for the years ended May 31, 1996, 1997, 1998, the seven months ended
December 31, 1997 (Unaudited) and 1998 and the three months ended March 31, 1998 (Unaudited) and 1999
(Unaudited).............................................................................................. F-7
Notes to consolidated financial statements................................................................. F-9
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of independent accountants on Financial Statement Schedule.......................................... F-30
Schedule II, valuation and qualifying accounts............................................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of TOWN
SPORTS INTERNATIONAL, INC. and SUBSIDIARIES at May 31, 1997 and 1998 and
December 31, 1998, and the results of their operations and their cash flows for
each of the three years ended May 31, 1996, 1997 and 1998 and for the seven
months ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 2n to the consolidated financial statements, the
Company changed its method of accounting for organizational costs effective June
1, 1997.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 16, 1999
F-2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ALL FIGURES $'000, EXCEPT SHARE DATA
MAY 31, 1997, 1998, DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31, MARCH 31,
-------------------- ------------- -----------
1997 1998 1998 1999
--------- --------- ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents...................................... $ 2,468 $ 22,997 $ 19,154 $ 16,817
Accounts receivable............................................ 312 420 628 1,015
Inventory...................................................... 327 673 1,253 1,155
Prepaid expenses and other current assets...................... 493 677 1,205 1,441
Prepaid corporate income taxes................................. 202 -- -- --
--------- --------- ------------- -----------
Total current assets......................................... 3,802 24,767 22,240 20,428
Fixed assets, net................................................ 34,214 54,518 81,426 92,393
Intangible assets, net........................................... 4,425 19,923 37,064 36,816
Deferred tax asset............................................... 5,972 7,159 8,570 9,272
Deferred membership costs........................................ 3,530 4,933 7,005 8,113
Other assets..................................................... 980 677 1,111 1,205
--------- --------- ------------- -----------
Total assets................................................. $ 52,923 $ 111,977 $ 157,416 $ 168,227
--------- --------- ------------- -----------
--------- --------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease
obligations.................................................. $ 1,924 $ 2,036 $ 2,191 $ 2,324
Accounts payable............................................... 1,802 2,451 3,711 5,292
Accrued expenses............................................... 4,017 7,869 6,305 10,184
Corporate income taxes payable................................. -- 122 62 672
Deferred revenue............................................... 4,599 6,391 9,493 11,579
--------- --------- ------------- -----------
Total current liabilities.................................... 12,342 18,869 21,762 30,051
Long-term debt and capital lease obligations..................... 39,147 86,253 87,333 87,505
Deferred lease liabilities....................................... 6,625 9,298 10,791 11,724
Deferred revenue................................................. 1,036 1,890 2,446 3,166
Other liabilities................................................ 724 774 682 765
--------- --------- ------------- -----------
Total liabilities............................................ 59,874 117,084 123,014 133,211
--------- --------- ------------- -----------
Commitments and contingencies (Notes 6, 7, 8 and 13)
Redeemable senior preferred stock, $1.00 par value; liquidation
value $40,488; authorized 100,000 shares; no shares issued and
outstanding at May 31, 1997 and 1998, 40,000 shares at December
31, 1998 and March 31, 1999.................................... -- -- 36,735 38,034
--------- --------- ------------- -----------
Stockholders' deficit:
Series A preferred stock, $1.00 par value; at liquidation
value; authorized 200,000 shares; issued and outstanding
152,455 shares at May 31, 1997, 153,637 shares at May 31,
1998, December 31, 1998 and March 31, 1999................... 16,250 18,736 20,351 21,064
Series B preferred stock, $1.00 par value; at liquidation
value; authorized 200,000 shares; issued and outstanding
3,857 shares at May 31, 1997, 1998, December 31, 1998 and
March 31, 1999............................................... 144 164 179 185
Class A voting common stock, $.001 par value; authorized
2,500,000 shares; issued and outstanding 1,010,000 shares at
May 31, 1997, 1,015,714 shares at May 31, 1998, December 31,
1998 and
March 31, 1999............................................... 1 1 1 1
Paid-in capital................................................ -- 3,994 7,844 8,034
Unearned compensation.......................................... -- (2,546) (2,546) (2,546)
Accumulated deficit............................................ (23,346) (25,456) (28,162) (29,756)
--------- --------- ------------- -----------
Total stockholders' deficit.................................. (6,951) (5,107) (2,333) (3,018)
--------- --------- ------------- -----------
Total liabilities and stockholders' deficit.................. $ 52,923 $ 111,977 $ 157,416 $ 168,227
--------- --------- ------------- -----------
--------- --------- ------------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ALL FIGURES $'000
FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
AND THE SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Club operations........................................... $ 40,796 $ 54,164 $ 79,719 $ 41,490 $ 69,964
Management fees and other................................. 2,959 2,403 2,631 1,500 1,698
--------- --------- --------- ----------- ---------
43,755 56,567 82,350 42,990 71,662
--------- --------- --------- ----------- ---------
Operating expenses:
Payroll and related....................................... 18,626 23,321 33,309 17,621 28,001
Club operating............................................ 14,542 18,044 25,858 13,258 24,261
General and administrative................................ 3,562 3,774 5,825 2,742 5,828
Depreciation and amortization............................. 2,929 4,219 7,736 3,944 8,818
Compensation expense incurred in connection with stock
options................................................. 1,967 5,933 1,442 397 434
--------- --------- --------- ----------- ---------
41,626 55,291 74,170 37,962 67,342
--------- --------- --------- ----------- ---------
Operating income........................................ 2,129 1,276 8,180 5,028 4,320
Interest expense, net of interest income of $60, $115,
$1,228, $526 and $272, respectively....................... 952 2,455 5,902 3,270 5,279
--------- --------- --------- ----------- ---------
Income (loss) before provision (benefit) for corporate
income taxes.......................................... 1,177 (1,179) 2,278 1,758 (959)
Provision (benefit) for corporate income taxes.............. 628 (243) 1,131 888 (399)
--------- --------- --------- ----------- ---------
Income (loss) before extraordinary item and cumulative
effect of change in accounting policy................. 549 (936) 1,147 870 (560)
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $624................................ -- -- (782) (782) --
--------- --------- --------- ----------- ---------
Income (loss) before cumulative effect of change in
accounting policy..................................... 549 (936) 365 88 (560)
Cumulative effect on prior years of a change in accounting
for club organizational costs, net of income tax benefit
of $70.................................................... -- -- (88) (88) --
--------- --------- --------- ----------- ---------
Net income (loss)....................................... 549 (936) 277 -- (560)
Accreted dividends on preferred stock....................... (400) (1,286) (2,387) (1,485) (2,146)
--------- --------- --------- ----------- ---------
Net income (loss) attributable to common stockholders... $ 149 $ (2,222) $ (2,110) $ (1,485) $ (2,706)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ALL FIGURES $'000
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue:
Club operations....................................................................... $ 21,822 $ 35,548
Management fees and other............................................................. 731 591
----------- -----------
22,553 36,139
----------- -----------
Operating expenses:
Payroll and related................................................................... 8,822 13,790
Club operating........................................................................ 6,958 12,532
General and administrative............................................................ 1,689 2,261
Depreciation and amortization......................................................... 2,138 4,629
Compensation expense incurred in connection with stock options........................ 184 190
----------- -----------
19,791 33,402
----------- -----------
Operating income.................................................................... 2,762 2,737
Interest expense, net of interest income of $499 and $250, respectively................. 1,769 1,918
----------- -----------
Income before provision for corporate income taxes.................................... 993 819
Provision for corporate income taxes.................................................... 465 395
----------- -----------
Net income............................................................................ 528 424
Accreted dividends on preferred stock................................................... (627) (1,933)
----------- -----------
Net loss attributable to common stockholders........................................ $ (99) $ (1,509)
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ALL FIGURES $'000, EXCEPT SHARE DATA
FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998,
THE SEVEN MONTHS ENDED DECEMBER 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------
SERIES A ($1.00 SERIES A ($.10 SERIES B ($1.00
PAR) PAR) PAR)
---------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995..................................... 496
Issuance of Class A Common Stock............................
Issuance of Class A and B Common Stock......................
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)...............................
Compensation expense incurred in connection with stock
options...................................................
Net income..................................................
------ -------
Balance at May 31, 1996................................... 496
Liquidation of Series A Preferred Stock, for $1,000 per
share, redemption of Class A and B Common Stock for a cash
price of $35 per share and change in equity related to
exercise of stock options................................. (496)
Issuance of Series A and B Preferred and Common Stock at
cash price of $100, $35 and $1, respectively.............. 152,455 $15,245 3,857 $135
Warrant exercise at $.01 per share..........................
Original issue discount in connection with the issuance of
warrants and subordinated debt............................
Compensation expense incurred in connection with common
stock options.............................................
Compensation expense incurred in connection with Series B
Preferred Stock options...................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively)................. 1,005 9
Net loss....................................................
------- ------- ------ ------- ------ ------
Balance at May 31, 1997................................... 152,455 16,250 -- -- 3,857 144
------ -------
------ -------
Issuance of Series A Preferred Stock and Class A Common
Stock..................................................... 1,182 119
Unearned Compensation incurred in connection with common
stock options.............................................
Amortization of unearned compensation.......................
Compensation expense incurred in connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($15.14 and $5.44 per share, respectively)................ 2,367 20
Net income..................................................
------- ------- ------ ------
Balance at May 31, 1998................................... 153,637 18,736 3,857 164
Warrant issuance in connection with Redeemable Senior
Preferred Stock...........................................
Compensation expense incurred in connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($10.51 and $3.89 per share, respectively)................ 1,615 15
Accretion of redeemable senior preferred stock dividend
($12.20 per share plus accretion to liquidation value)....
Net loss....................................................
------- ------- ------ ------
Balance at December 31, 1998.............................. 153,637 20,351 3,857 179
Compensation expense incurred in connection with Series B
preferred stock options (Unaudited).......................
Accretion of Series A and Series B preferred stock dividend
(Unaudited)............................................... 713 6
Accretion of redeemable senior preferred stock dividend
(Unaudited)...............................................
Net income (Unaudited)......................................
------- ------- ------ ------
Balance at March 31, 1999 (Unaudited)....................... 153,637 $21,064 3,857 $185
------- ------- ------ ------
------- ------- ------ ------
<CAPTION>
COMMON STOCK
------------------------------------------------------
CLASS A ($.001 CLASS A ($.01 CLASS B
PAR) PAR) CONVERTIBLE
----------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ -------- ------ ------ -------
<S> <C> <C> <C> <C>
Balance at May 31, 1995..................................... 475,000 $ 5
Issuance of Class A Common Stock............................ 87,948 1
Issuance of Class A and B Common Stock...................... 13,358 2,351
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)...............................
Compensation expense incurred in connection with stock
options...................................................
Net income..................................................
--
-------- ------ -------
Balance at May 31, 1996................................... 576,306 6 2,351
Liquidation of Series A Preferred Stock, for $1,000 per
share, redemption of Class A and B Common Stock for a cash
price of $35 per share and change in equity related to
exercise of stock options................................. (576,306) (6) (2,351)
Issuance of Series A and B Preferred and Common Stock at
cash price of $100, $35 and $1, respectively.............. 1,000,000 $1
Warrant exercise at $.01 per share.......................... 10,000
Original issue discount in connection with the issuance of
warrants and subordinated debt............................
Compensation expense incurred in connection with common
stock options.............................................
Compensation expense incurred in connection with Series B
Preferred Stock options...................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively).................
Net loss....................................................
-- --
--------- -------- ------ -------
Balance at May 31, 1997................................... 1,010,000 1 -- -- -- --
--
--
-------- ------ -------
-------- ------ -------
Issuance of Series A Preferred Stock and Class A Common
Stock..................................................... 5,714 --
Unearned Compensation incurred in connection with common
stock options.............................................
Amortization of unearned compensation.......................
Compensation expense incurred in connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($15.14 and $5.44 per share, respectively)................
Net income..................................................
--
---------
Balance at May 31, 1998................................... 1,015,714 1
Warrant issuance in connection with Redeemable Senior
Preferred Stock...........................................
Compensation expense incurred in connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($10.51 and $3.89 per share, respectively)................
Accretion of redeemable senior preferred stock dividend
($12.20 per share plus accretion to liquidation value)....
Net loss....................................................
--
---------
Balance at December 31, 1998.............................. 1,015,714 1
Compensation expense incurred in connection with Series B
preferred stock options (Unaudited).......................
Accretion of Series A and Series B preferred stock dividend
(Unaudited)...............................................
Accretion of redeemable senior preferred stock dividend
(Unaudited)...............................................
Net income (Unaudited)......................................
--
---------
Balance at March 31, 1999 (Unaudited)....................... 1,015,714 $1
--
--
---------
---------
<CAPTION>
(ACCUMULATED
DEFICIT) TOTAL
PAID-IN UNEARNED RETAINED STOCKHOLDERS'
CAPITAL COMPENSATION EARNINGS EQUITY (DEFICIT)
-------- ------------ ------------ ----------------
Balance at May 31, 1995..................................... $ 1,788 $ 193 $ 1,986
Issuance of Class A Common Stock............................ 1,371 1,372
Issuance of Class A and B Common Stock...................... 144 144
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)............................... (400) (400)
Compensation expense incurred in connection with stock
options................................................... 1,823 1,823
Net income.................................................. 549 549
-------- ------------ -------
Balance at May 31, 1996................................... 5,126 342 5,474
Liquidation of Series A Preferred Stock, for $1,000 per
share, redemption of Class A and B Common Stock for a cash
price of $35 per share and change in equity related to
exercise of stock options................................. (11,228) (21,466) (32,700)
Issuance of Series A and B Preferred and Common Stock at
cash price of $100, $35 and $1, respectively.............. (226) 15,155
Warrant exercise at $.01 per share..........................
Original issue discount in connection with the issuance of
warrants and subordinated debt............................ 123 123
Compensation expense incurred in connection with common
stock options............................................. 5,660 5,660
Compensation expense incurred in connection with Series B
Preferred Stock options................................... 273 273
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively)................. 272 (1,286)
Net loss.................................................... (936) (936)
-------- ------------ -------
Balance at May 31, 1997................................... (23,346) (6,951)
Issuance of Series A Preferred Stock and Class A Common
Stock..................................................... 6 125
Unearned Compensation incurred in connection with common
stock options............................................. 3,352 (3,352)
Amortization of unearned compensation....................... 806 806
Compensation expense incurred in connection with Series B
Preferred stock options................................... 636 636
Accretion of Series A and Series B preferred stock dividend
($15.14 and $5.44 per share, respectively)................ (2,387)
Net income.................................................. 277 277
-------- ------------ ------------ -------
Balance at May 31, 1998................................... 3,994 (2,546) (25,456) (5,107)
Warrant issuance in connection with Redeemable Senior
Preferred Stock........................................... 3,416 3,416
Compensation expense incurred in connection with Series B
Preferred stock options................................... 434 434
Accretion of Series A and Series B preferred stock dividend
($10.51 and $3.89 per share, respectively)................ (1,630)
Accretion of redeemable senior preferred stock dividend
($12.20 per share plus accretion to liquidation value).... (516) (516)
Net loss.................................................... (560) (560)
-------- ------------ ------------ -------
Balance at December 31, 1998.............................. 7,844 (2,546) (28,162) (2,333)
Compensation expense incurred in connection with Series B
preferred stock options (Unaudited)....................... 190 190
Accretion of Series A and Series B preferred stock dividend
(Unaudited)............................................... (719)
Accretion of redeemable senior preferred stock dividend
(Unaudited)............................................... (1,299) (1,299)
Net income (Unaudited)...................................... 424 424
-------- ------------ ------------ -------
Balance at March 31, 1999 (Unaudited)....................... $ 8,034 $(2,546) $(29,756) $(3,018)
-------- ------------ ------------ -------
-------- ------------ ------------ -------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALL FIGURES $'000
FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
AND THE SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ 549 $ (936) $ 277 $ -- $ (560)
--------- --------- --------- ----------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Compensation expense incurred in connection with stock
options................................................ 1,967 5,933 1,442 397 434
Depreciation and amortization............................ 2,929 4,219 7,736 3,944 8,818
Amortization of debt issuance costs...................... -- 156 412 245 363
Losses from extinguishment of debt....................... -- -- 1,406 1,377 --
Write-off of organization costs.......................... -- -- 158 158 --
Noncash rental expense, net of noncash rental income..... 1,277 1,620 2,670 1,354 1,493
Change in certain working capital components............. 1,216 4,389 4,316 1,620 204
Increase in deferred tax asset........................... (1,539) (2,058) (1,187) (1,081) (1,411)
Increase in deferred membership costs.................... (926) (847) (1,403) (708) (2,072)
Other.................................................... 222 (174) (94) (113) 124
--------- --------- --------- ----------- ---------
Total adjustments........................................ 5,146 13,238 15,456 7,193 7,953
--------- --------- --------- ----------- ---------
Net cash provided by operating activities................ 5,695 12,302 15,733 7,193 7,393
--------- --------- --------- ----------- ---------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired
businesses............................................... (5,380) (11,403) (16,170) (5,304) (21,815)
Acquisition of businesses.................................. (35) (1,888) (19,733) (7,058) (25,103)
Intangible and other assets................................ (72) (280) (137) -- (434)
--------- --------- --------- ----------- ---------
Net cash used in investing activities.................... (5,487) (13,571) (36,040) (12,362) (47,352)
--------- --------- --------- ----------- ---------
Cash flows from financing activities:
Issuance of stock, net of expenses......................... 2,000 15,155 125 125 --
Issuance of Senior Preferred Stock, net of expenses........ -- -- -- -- 39,635
Redemption and liquidation of stock, including expenses.... -- (38,820) -- -- --
Proceeds from borrowings, net of expenses.................. 5,365 40,081 85,841 85,570 16,975
Repayments of borrowings................................... (7,221) (13,607) (45,130) (43,334) (20,494)
--------- --------- --------- ----------- ---------
Net cash provided by financing activities................ 144 2,809 40,836 42,361 36,116
--------- --------- --------- ----------- ---------
Net (decrease) increase in cash and cash equivalents..... 352 1,540 20,529 37,192 (3,843)
Cash and cash equivalents at beginning of period............. 576 928 2,468 2,468 22,997
--------- --------- --------- ----------- ---------
Cash and cash equivalents at end of period............... $ 928 $ 2,468 $ 22,997 $ 39,660 $ 19,154
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Summary of the change in certain working capital components,
net of effects of acquired businesses:
(Increase) decrease in accounts receivable............... $ (19) $ 469 $ (108) $ 69 $ (208)
Increase in inventory.................................... (135) (39) (343) (323) (580)
(Increase) decrease in prepaid expenses and other current
assets................................................. (38) 631 30 (18) (336)
Increase (decrease) in accounts payable and accrued
expenses............................................... 805 2,055 1,895 981 (2,330)
(Decrease) increase in prepaid corporate income taxes.... (913) 156 324 -- --
Increase in deferred revenue............................. 1,516 1,117 2,518 911 3,658
--------- --------- --------- ----------- ---------
Net change in certain working capital components....... $ 1,216 $ 4,389 $ 4,316 $ 1,620 $ 204
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALL FIGURES $'000
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 1999 (UNAUDITED)
DECREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
<S> <C> <C>
1999
-----------
1998
----------- (UNAUDITED)
(UNAUDITED)
Cash flows from operating activities:
Net income........................................................................... $ 528 $ 424
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation expense incurred in connection with stock options..................... 184 190
Depreciation and amortization...................................................... 2,138 4,629
Amortization of debt issuance costs................................................ 157 157
Noncash rental expense, net of noncash rental income............................... 715 933
Change in certain working capital components....................................... 2,706 6,001
Increase in deferred tax asset..................................................... (526) (702)
Increase in deferred membership costs.............................................. (452) (1,108)
Other.............................................................................. 25 (3)
----------- -----------
Total adjustments.................................................................. 4,947 10,097
----------- -----------
Net cash provided by operating activities.......................................... 5,475 10,521
----------- -----------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired businesses.......................... (5,730) (11,371)
Acquisition of businesses............................................................ (2,975) (1,050)
Intangible and other assets.......................................................... (264) (128)
Landlord contributions............................................................... -- 87
----------- -----------
Net cash used in investing activities.............................................. (8,969) (12,462)
----------- -----------
Cash Flows from Financing Activities:
Repayments of borrowings............................................................. (712) (396)
----------- -----------
Net cash used in financing activities............................................ (712) (396)
----------- -----------
Net decrease in cash and cash equivalents........................................ (4,206) (2,337)
Cash and cash equivalents at beginning of period....................................... 39,660 19,154
----------- -----------
Cash and cash equivalents at end of period........................................... $ 35,454 $ 16,817
----------- -----------
----------- -----------
Summary of the change in certain working capital components, net of effects
of acquired businesses:
Increase in accounts receivable...................................................... $ (1,062) $ (387)
Decrease in inventory................................................................ 8 98
Increase in prepaid expenses and other current assets................................ (1,611) (189)
Increase in accounts payable and accrued expenses.................................... 4,111 3,673
Increase in deferred revenue......................................................... 1,260 2,806
----------- -----------
Net change in certain working capital components................................... $ 2,706 $ 6,001
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALL FIGURES $'000, EXCEPT SHARE DATA
1. NATURE OF BUSINESS:
Town Sports International, Inc. and Subsidiaries (the "Company") owns,
operates or manages 55 fitness clubs ("clubs") in the New York metropolitan
market, eight clubs in Washington, D.C., four clubs in Boston, and two clubs in
Switzerland as of December 31, 1998. The Company's geographic concentration in
the New York metropolitan market may expose the Company to adverse developments
related to competition, demographic changes, real estate costs and economic down
turns. The Company operates in a single segment as defined by Statement of
Financial Accounting Standards No. 131, " DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION."
On December 10, 1996, the Company completed a restructuring of its ownership
and debt capitalization. The restructuring was undertaken to increase
stockholder value by providing access to growth capital and financial advisory
skills thereby enabling the Company to optimize its competitive advantage in the
market place, and to present certain existing equity holders the opportunity to
diversify their respective equity interests in the Company. The restructuring
was accounted for as a leveraged recapitalization whereby new investors, on a
fully-diluted basis, effectively acquired 73% of the Company resulting in a
reduction of equity of $32,700. The reduction in equity included the liquidation
of Series A Preferred Stock of $496, and the redemption of stock and stock
options outstanding immediately prior to the recapitalization of $28,025 and
$4,179, respectively. In addition, 368,333 shares of Series B Redeemable
Preferred Stock, which had been accounted for as mezzanine financing, were
redeemed at a cost of $6,121. New and existing investors acquired newly
constituted preferred and common stock. Closing fees paid to certain new
investors totaled approximately $800. Senior and subordinated debt facilities
were obtained to finance the repayment of existing bank facilities and to
provide growth capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Town Sports International, Inc. and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
B. CHANGE IN YEAR END:
On January 7, 1999, The Company's board of directors approved a change in
the Company's fiscal year end from May 31 to December 31, effective beginning
with the seven month period ended December 31, 1998 ("the transition period").
C. REVENUE RECOGNITION:
The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time with
30 days notice. Initiation fees and related direct expenses, primarily salaries
and sales commissions payable to membership consultants, are deferred and
recognized, on a straight-line basis, in operations over an estimated membership
period of twenty four (24) months. Dues that are received in advance are
recognized on a pro-rata basis over the periods in which services are to be
provided.
F-9
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $1,975, pursuant to various state consumer
protection laws.
Management fees earned for services rendered are recognized at the time the
related services are performed.
The Company recognizes revenue from merchandise sales upon delivery to the
member.
D. INVENTORY:
Inventory consists primarily of athletic equipment and supplies for sale to
members and club supplies. Inventories are valued at the lower of cost or market
by the first-in, first-out method.
E. FIXED ASSETS:
Fixed assets are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which are thirty years for
building and improvements, five years for club equipment, furniture, fixtures
and computer equipment, and three years for proprietary computer software.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining period of the lease. Expenditures for maintenance and
repairs are charged to operations as incurred. The cost and related accumulated
depreciation or amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in operations.
F. ADVERTISING AND CLUB PREOPENING COSTS
Advertising costs and club preopening costs are charged to operations during
the period in which they are incurred. Total advertising costs incurred by the
Company during the years ended May 31, 1996, 1997, 1998 and the seven months
ended December 31, 1998 totaled $1,291, $1,627, $2,147 and $2,081, respectively.
G. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
The most significant assumptions and estimates relate to the useful lives
and recoverability of fixed and intangible assets, deferred income tax
valuation, valuation of and expense incurred in connection with stock options
and warrants and the estimated membership period.
H. CORPORATE INCOME TAXES:
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined on the basis of the difference between the financial statement and
tax bases of assets and liabilities ("temporary differences") at enacted tax
rates in effect for the
F-10
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
years in which the temporary differences are expected to reverse. A valuation
allowance is recorded if it is more likely than not that all or part of a
deferred tax asset will not be realized.
I. STATEMENTS OF CASH FLOWS:
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEARS ENDED MAY 31, DECEMBER 31,
------------------------------- ----------------------
1996 1997 1998 1997 1998
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash paid for:
Interest (net of amounts capitalized).............................. $ 1,118 $ 1,603 $ 6,798 $ 2,430 $ 4,705
Taxes.............................................................. 3,080 1,655 1,300 455 1,072
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts payable........... 293 850 2,496 99 1,966
Acquisition of equipment financed by suppliers or lessors............ 1,475 1,411 562 261 --
See Notes 9 and 10 for additional noncash investing and financing
activities.
</TABLE>
J. CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments which have
maturities of three months or less when acquired to be cash equivalents. The
carrying amounts reported in the balance sheets for cash and cash equivalents
approximate fair value.
K. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE:
The Company recognizes rental expense for leases with scheduled rent
increases on the straight-line basis over the life of the lease.
L. FOREIGN CURRENCY:
Transactions denominated in a foreign currency have been translated into
U.S. dollars at the rates of exchange at the transaction dates. Assets and
liabilities have been translated at the respective year-end exchange rates. For
the years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998, the Company recognized foreign exchange gains (losses) of approximately
$20, ($65), ($3) and $1, respectively. These gains (losses) relate to certain
management fees earned in Switzerland.
M. INVESTMENTS IN AFFILIATED COMPANIES:
The Company has investments in Capitol Hill Squash Club Associates and
Kalorama Sports Management Associates (collectively referred to as the
"Affiliates"). The Affiliates have operations, which are similar, or related to,
those of the Company. The Company accounts for these Affiliates in
F-11
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accordance with the equity method. The assets, liabilities, equity and operating
results of the Affiliates and the Company's pro rata share of the Affiliates'
net assets and operating results were not material for all periods presented.
N. INTANGIBLE ASSETS:
Intangible assets consist of acquired leasehold rights, membership lists,
debt issuance costs, goodwill and covenants-not-to-compete. Such intangibles are
stated at cost and, except debt issuance costs, are being amortized by the
straight-line method over their estimated lives. Debt issuance costs are
amortized as additional interest expense over life of the underlying debt using
the interest method. Effective June 1, 1997, the Company changed the estimated
useful lives of membership lists from three to two years. The effect on
operating results for the year ended May 31, 1998 of decreasing the useful life
was to increase amortization expense by $234, $117 net of taxes. Goodwill and
acquired leasehold rights are being amortized over the remaining lives of the
respective leases, five to fifteen years, and debt issuance costs are being
amortized over the term of the respective borrowings, five to seven years.
Prior to the year ended May 31, 1998, the Company capitalized direct costs
(legal fees and real-estate commissions) incurred to obtain leases for new clubs
to be constructed by the Company ("Organizational Costs"). Such amounts were
amortized over a five year period using the straight-line method. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement of
Position 98-5 "REPORTING ON THE COSTS OF START-UP ACTIVITIES" ("SOP 98-5") which
requires that Organizational Costs be expensed as incurred. In connection with
the adoption of SOP 98-5, the Company restated its first-quarter operating
results as if adoption had occurred on June 1, 1997 and recorded a pre-tax
charge of $158, $88 net of taxes, as the cumulative effect of this accounting
change.
O. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets, such as fixed assets and intangible assets, including
goodwill, are reviewed for impairment when events or circumstances indicate that
their carrying value may not be recoverable. Estimated undiscounted expected
future cash flows are used to determine if an asset is impaired in which case
the asset's carrying value would be reduced to fair value. For all periods
presented, no impairment losses were recorded.
P. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents. Such amounts are
held, primarily, in a single commercial bank. The Company holds no collateral
for these financial instruments.
Q. STOCK-BASED EMPLOYEE COMPENSATION:
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method ("APB No. 25"). In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Company's stock is
not greater than the amount an
F-12
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
employee must pay to acquire the stock as defined; however, to the extent that
stock options are granted to employees with variable terms or if the fair value
of the Company's stock as of the measurement date is greater than the amount an
employee must pay to acquire the stock, then the Company will recognize
compensation expense. However, the fair value of options or warrants granted to
nonemployees for financing are included in operating results as an expense.
Disclosures, including pro forma operating results had the Company prepared
its financial statements in accordance with the fair value based method of
accounting for stock-based compensation, have been included in Note 9.
R. OTHER RECENT ACCOUNTING PRONOUNCEMENTS:
During the transition period, the Company adopted the provisions of
Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE" ("SOP 98-1"). SOP 98-1 requires the
Company to capitalize certain costs incurred in connection with developing
software to be used internally. The amounts capitalized during the period were
$558.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." SFAS No. 133 standardizes the accounting for derivative instruments
by requiring that all derivatives be recognized as assets and liabilities and
measured at fair value. This statement is effective for fiscal years beginning
after June 15, 1999. Based on current estimates, management does not believe
that the future adoption of SFAS No. 133 will have an effect on the Company's
financial statements.
3. FIXED ASSETS:
Fixed assets as of May 31, 1997, 1998 and December 31, 1998, are shown at
cost, less accumulated depreciation and amortization, and are summarized below:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- ------------
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Leasehold improvements....................................................... $ 26,309 $ 39,029 $ 58,835
Club equipment............................................................... 8,581 13,394 19,984
Furniture, fixtures and computer equipment................................... 5,171 6,841 10,794
Building and improvements.................................................... 4,995 4,995 4,995
Land......................................................................... 986 986 986
Construction in progress..................................................... 1,284 6,937 8,488
--------- --------- ------------
47,326 72,182 104,082
Less, Accumulated depreciation and amortization............................ 13,112 17,664 22,656
--------- --------- ------------
$ 34,214 $ 54,518 $ 81,426
--------- --------- ------------
--------- --------- ------------
</TABLE>
Depreciation and leasehold amortization expense for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998 was approximately
$2,813, $3,843, $6,130 and $5,664, respectively.
F-13
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
4. INTANGIBLE ASSETS:
Intangible assets as of May 31, 1997, 1998 and December 31, 1998 are shown
at cost, less accumulated amortization, and are summarized below:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- ------------
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Goodwill arising on acquisition of businesses.................................. $ 2,798 $ 14,755 $ 32,627
Membership lists............................................................... 176 3,154 5,712
Deferred financing costs....................................................... 2,150 4,103 4,203
Covenants-not-to-compete....................................................... -- 400 550
Organizational expenses........................................................ 158 -- --
--------- --------- ------------
5,282 22,412 43,092
Less, Accumulated amortization............................................... 857 2,489 6,028
--------- --------- ------------
$ 4,425 $ 19,923 $ 37,064
--------- --------- ------------
--------- --------- ------------
</TABLE>
Amortization expense of intangible assets for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998 was approximately $116,
$532, $2,018 and $3,517, respectively. Such amount includes amortization expense
of deferred financing costs of $0, $156, $412 and $363, respectively, which has
been classified as interest expense for financial reporting purposes.
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- -------------
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
Accrued payroll................................................................. $ 1,882 $ 3,359 $ 2,210
Accrued interest................................................................ 839 1,171 2,017
Accrued other................................................................... 1,296 2,089 2,078
Amounts payable under agreement to purchase a club.............................. -- 1,250 --
--------- --------- ------
$ 4,017 $ 7,869 $ 6,305
--------- --------- ------
--------- --------- ------
</TABLE>
F-14
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31, MARCH 31,
-------------------- ------------ -----------
1997 1998 1998 1999
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
9-3/4% Senior Notes, due 2004................................... -- $ 85,000 $ 85,000 $ 85,000
Term loan....................................................... $ 30,000 -- -- --
Subordinated note payable--face value of $7,500. Note shown net
of original issue discount arising out of issuance of warrants
to buy common stock........................................... 7,384 -- -- --
Notes payable for acquired businesses........................... 1,370 1,826 3,739 4,199
Capital lease obligations....................................... 2,317 1,463 785 630
--------- --------- ------------ -----------
41,071 88,289 89,524 89,829
Less, Current portion due within one year..................... 1,924 2,036 2,191 2,324
--------- --------- ------------ -----------
Long-term portion............................................... $ 39,147 $ 86,253 $ 87,333 $ 87,505
--------- --------- ------------ -----------
--------- --------- ------------ -----------
</TABLE>
The aggregate long-term debt and capital lease obligations maturing during
the next five years and thereafter is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT DUE
- -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ $ 2,191
2000............................................................................ 1,137
2001............................................................................ 519
2002............................................................................ 208
2003............................................................................ 216
Thereafter...................................................................... 85,253
------------
$ 89,524
------------
------------
</TABLE>
On October 16, 1997, the Company issued $85,000 of 9-3/4% Senior Notes
("Senior Notes"), due October 2004. The net proceeds from the Senior Notes
totaled approximately $81,700 of which $41,500 was used to repay the term loan,
the line of credit and the subordinated note payable. The transaction fees of
approximately $3,300, were accounted for as deferred financing costs. The Senior
Notes bear interest at an annual rate of 9-3/4%, payable semi-annually. The
notes are redeemable at the option of the Company on or after October 15, 2001.
The Senior Notes are non-collateralized and rank "PARI PASSU" with all
unsubordinated debt and senior in right of payment with all subordinated
indebtedness of the Company. The note indenture under which the Senior Notes
were issued contains certain covenants that, among other things, limit the
Company's ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, engage in transactions with affiliates, incur
liens and engage in asset sales.
The Company has a line of credit with its principal bank for direct
borrowings and letters of credit of up to $25,000. The line of credit carries
interest at the Company's option based upon the Eurodollar borrowing rate plus
2.50% or the bank's prime rate plus 1.50%, as defined and the Company is
F-15
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
required to pay a commitment commission of 0.375% per annum based upon the daily
unutilized amount. There were no outstanding borrowings against this line of
credit as of December 31, 1998; however the amount available for borrowing has
been reduced by outstanding letters of credit totaling $2,007 (see Note 8). This
line of credit expires on October 15, 2002. The line of credit, as amended,
contains various covenants including interest coverage and a leverage ratio as
well as restrictions on the payment of dividends. The line of credit is
collateralized by a mortgage on land, building and equipment, which, as of
December 31, 1998, had an aggregate book value of approximately $3,447, and by
all other assets of the Company.
The Term Loan, prior to repayment, carried interest based upon Eurodollar
borrowing rate plus 3.25%, or the base prime rate plus 2.00% as determined by
the Company.
The Subordinated note, prior to repayment, carried interest of 11.5%.
Notes payable were incurred upon the acquisition of various fitness clubs
and are subject to the Company's right of offset for possible post acquisition
adjustments arising out of operations of the acquired clubs. These notes are
stated at a discount from face value at rates of between 5% and 7%, and are
non-collateralized.
The carrying value of long-term debt, other than the Senior Notes,
approximates fair market value as of May 31, 1997, 1998 and December 31, 1998 as
the debt is generally short term in nature. The Senior Notes have a fair value
of approximately $82,000 as of December 31, 1998, based on the quoted market
price.
The Company's interest expense and capitalized interest related to club
facilities under construction for the years ended May 31, 1996, 1997, 1998 and
the seven months ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- -------------
1996 1997 1998 1998
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Interest costs expensed.............................................. $ 1,012 $ 2,570 $ 7,130 $ 5,551
Interest costs capitalized........................................... 46 28 526 308
--------- --------- --------- ------
$ 1,058 $ 2,598 $ 7,656 $ 5,859
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The Company leases equipment under noncancelable capital leases. The initial
lease terms range from three to five years, after which the Company is required
to purchase the equipment at amounts defined by the agreements.
F-16
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
As of December 31, 1998, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------- ---------------
<S> <C>
1999........................................................................... $ 629
2000........................................................................... 191
2001........................................................................... 50
2002........................................................................... 4
-----
874
Less, Amounts representing interest.......................................... 89
-----
Present value of minimum capital lease payments............................ $ 785
-----
-----
</TABLE>
The cost of leased equipment included in club equipment was approximately
$4,190, $5,033 and $5,033 at May 31, 1997, 1998 and December 31, 1998,
respectively; related accumulated depreciation was $1,283, $2,234 and $3,222,
respectively.
7. RELATED PARTY TRANSACTIONS:
a. The Company entered into a management agreement with Town Squash AG
("TSAG"). The Company, together with the shareholders of TSAG, is
contingently liable to fund shortfalls in operating cash flow of TSAG, as
defined. The terms of the agreement provide for the Company to fund a
maximum amount of operating cash flow of approximately $142 ("Advances").
As of May 31, 1997, 1998 and December 31, 1998, the Company had no
outstanding Advances to TSAG.
Management fees earned during the years ended May 31, 1996, 1997, 1998
and the seven months ended December 31, 1998 amounted to approximately
$695, $223, $239 and $224, respectively.
b. The Company entered into a professional service agreement with
Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS"), for strategic and
financial advisory services on December 10, 1996. Fees for such services
are $250 per annum, and are payable while BRS owns 20% or more of the
outstanding Common Stock of the Company. Amounts due BRS on May 31, 1997
and 1998, which are included in accounts payable, were $104. No amounts
were due BRS at December 31, 1998.
8. LEASES:
The Company leases office, warehouse and multi-recreational facilities and
certain equipment under noncancelable operating leases. In addition to base
rent, the facility leases generally provide for additional rent based on
increases in real estate taxes and other costs. Certain leases give the Company
the right to acquire the leased facility at defined prices based on fair value
and provide for additional rent based upon defined formulas of revenue, cash
flow or operating results of the respective facilities.
F-17
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
8. LEASES: (CONTINUED)
Under the provisions of certain of these leases, the Company is required to
maintain irrevocable letters of credit, which total $2,007.
The leases expire at various times through December 31, 2021, and certain
leases may be extended at the Company's option.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, MINIMUM ANNUAL RENTAL
- --------------------------------------------------------------------- -----------------------
<S> <C>
1999................................................................. $ 20,616
2000................................................................. 22,095
2001................................................................. 22,259
2002................................................................. 22,019
2003................................................................. 21,789
Aggregate thereafter................................................. 176,925
--------
$ 285,703
--------
--------
</TABLE>
Rent expense, including the effect of deferred lease liabilities, for the
years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998 was approximately $8,653, $10,169, $15,493 and $13,914, respectively. Such
amounts include additional rent of $1,863, $2,146, $2,590 and $2,087,
respectively.
The Company, as landlord, leases space under noncancelable operating leases.
In addition to base rent, certain leases provide for additional rent based on
increases in real estate taxes, indexation, utilities and defined amounts based
on the operating results of the lessee. The leases expire at various times
through December 31, 2013. Future minimum rentals receivable under noncancelable
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, MINIMUM ANNUAL RENTAL
- --------------------------------------------------------------------- -----------------------
<S> <C>
1999................................................................. $ 828
2000................................................................. 825
2001................................................................. 829
2002................................................................. 761
2003................................................................. 599
Aggregate thereafter................................................. 1,033
------
$ 4,875
------
------
</TABLE>
Rental income, including noncash rental income, for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998, was approximately
$882, $936, $963 and $822, respectively. Such amounts included additional rental
charges above the base rent of $570, $620, $651 and $608, respectively.
F-18
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK:
a. CAPITALIZATION:
The Company's certificate of incorporation, as amended during November
1998, provides for the issuance of up to 3,500,000 shares of capital
stock, consisting of 2,500,000 shares of class A Voting Common Stock
("Class A"), par value $0.001 per share; 500,000 shares of Class B
Non-voting Common Stock ("Class B"), par value of $0.001 per share,
(Class A and Class B are collectively referred to herein as "Common
Stock"); 100,000 shares of Redeemable Senior Preferred Stock ("Senior"),
par value $1.00 per share; 200,000 shares of Series A Preferred Stock,
("Series A") par value $1.00 per share, and 200,000 shares of Series B
Preferred Stock ("Series B") par value $1.00 per share.
All stockholders have preemptive rights to purchase a pro-rata share of
any future sales of securities, as defined.
REDEEMABLE SENIOR PREFERRED STOCK
During November 1998, the Company issued 40,000 shares of mandatorily
redeemable Senior stock and 143,261 warrants. The Senior stock has no
voting rights except as required by law. The warrants have an exercise
price of $0.01, expire in November 2008 and are exercisable into an equal
number of shares of Class A Common Stock. After payment of fees and
expenses of approximately $365 the Company received net proceeds of
$39,635. Upon issuance, a $3,416 value was ascribed to the warrants. The
initial fair value of the Senior stock ($36,219) is being accreted to its
liquidation value using the interest method. The accreted amount for the
seven months ended December 31, 1998 was $28. The Senior stock is
redeemable in November 2008. In the event that certain defined events
occur, the number of warrants exercisable will be reduced.
The Senior stock has liquidation preferences over Series A, Series B and
Common Stock. The Senior stock may, at the option of the holder, be
converted into Common Stock upon the initial public offering ("IPO") of
the Company's common stock at a conversion rate equal to the IPO price.
The Senior stock has a liquidation value of $1,000 per share plus
cumulative unpaid dividends of $488 as of December 31, 1998. The Senior
stockholders are entitled to a cumulative 12% annual dividend, based upon
the per share price of $1,000.
F-19
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
A summary of transactions related to the Senior stock for the seven month
period ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Proceeds received in connection with the issuance of Senior stock
and warrants..................................................... $ 40,000
Expenses incurred in connection with issuance...................... (365)
Fair value ascribed to warrants at issuance........................ (3,416)
---------
Fair value of Senior stock at date of issuance..................... 36,219
Accretion to Senior stock liquidation value........................ 28
Accretion of Senior stock dividends................................ 488
---------
December 31, 1998 Senior stock carrying value...................... $ 36,735
---------
---------
</TABLE>
Cumulative unpaid dividends on Senior stock are payable upon certain
defined events which include: the dissolution, liquidation or winding up
of the Company; the redemption of such shares; or the sale of
substantially all of the assets of the Company.
PREFERRED STOCK
The Preferred Stock has liquidation preferences over Common Stock. The
Company's Series A and Series B stock have no conversion features or
voting rights except as required by law, and rank "PARI PASSU."
Series A stock has a liquidation value of $100 per share plus cumulative
unpaid dividends of $4,987 as of December 31, 1998. Series A stockholders
are entitled to a cumulative 14% annual dividend based upon the per share
price of $100.
Series B stock has a liquidation value of $35 per share plus cumulative
unpaid dividends of $44 as of December 31, 1998. Series B stockholders
are entitled to a cumulative 14% annual dividend based upon the per share
price of $35.
Cumulative unpaid dividends on all Preferred Stock are payable upon
certain defined events which include: the dissolution; liquidation or
winding up of the Company; the redemption of such shares; or the sale of
substantially all of the assets of the Company.
COMMON STOCK
Class A stock and Class B stock each have identical terms with the
exception that Class A stock is entitled to one vote per share, while
Class B stock has no voting rights, except as required by law. In
addition, Class B stock is convertible into an equal number of Class A
shares, at the option of the holder of the majority of the Class B stock.
To date, the Company has not issued Class B stock.
F-20
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
b. STOCK OPTIONS and WARRANTS:
The following table summarizes the stock option activity for the years ended
May 31, 1996, 1997, 1998 and the seven months ended December 31, 1998:
<TABLE>
<CAPTION>
CLASS A CLASS A
COMMON COMMON CLASS B SERIES B
($0.01 ($.001 CONVERTIBLE REDEEMABLE SERIES B
STOCK OPTIONS PAR VALUE) PAR VALUE) COMMON PREFERRED PREFERRED
- --------------------------------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at June 1, 1995...................... 150,000 121,000 21,251
Options exercised................................ (13,358) (2,351)
Options cancelled................................ (6,642) (349)
----------- ----------- -----------
Outstanding at May 31, 1996.................... 130,000 118,300 21,251
Options granted.................................. 57,142 20,000 164,783
Options exercised................................ (130,000) (138,300) (21,251)
----------- ----------- ----------- ----------- ----------
Outstanding at May 31, 1997.................... -- 57,142 -- -- 164,783
----------- ----------- -----------
----------- ----------- -----------
Options granted.................................... 14,700
----------- ----------
Outstanding at May 31, 1998 and December 31,
1998......................................... 71,842 164,783
----------- ----------
----------- ----------
Exercise price:
Outstanding at June 1, 1995...................... $ 3.40 $ 10.00 $ 3.00
Options exercised................................ 2.40 9.89
Options cancelled................................ 2.40 9.89
----------- ----------- -----------
Weighted average price of outstanding options at
May 31, 1996..................................... 3.55 10.06 3.00
Options granted.................................. $ 1.00(i) 6.00 (ii $ 10.00(ii)
Options exercised................................ 3.55 9.47 3.00
----------- ----------- ----------- ----------- ----------
Weighted average price of outstanding options at
May 31, 1997..................................... -- 1.00 -- -- 10.00
----------- ----------- -----------
----------- ----------- -----------
Options granted.................................. 17.50 (ii
----------- ----------
Weighted average price of outstanding options at
May 31, 1998 and December 31, 1998............... 4.38 10.00
----------- ----------
----------- ----------
</TABLE>
- ------------------------
(i) Option exercise price equal to market price on the grant date based upon
independent appraisal.
(ii) Option exercise price less than market price on the grant date based upon
independent appraisal.
As of May 31, 1996, all outstanding options were exercisable. As of May 31,
1997 and 1998, all outstanding options for Series B Redeemable Preferred Stock
were exercisable and 11,428 and 25,797 options of Class A stock respectively
were exercisable.
F-21
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
The following table summarizes stock option information as of December 31,
1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Class A Common:
1997 Grants.................................... 57,142 99 months $ 1.00 22,857 $ 1.00
1998 Grants.................................... 14,700 99 months $ 17.50 2,940 $ 17.50
Series B Preferred............................... 164,783 275 months $ 10.00 164,783 $ 10.00
</TABLE>
CLASS A COMMON STOCK ($.001 PAR VALUE) OPTIONS:
During the year ended May 31, 1997, the Company adopted the Town Sports
International Inc. 1997 Common Stock Option Plan (the "1997 Plan"). The
provisions of the 1997 Plan, as amended and restated, provide for the Company's
Board of Directors to grant to executives and key employees options to acquire
80,876 shares of Class A stock.
The Company granted 57,142 options ("1997 Grants") with an exercise price of
$1.00 on December 10, 1996. The 1997 Grants have a term of 10 years and
originally vested based on the achievement of annual equity values as defined.
During the year ended May 31, 1998, the 1997 Grants were amended. The amendment
impacted 45,714 options, which had not previously vested (the "Amended Grants")
by adding a provision whereby unvested outstanding options would automatically
vest on December 10, 2005. Vesting will be accelerated in the event that certain
defined events occur including the achievement of certain equity values, the
sale of the Company, or an initial public offering of equity securities as
defined.
During the year ended May 31, 1998, the Company granted 14,700 options
("1998 Grants") with an exercise price of $17.50 and a term of 10 years. This
exercise price was below the estimated fair value of the Class A stock of $60.50
on the date of grant. The 1998 Grants vest in full on December 10, 2005;
however, vesting will be accelerated in the event that certain defined events
occur including the achievement of annual equity values or the sale of the
Company.
In accordance with APB No. 25, the Company recorded unearned compensation in
connection with the Amended Grants and the 1998 Grants. Such amount is included
within stockholders' deficit and represented the difference between the
estimated fair value of the Class A stock on the date of amendment or grant,
respectively, and the exercise price. Unearned compensation will be amortized as
compensation expense over the vesting period. During the year ended May 31,
1998, amortization of unearned compensation totaled $806. For the seven months
ended December 31, 1998, no additional options vested and accordingly there was
no amortization of unearned compensation.
As of December 31, 1998, shares reserved for future option awards totaled
9,034.
F-22
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
SERIES B PREFERRED STOCK OPTIONS:
During the year ended May 31, 1997, the Company granted 164,783 options
("Series B Options") to certain employees which entitle the holders to purchase
an equal number of shares of Series B stock at an exercise price of $10.00 per
share. The estimated fair value of the Series B stock on the date of grant was
$35.00 per share. Accordingly, the Company recognized an aggregate charge for
the difference between the Series B Options' exercise price and the estimated
fair value of the Series B stock, which totaled $4,120. Series B Options were
fully vested on the date of grant and expire on December 31, 2021. The terms of
the Series B Options also contain provisions whereby the exercise price will be
reduced or in certain cases, the option holder will receive cash in accordance
with a formula as defined. The aggregate value of either a reduction in exercise
price or the distribution of cash will be deemed compensatory and accordingly
the Company will record compensation expense. For the years ended May 31, 1997
and 1998 and the seven months ended December 31, 1998, compensation expense
recognized in connection with Series B Options totaled $273, $636 and $434,
respectively. There are no shares of Series B Preferred Stock reserved for
future option grants.
CLASS A ($0.01 PAR VALUE) AND CLASS B CONVERTIBLE OPTIONS:
During the years ended May 31, 1996 and 1997, in connection with the
granting of Class A Common Stock ($0.001 par value) and Class B Convertible
Common Stock Options, the Company recognized a compensation charge of
approximately $1,967 and $5,933, respectively. Such charges represented the
difference between the exercise price of the respective options and the fair
market value of the underlying stock as determined by the Board of Directors.
PRO FORMA OPERATING RESULTS:
The following table summarizes the pro forma operating results of the
Company had compensation costs for the outstanding options been determined in
accordance with the fair value based method of accounting for stock-based
compensation. There were no options granted during the year ended May 31, 1996
and the seven months ended December 31, 1998.
Since option grants vest over several years and additional grants are
expected in the future, the pro forma results noted below are not likely to be
representative of the effects on future years of the application of the fair
value based method. No additional options vested during the seven months ended
December 31, 1998, therefore the effects of the fair value based method on
operating results for that period was immaterial.
<TABLE>
<CAPTION>
MAY 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Pro forma amounts:
Net loss attributable to common stockholders........................... $ (1,826) $ (1,804)
--------- ---------
--------- ---------
</TABLE>
For the purposes of the above pro forma information, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. For the years ending May 31, 1997 and 1998, the weighted-average
fair value of the option grants was approximately $26.00 and $44.00,
respectively. The following weighted-average assumptions were used in computing
the fair
F-23
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
value of options grants: expected volatility of 60% for all periods; risk-free
interest rate of approximately 6.5% for May 31, 1997 and 5.5% for May 31, 1998;
expected lives of five years for May 31, 1997, and three to five years for May
31, 1998; and a zero dividend yield for all periods.
WARRANTS TO BUY COMMON STOCK:
In connection with the issuance of the Subordinated note payable on December
10, 1996, warrants to buy 124,022 shares of Class A Common Stock were issued at
an exercise price of $0.01 per share. Original issue discount arising upon this
issue, totaled approximately $123. 10,000 warrants were exercised on December
10, 1996. The amount of warrants outstanding was reduced during the seven months
ended December 31, 1998 by 38,308 to 75,714 in connection with the issuance of
the Senior stock. As of December 31, 1998, the remaining outstanding warrants
are fully exercisable and expire in December 2006.
10. ASSET ACQUISITIONS:
During the years ended May 31, 1996, 1997, 1998 and the seven months ended
December 31, 1998, the Company completed the acquisition of 36 fitness clubs.
With the exception of the Ultrafit, Inc. and Affiliates ("Ovox") and Lifestyle
Fitness of Springfield, Inc. and Affiliates ("Lifestyle") acquisitions, as
discussed below, the individual acquisitions were not material to the financial
position or results of operations of the Company. The table below summarizes the
aggregate purchase price and the purchase price allocation to assets acquired:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- ------------
1996 1997 1998 1998
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Number of clubs acquired............................................... 1 3 16 16
--------- --------- --------- ------------
--------- --------- --------- ------------
Purchase prices payable in cash at closing............................. $ 35 $ 1,888 $ 19,733 $ 25,103
Issuance and assumption of notes payable............................... 269 2,250 4,110 4,654
--------- --------- --------- ------------
Total purchase prices.............................................. $ 304 $ 4,138 $ 23,843 $ 29,757
--------- --------- --------- ------------
--------- --------- --------- ------------
Allocation of purchase prices:
Fixed assets......................................................... $ 299 $ 2,462 $ 9,011 $ 9,177
Membership lists..................................................... -- 177 2,978 2,559
Goodwill............................................................. -- 1,484 11,557 18,021
Other net assets acquired............................................ 5 15 297 --
--------- --------- --------- ------------
Total allocation of purchase prices................................ $ 304 $ 4,138 $ 23,843 $ 29,757
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
For financial reporting purposes, these acquisitions have been accounted for
under the purchase method and, accordingly, the purchase prices have been
assigned to the assets and liabilities acquired on the basis of their respective
fair values on the date of acquisition. The excess of purchase prices over the
net tangible assets acquired has been allocated to membership lists acquired,
covenant-not-to compete and goodwill. Intangible assets are amortized by the
straight-line basis over the estimated life
F-24
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
10. ASSET ACQUISITIONS: (CONTINUED)
of the asset. Acquired membership lists are amortized over a 2 year period and
goodwill is amortized over remaining lives of the leases of the acquired fitness
club which range from 3.5 to 15 years. The results of operations of the clubs
have been included in the Company's consolidated financial statements from the
respective dates of acquisition and the impact of these acquisitions on the
consolidated financial statements of the Company was not material, with the
exception of the following acquisitions.
On April 6, 1998, the Company acquired Ovox. Ovox's operations consisted of
four fitness clubs in New Jersey which were owned and operated by a common group
of investors. The purchase price totaled $8,177, which included $7,750 of cash
and notes payable of $236. Transaction costs amounted to $191. The excess of the
purchase price over the net fair value of the assets acquired was $6,589, and
has been allocated to the membership lists acquired and goodwill. The following
unaudited pro forma information has been prepared assuming the Ovox acquisition
had taken place at the beginning of the respective periods. The pro forma
adjustments give effect to amortization of goodwill, interest expense on
acquisition debt, and related income tax effects:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MAY 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues........................................................... $ 60,898 $ 87,158
Pro forma net income (loss) before extraordinary item and
cumulative effect of change in accounting policy................. (862) 1,275
Proforma net loss attributable to common stockholders.............. $ (2,148) $ (1,982)
</TABLE>
On August 6, 1998, the Company acquired Lifestyle. Lifestyle's operations
consisted of six fitness clubs in New Jersey, which were owned and operated by a
common group of investors. The purchase price totaled $10,752, which included
$10,000 of cash and notes payable of $300. Transaction costs amounted to $452.
The following unaudited pro forma information has been prepared assuming the
Lifestyle acquisition had taken place at the beginning of the respective periods
reported herein. The pro forma adjustments give effect to amortization of
goodwill, interest expense on acquisition debt, and the related income tax
effects:
<TABLE>
<CAPTION>
FOR THE
YEAR FOR THE SEVEN
ENDED MONTHS ENDED
MAY 31, DECEMBER 31,
1998 1998
----------- -------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues.......................................................... $ 90,037 $ 72,989
Pro forma net income (loss) before extraordinary item and
cumulative effect of change in accounting policy................ 1,130 (575)
Pro forma net income (loss) attributable to common stockholders... $ 260 $ (2,240)
</TABLE>
This unaudited proforma financial information is presented for informational
purposes only and may not be indicative of the results of operations as they
would have been if the Company and the
F-25
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
10. ASSET ACQUISITIONS: (CONTINUED)
acquired clubs had been a single entity for the respective periods presented,
nor is it indicative of the results of operations which may occur in the future.
Anticipated efficiencies from the consolidation of the acquired clubs and the
Company have been excluded from the amounts included in the proforma summary
presented above.
11. REVENUE FROM CLUB OPERATIONS:
Revenues from club operations for the years ended May 31, 1996, 1997, 1998
and the seven months ended December 31, 1997 (unaudited) and 1998 are summarized
below:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- ----------------------
1996 1997 1998 1997 1998
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Membership dues......................................... $ 35,800 $ 45,916 $ 66,878 $ 34,987 $ 59,105
Initiation fees......................................... 1,849 3,308 4,408 2,423 3,374
Other club revenues..................................... 3,147 4,940 8,433 4,080 7,485
--------- --------- --------- ----------- ---------
$ 40,796 $ 54,164 $ 79,719 $ 41,490 $ 69,964
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
12. CORPORATE INCOME TAXES:
The (benefit) provision for income taxes for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
MAY 31, 1996
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current........................................................................... $ 1,256 $ 911 $ 2,167
Deferred.......................................................................... (964) (575) (1,539)
--------- ----- ---------
$ 292 $ 336 $ 628
--------- ----- ---------
--------- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1997
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current........................................................................... $ 1,053 $ 762 $ 1,815
Deferred.......................................................................... (1,226) (832) (2,058)
--------- ----- ---------
$ (173) $ (70) $ (243)
--------- ----- ---------
--------- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1998
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current........................................................................... $ 1,383 $ 935 $ 2,318
Deferred.......................................................................... (751) (436) (1,187)
--------- ----- ---------
--------- ----- ---------
$ 632 $ 499 $ 1,131
--------- ----- ---------
--------- ----- ---------
</TABLE>
F-26
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
12. CORPORATE INCOME TAXES: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current........................................................................... $ 588 425 $ 1,012
Deferred.......................................................................... (952) (460) (1,411)
--------- ----- ---------
$ (364) $ (35) $ (399)
--------- ----- ---------
--------- ----- ---------
</TABLE>
The components of the net deferred tax asset as of May 31, 1997, 1998 and
December 31, 1998 are summarized below:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- -------------
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred lease liabilities.................................................... $ 2,966 $ 4,106 $ 4,750
Compensation expense incurred in connection with stock options................ 1,846 2,445 2,611
Fixed assets and intangible assets............................................ 1,153 358 1,176
State net operating loss carry-forwards....................................... 100 214 286
Deferred revenue.............................................................. 1,835 2,349 2,964
Other......................................................................... 33 56 162
--------- --------- ------
7,933 9,528 11,949
--------- --------- ------
Deferred tax liabilities:
Accrued expenses.............................................................. (153) (150) (149)
Deferred costs................................................................ (1,624) (2,035) (2,946)
--------- --------- ------
(1,777) (2,185) (3,095)
--------- --------- ------
Net deferred tax asset, prior to valuation allowance........................ 6,156 7,343 8,854
Valuation allowance............................................................. (184) (184) (284)
--------- --------- ------
Net deferred tax asset...................................................... $ 5,972 $ 7,159 $ 8,570
--------- --------- ------
--------- --------- ------
</TABLE>
As of December 31, 1998, the Company had state net operating loss
carry-forwards of approximately $2,900. Such amounts expire between December 31,
1999 and December 31, 2005.
F-27
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
12. CORPORATE INCOME TAXES: (CONTINUED)
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income (loss) before provision (benefit) for corporate
income taxes:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate..................................................... 34% (34)% 34%
State and local income taxes, net of federal tax benefit, change of valuation
allowance and tax rates...................................................... 19 (14) 15
Adjustment of prior year's tax refund.......................................... -- 25 --
Non-taxable interest income.................................................... -- -- --
Other.......................................................................... -- 2 1
-- -- --
53% (21)% 50%
-- -- --
-- -- --
<CAPTION>
SEVEN MONTHS
ENDED
DECEMBER 31,
-----------------
1998
-----------------
<S> <C>
Federal statutory tax rate..................................................... (34)%
State and local income taxes, net of federal tax benefit, change of valuation
allowance and tax rates...................................................... 1
Adjustment of prior year's tax refund.......................................... --
Non-taxable interest income.................................................... (11)
Other.......................................................................... 2
--
(42)%
--
--
</TABLE>
13. CONTINGENCIES:
A claim had been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal Court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. A further claim was filed in New York State Supreme Court in April
1998 and was dismissed in December 1998.
The Company is a party to various other lawsuits arising in the normal
course of business. Management believes that the ultimate outcome of these
matters will not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
14. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) defined contribution plan (the "Plan") and is
subject to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"). The Plan provides for the Company to make discretionary
contributions; however, the Company elected not to make contributions for the
years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998.
15. EXTRAORDINARY ITEM:
During the year ended May 31, 1998, the Company completed a $85,000
financing. As part of this financing, an existing term loan, a line of credit
and a subordinated note were repaid. Accordingly, previously capitalized fees
and expenses relating to obtaining such financing of $1,406 were written off,
net of taxes of $624.
F-28
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
16. SUBSEQUENT EVENT:
Subsequent to December 31, 1998, the Company acquired two fitness clubs.
These acquisitions will be accounted for in accordance with the purchase method.
The aggregate purchase price totaled $1,709 which included $1,000 payable at
closing and the issuance of notes payable totaling $709.
17. NOTE TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION:
The consolidated financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited. In the opinion of
management, these unaudited consolidated financial statements reflect all
adjustments necessary (which are of a normal recurring nature) to present fairly
the financial position and results of operations and cash flows for the interim
periods, but are not necessarily indicative of the results of operations for a
full fiscal year.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
Our audits on the consolidated financial statements referred to in our
report dated February 16, 1999 appearing in this prospectus on page F-2 also
included an audit of the financial statement schedule which appears on page F-31
of this prospectus. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 16, 1999
F-30
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
For each of the years ended May 31, 1996, 1997, 1998 and the seven month
period ended December 31, 1998.
<TABLE>
<CAPTION>
COL. B COL. C COL. E
------------- ---------------------------- -------------
BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE AT
BEGINNING COSTS AND OTHER ----------- END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ---------------------------------------------------- ------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Deferred tax asset valuation allowance:
1996................................................ $ 284 $ 284
1997................................................ 284 $ (100)(1) 184
1998................................................ 184 184
The seven months ended December 31, 1998............ 184 $ 100(2) 284
</TABLE>
- ------------------------
(1) Reduction of valuation allowance from the utilization of state net operating
loss carryfowards which were no longer required.
(2) Increase in valuation allowance required for state net operating loss
carryforwards.
F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
$40,000,000
[LOGO]
[LOGO]
[LOGO]
[LOGO]
Town Sports
International
9 3/4% SENIOR NOTES DUE 2004
, 1999
"UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS."
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Sections 721 to 725 of the New York Business
Corporation Law ("NYBCL") which provide for indemnification of directors and
officers. Pursuant to Section 721 of the NYBCL, no indemnification shall be made
to or on behalf of a director or officer if a judgment or other final
adjudication adverse to the director or officer establishes that his or her acts
were committed in bad faith or were the results of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
or she personally gained in fact a financial profit or other advantage to which
he or she was not legally entitled. Section 402(b) of the NYBCL permits a
certificate of incorporation to set forth a provision limiting or eliminating
the personal liability of directors to a corporation or its shareholders for
damages for any breach of duty in such capacity, provided that no such provision
shall eliminate or limit the liability of a director (i) if a judgment or other
final adjudication adverse to him or her establishes that his or her acts were
in bad faith or involved intentional misconduct or a knowing violation of law or
(ii) that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled, or (iii) in certain other
cases specified in Section 719 of the NYBCL.
Article Eighth of Registrant's Restated Certificate of Incorporation
provides that, except to the extent limitation of liability or indemnification
is not permitted by applicable law: (i) a director or officer of the Registrant
shall not be liable to the Registrant or any of its shareholders for damages for
any breach of duty in such capacity, and (ii) the Registrant shall fully
indemnify any person made, or threatened to be made a party to an action or
proceeding, whether civil or criminal, including an investigative,
administrative or legislative proceeding, and including an action by or in the
right of the Registrant or any other enterprise, by reason of the fact that the
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant any other enterprise as a director, officer or
in any other capacity, against any and all damages incurred as a result of or in
connection with such action or proceeding or any appeal thereof.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S>
+2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among Town Sports
International, Inc., various Sellers and Option Holders and TSI Merger Sub, Inc.
+2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., Town Sports International, Inc. and various sellers and Option
Holders of the Company.
+3.1 Certificate of Incorporation of Town Sports International, Inc.
+3.2 By-Laws of Town Sports International, Inc.
+4.1 Indenture dated as of October 16, 1997 between Town Sports International, Inc. and
United States Trust Company of New York.
4.2 Purchase Agreement dated as of June 10, 1999 between Town Sports International,
Inc. and Deutsche Bank Securities, Inc.
4.3 Registration Rights Agreement dated as of June 21, 1999 between Town Sports
International, Inc., and Deutsche Bank Securities, Inc.
5.1 Opinion and consent of Kirkland & Ellis.
+10.1 Amended and Restated Credit Agreement among Town Sports International, Inc.,
Various Lending Institutions, and Bankers Trust Company, as Administrative Agent
dated as of October 16, 1997.
+10.2 Registration Rights Agreement dated as of December 10, 1996 by and among Town
Sports International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various
investors, Farallon Capital Partners, L.P., Farallon Capital Institutional
Partners, L.P., RR Capital Partners, L.P., Farallon Capital Institutional Partners
II, L.P., Canterbury Mezzanine Capital, L.P., and certain TSI shareholders.
+10.3 Shareholders Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P.,
Canterbury Mezzanine Capital, L.P., and certain TSI shareholders.
10.4 Third Amendment to the Amended and Restated Credit Agreement, dated as of June 9,
1999, among Town Sports International, Inc., various lending institutions and
Bankers Trust Company, as Administrative Agent.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Town Sports International, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
+25.1 Statement of Eligibility of Trustee on Form T-1.
+27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- ------------------------
+ Previously filed
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifications Accounts
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered therein, and the
offering of such Securities at the time shall be deemed to be the initial BONA
FIDE offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the termination of the
offering; and
(4) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) That for the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(6) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
In so far as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and exchange Commission such indemnification is against public policy
as expressed in the Securities At and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of New York, state of New
York, on July 9, 1999.
<TABLE>
<S> <C> <C>
TOWN SPORTS INTERNATIONAL, INC.
By /s/ MARK A. SMITH
-----------------------------------------
Mark A. Smith
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Pyle his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this registration statement
and any subsequent registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated on July 9, 1999.
<TABLE>
<S> <C> <C>
By /s/ MARK A. SMITH
-----------------------------------------
Mark A. Smith
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD (PRINCIPAL EXECUTIVE OFFICER)
By /s/ RICHARD PYLE
-----------------------------------------
Richard Pyle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
By /s/ KEITH ALESSI
-----------------------------------------
Keith Alessi
DIRECTOR
By /s/ PAUL ARNOLD
-----------------------------------------
Paul Arnold
DIRECTOR
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
By /s/ BRUCE BRUCKMANN
-----------------------------------------
Bruce Bruckmann
DIRECTOR
By /s/ STEPHEN EDWARDS
-----------------------------------------
Stephen Edwards
DIRECTOR
By /s/ JASON FISH
-----------------------------------------
Jason Fish
DIRECTOR
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
+2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among Town Sports
International, Inc., various Sellers and Option Holders and TSI Merger Sub, Inc.
+2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., Town Sports International, Inc. and Various Sellers and Option
Holders of the Company.
+3.1 Certificate of Incorporation of Town Sports International, Inc.
+3.2 By-Laws of Town Sports International, Inc.
+4.1 Indenture dated as of October 16, 1997 between Town Sports International, Inc. and
United States Trust Company of New York.
4.2 Purchase Agreement dated as of June 10, 1999 between Town Sports International, Inc.
and Deutsche Bank Securities, Inc.
4.3 Registration Rights Agreement dated as of June 21, 1999 between Town Sports
International, Inc., and Deutsche Bank Securities, Inc.
5.1 Opinion and consent of Kirkland & Ellis.
+10.1 Amended and Restated Credit Agreement among Town Sports International, Inc., Various
Lending Institutions, and Bankers Trust Company, as Administrative Agent dated as of
October 16, 1997.
+10.2 Registration Rights Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Canterbury
Mezzanine Capital, L.P., and certain TSI shareholders.
+10.3 Shareholders Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Canterbury
Mezzanine Capital, L.P., and certain TSI shareholders.
10.4 Third Amendment to the Amended and Restated Credit Agreement, dated as of June 9,
1999, among Town Sports International, Inc., various lending institutions and Bankers
Trust Company, as Administrative Agent.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Town Sports International, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
+25.1 Statement of Eligibility of Trustee on Form T-1
+27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- ------------------------
+ Previously filed
<PAGE>
Purchase Agreement
Town Sports International, Inc.
$40,000,000
9 3/4% Senior Notes due 2004
PURCHASE AGREEMENT
June 10, 1999
DEUTSCHE BANK SECURITIES, INC.
130 Liberty Street
New York, New York 10006
Ladies and Gentlemen:
Town Sports International, Inc., a New York corporation (the
"Company"), hereby confirms its agreement with you (the "Initial Purchaser"), as
set forth below.
1. The Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the Initial Purchaser
$40,000,000 aggregate principal amount of its 9 3/4% Senior Notes due 2004,
Series C (the "Notes"). The Notes are to be issued under an indenture (the
"Indenture") dated as of October 16, 1997 between the Company and United States
Trust Company of New York, as Trustee (the "Trustee").
The Notes will be offered and sold to the Initial Purchaser without
being registered under the Securities Act of 1933, as amended (the "Act"), in
reliance on exemptions therefrom.
In connection with the sale of the Notes, the Company has prepared a
final offering memorandum dated June 10, 1999 (the "Memorandum") setting forth
or including a description of the terms of the Notes, the terms of the offering
of the Notes, a description of the Company and any material developments
relating to the Company occurring after the date of the most recent historical
financial statements included therein.
The Initial Purchaser and its direct and indirect transferees of the
Notes will be entitled to the benefits of the Registration Rights Agreement,
substantially in the form attached hereto as Exhibit A (the "Registration Rights
Agreement"), pursuant to which the Company has agreed, among other
<PAGE>
-2-
things, to file a registration statement (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission") registering the Notes or
the Exchange Notes (as defined in the Registration Rights Agreement) under the
Act.
2. Representations and Warranties. The Company represents and
warrants to and agrees with the Initial Purchaser that:
(a) Neither the Preliminary Memorandum as of the date thereof nor
the Memorandum nor any amendment or supplement thereto as of the date thereof
and at all times subsequent thereto up to the Closing Date (as defined in
Section 3 below) contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
Section 2(a) do not apply to statements or omissions made in reliance upon and
in conformity with information relating to the Initial Purchaser furnished to
the Company in writing by the Initial Purchaser expressly for use in the
Preliminary Memorandum, the Memorandum or any amendment or supplement thereto.
(b) The Company has the authorized, issued and outstanding
capitalization set forth in the Memorandum; all of the subsidiaries of the
Company are listed in Schedule 1 attached hereto (each, a "Subsidiary" and
collectively, the "Subsidiaries"); all of the outstanding shares of capital
stock of the Company and the Subsidiaries have been, and as of the Closing Date
will be, duly authorized and validly issued, are fully paid and nonassessable
and were not issued in violation of any preemptive or similar rights; all of the
outstanding shares of capital stock of the Company and of each of the
Subsidiaries will be free and clear of all liens, encumbrances, equities and
claims or restrictions on transferability (other than those imposed by the Act
and the securities or "Blue Sky" laws of certain jurisdictions) or voting;
except as set forth in the Memorandum, there are no (i) options, warrants or
other rights to purchase, (ii) agreements or other obligations to issue or (iii)
other rights to convert any obligation into, or exchange any securities for,
shares of capital stock of or ownership interests in the Company or any of the
Subsidiaries outstanding.
(c) Each of the Company and the Subsidiaries is duly incorporated,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation and has
<PAGE>
-3-
all requisite corporate power and authority to own its properties and conduct
its business as now conducted and as described in the Memorandum; each of the
Company and the Subsidiaries is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified would not,
individually or in the aggregate, have a material adverse effect on the general
affairs, management, business, condition (financial or otherwise), prospects or
results of operations of the Company and the Subsidiaries, taken as a whole (any
such event, a "Material Adverse Effect").
(d) The Company has all requisite corporate power and authority to
execute, deliver and perform each of its obligations under the Notes, the
Exchange Notes and the Private Exchange Notes (as defined in the Registration
Rights Agreement). The Notes, when issued, will be in the form contemplated by
the Indenture. The Notes, the Exchange Notes and the Private Exchange Notes have
each been duly and validly authorized by the Company and, when executed by the
Company and authenticated by the Trustee in accordance with the provisions of
the Indenture and, in the case of the Notes, when delivered to and paid for by
the Initial Purchaser in accordance with the terms of this Agreement, will
constitute valid and legally binding obligations of the Company, entitled to the
benefits of the Indenture, and enforceable against the Company in accordance
with their terms, except that the enforcement thereof may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally, and (ii) general
principles of equity and the discretion of the court before which any proceeding
therefor may be brought.
(e) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Indenture. The Indenture
meets the requirements for qualification under the Trust Indenture Act of 1939,
as amended (the "TIA"). The Indenture has been duly and validly authorized by
the Company and (assuming the due authorization, execution and delivery by the
Trustee) constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except that the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
and the discretion of the court before which any proceeding therefor may be
brought.
<PAGE>
-4-
(f) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Registration Rights
Agreement. The Registration Rights Agreement has been duly and validly
authorized by the Company and, when executed and delivered by the Company, will
constitute a valid and legally binding agreement of the Company enforceable
against the Company in accordance with its terms, except that (A) the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
and the discretion of the court before which any proceeding therefor may be
brought and (B) any rights to indemnity or contribution thereunder may be
limited by federal and state securities laws and public policy considerations.
(g) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. This Agreement and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by the Company. This Agreement has been duly
executed and delivered by the Company.
(h) No consent, approval, authorization or order of any court or
governmental agency or body, or third party is required for the issuance and
sale by the Company of the Notes to the Initial Purchaser or the consummation by
the Company of the other transactions contemplated hereby, except such as have
been obtained and such as may be required under state securities or "Blue Sky"
laws in connection with the purchase and resale of the Notes by the Initial
Purchaser. None of the Company or the Subsidiaries is (i) in violation of its
certificate of incorporation or bylaws (or similar organizational document),
(ii) in breach or violation of any statute, judgment, decree, order, rule or
regulation applicable to any of them or any of their respective properties or
assets, except for any such breach or violation which would not, individually or
in the aggregate, have a Material Adverse Effect, or (iii) in breach of or
default under (nor has any event occurred which, with notice or passage of time
or both, would constitute a default under) or in violation of any of the terms
or provisions of any indenture, mortgage, deed of trust, loan agreement, note,
lease, license, franchise agreement, permit, certificate, contract or other
agreement or instrument to which any of them is a party or to which any of them
or their respective properties or assets is subject (collectively, "Contracts"),
except for any such breach, default, violation or event which would
<PAGE>
-5-
not, individually or in the aggregate, have a Material Adverse Effect.
(i) The execution, delivery and performance by the Company of this
Agreement, the Indenture and the Registration Rights Agreement and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance and sale of the Notes to the
Initial Purchaser) will not conflict with or constitute or result in a breach of
or a default under (or an event which with notice or passage of time or both
would constitute a default under) or violation of any of (i) the terms or
provisions of any Contract, except for any such conflict, breach, violation,
default or event which would not, individually or in the aggregate, have a
Material Adverse Effect, (ii) the certificate of incorporation or bylaws (or
similar organizational document) of the Company or any of the Subsidiaries or
(iii) (assuming compliance with all applicable state securities or "Blue Sky"
laws and assuming the accuracy of the representations and warranties of the
Initial Purchaser in Section 8 hereof) any statute, judgment, decree, order,
rule or regulation applicable to the Company or any of the Subsidiaries or any
of their respective properties or assets, except for any such conflict, breach
or violation which would not, individually or in the aggregate, have a Material
Adverse Effect.
(j) The audited consolidated financial statements of the Company and
the Subsidiaries included in the Memorandum present fairly in all material
respects the financial position, results of operations and cash flows of the
Company and the Subsidiaries at the dates and for the periods to which they
relate and have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis, except as otherwise stated therein.
The summary and selected financial and statistical data in the Memorandum
present fairly in all material respects the information shown therein and have
been prepared and compiled on a basis consistent with the audited financial
statements included therein, except as otherwise stated therein.
PricewaterhouseCoopers LLP (the "Independent Accountants") is an independent
public accounting firm within the meaning of the Act and the rules and
regulations promulgated thereunder.
(k) The pro forma financial information included in the Memorandum
(i) comply as to form in all material respects with the applicable requirements
of Regulation S-X promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (ii) have been prepared in accordance with the
<PAGE>
-6-
Commission's rules and guidelines with respect to pro forma financial
information and (iii) have been properly computed on the bases described
therein; the assumptions used in the preparation of the pro forma financial data
and other pro forma financial information included in the Memorandum are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions or circumstances referred to therein.
(l) There is not pending or, to the knowledge of the Company,
threatened any action, suit, proceeding, inquiry or investigation to which the
Company or any of the Subsidiaries is a party, or to which the property or
assets of the Company or any of the Subsidiaries are subject, before or brought
by any court, arbitrator or governmental agency or body which, if determined
adversely to the Company or any of the Subsidiaries, would, individually or in
the aggregate, have a Material Adverse Effect or which seeks to restrain,
enjoin, prevent the consummation of or otherwise challenge the issuance or sale
of the Notes to be sold hereunder or the consummation of the other transactions
described in the Memorandum.
(m) Each of the Company and the Subsidiaries possesses all licenses,
permits, certificates, consents, orders, approvals and other authorizations
from, and has made all declarations and filings with, all federal, state, local
and other governmental authorities, all self-regulatory organizations and all
courts and other tribunals, presently required or necessary to own or lease, as
the case may be, and to operate its respective properties and to carry on its
respective businesses as now or proposed to be conducted as set forth in the
Memorandum ("Permits"), except where the failure to obtain such Permits would
not, individually or in the aggregate, have a Material Adverse Effect; each of
the Company and the Subsidiaries has fulfilled and performed all of its
obligations with respect to such Permits and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the holder of any
such Permit; and none of the Company or the Subsidiaries has received any notice
of any proceeding relating to revocation or modification of any such Permit,
except as described in the Memorandum and except where such revocation or
modification would not, individually or in the aggregate, have a Material
Adverse Effect.
(n) Since the date of the most recent financial statements appearing
in the Memorandum, except as described therein, (i) none of the Company or the
Subsidiaries has incurred any liabilities or obligations, direct or contingent,
or
<PAGE>
-7-
entered into or agreed to enter into any transactions or contracts (written or
oral) not in the ordinary course of business which liabilities, obligations,
transactions or contracts would, individually or in the aggregate, be material
to the general affairs, management, business, condition (financial or
otherwise), prospects or results of operations of the Companies and its
Subsidiaries, taken as a whole, (ii) none of the Company or the Subsidiaries has
purchased any of its outstanding capital stock, nor declared, paid or otherwise
made any dividend or distribution of any kind on its capital stock (other than
with respect to any of such Subsidiaries, the purchase of, or dividend or
distribution on, capital stock owned by the Company) and (iii) there shall not
have been any material change in the capital stock or long-term indebtedness of
the Company or the Subsidiaries.
(o) Each of the Company and the Subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns, except where the
failure to so file such returns would not, individually or in the aggregate,
have a Material Adverse Effect, and has paid all taxes shown as due thereon; and
other than tax deficiencies which the Company or any Subsidiary is contesting in
good faith and for which the Company or such Subsidiary has provided adequate
reserves, there is no tax deficiency that has been asserted against the Company
or any of the Subsidiaries that would have, individually or in the aggregate, a
Material Adverse Effect.
(p) The statistical and market-related data included in the
Memorandum are based on or derived from sources which the Company believes to be
reliable and accurate.
(q) Neither the Company nor any agent acting on its behalf has taken
or will take any action that might cause this Agreement or the sale of the Notes
to violate Regulation T, U or X of the Board of Governors of the Federal Reserve
System, in each case as in effect, or as the same may hereafter be in effect, on
the Closing Date.
(r) Each of the Company and the Subsidiaries has good and marketable
title to all real property and good title to all personal property described in
the Memorandum as being owned by it and good and marketable title to a leasehold
estate in the real and personal property described in the Memorandum as being
leased by it free and clear of all liens, charges, encumbrances or restrictions,
except as described in the Memorandum or to the extent the failure to have such
title or the existence of such liens, charges, encumbrances or restrictions
<PAGE>
-8-
would not, individually or in the aggregate, have a Material Adverse Effect. All
leases, contracts and agreements to which the Company or any of the Subsidiaries
is a party or by which any of them is bound are valid and enforceable against
the Company or such Subsidiary, and are valid and enforceable against the other
party or parties thereto and are in full force and effect with only such
exceptions as would not, individually or in the aggregate, have a Material
Adverse Effect. The Company and the Subsidiaries own or possess adequate
licenses or other rights to use all patents, trademarks, service marks, trade
names, copyrights and know-how necessary to conduct the businesses now or
proposed to be operated by them as described in the Memorandum, and none of the
Company or the Subsidiaries has received any notice of infringement of or
conflict with (or knows of any such infringement of or conflict with) asserted
rights of others with respect to any patents, trademarks, service marks, trade
names, copyrights or know-how which, if such assertion of infringement or
conflict were sustained, would have a Material Adverse Effect.
(s) To the best knowledge of the Company, there are no legal or
governmental proceedings involving or affecting the Company or any Subsidiary or
any of their respective properties or assets which would be required to be
described in a prospectus pursuant to the Act that are not described in the
Memorandum, nor are there any material contracts or other documents which would
be required to be described in a prospectus pursuant to the Act that are not
described in the Memorandum.
(t) Except as would not, individually or in the aggregate, have a
Material Adverse Effect (A) each of the Company and the Subsidiaries is in
compliance with and not subject to liability under applicable Environmental Laws
(as defined below), (B) each of the Company and the Subsidiaries has made all
filings and provided all notices required under any applicable Environmental
Law, and has and is in compliance with all Permits required under any applicable
Environmental Laws and each of them is in full force and effect, (C) there is no
civil, criminal or administrative action, suit, demand, claim, hearing, notice
of violation, investigation, proceeding, notice or demand letter or request for
information pending or, to the knowledge of the Company or any of the
Subsidiaries, threatened against the Company or any of the Subsidiaries under
any Environmental Law, (D) no lien, charge, encumbrance or restriction has been
recorded under any Environmental Law with respect to any assets, facility or
property owned, operated, leased or controlled by the Company or any of the
Subsidiaries, (E) none of the Company or the Subsidiaries has received notice
that it
<PAGE>
-9-
has been identified as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA") or any comparable state law, (F) no property or facility of the
Company or any of the Subsidiaries is (i) listed or proposed for listing on the
National Priorities List under CERCLA or is (ii) listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list maintained by any
state or local governmental authority.
For purposes of this Agreement, "Environmental Laws" means the
common law and all applicable federal, state and local laws or regulations,
codes, orders, decrees, judgments or injunctions issued, promulgated, approved
or entered thereunder, relating to pollution or protection of public or employee
health and safety or the environment, including, without limitation, laws
relating to (i) emissions, discharges, releases or threatened releases of
hazardous materials into the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata), (ii) the
manufacture, processing, distribution, use, generation, treatment, storage,
disposal, transport or handling of hazardous materials, and (iii) underground
and above ground storage tanks and related piping, and emissions, discharges,
releases or threatened releases therefrom.
(u) There is no strike, labor dispute, slowdown or work stoppage
with the employees of the Company or any of the Subsidiaries which is pending
or, to the knowledge of the Company or any of the Subsidiaries, threatened.
(v) Each of the Company and the Subsidiaries carries insurance in
such amounts and covering such risks as is adequate for the conduct of its
business and the value of its properties.
(w) None of the Company or the Subsidiaries has any liability for
any prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), to which the Company or any of the Subsidiaries makes or ever
has made a contribution and in which any employee of the Company or of any
Subsidiary is or has ever been a participant. With respect to such plans, the
Company and each Subsidiary is in compliance in all material respects with all
applicable provisions of ERISA.
<PAGE>
-10-
(x) Each of the Company and the Subsidiaries (i) makes and keeps
accurate books and records and (ii) maintains internal accounting controls which
provide reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain accountability
for its assets, (C) access to its assets is permitted only in accordance with
management's authorization and (D) the reported accountability for its assets is
compared with existing assets at reasonable intervals.
(y) None of the Company or the Subsidiaries will be an "investment
company" or "promoter" or "principal underwriter" for an "investment company,"
as such terms are defined in the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder.
(z) The Notes, the Indenture and the Registration Rights Agreement
conform or will conform, as the case may be, in all material respects to the
descriptions thereof in the Memorandum.
(aa) No holder of securities of the Company or any Subsidiary will
be entitled to have such securities registered under the registration statements
required to be filed by the Company pursuant to the Registration Rights
Agreement other than as expressly permitted thereby.
(bb) None of the Company or the Subsidiaries (each on a consolidated
basis) is, nor will any of the Company or the Subsidiaries (each on a
consolidated basis) be, after giving effect to the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, (a) left with unreasonably small capital with which to
carry on its business as it is proposed to be conducted, (b) unable to pay its
debts (contingent or otherwise) as they mature or (c) otherwise insolvent.
(cc) None of the Company, the Subsidiaries or any of their
respective Affiliates (as defined in Rule 501(b) of Regulation D under the Act)
has directly, or through any agent, (i) sold, offered for sale, solicited offers
to buy or otherwise negotiated in respect of, any "security" (as defined in the
Act) which is or could be integrated with the sale of the Notes in a manner that
would require the registration under the Act of the Notes or (ii) engaged in any
form of general solicitation or general advertising (as those terms are used in
Regulation D under the Act) in connection with the offering of the
<PAGE>
-11-
Notes or in any manner involving a public offering within the meaning of Section
4(2) of the Act. Assuming the accuracy of the representations and warranties of
the Initial Purchaser in Section 8 hereof, it is not necessary in connection
with the offer, sale and delivery of the Notes to the Initial Purchaser in the
manner contemplated by this Agreement to register any of the Notes under the Act
or to qualify the Indenture under the TIA.
(dd) No securities of the Company or any Subsidiary are of the same
class (within the meaning of Rule 144A under the Act) as the Notes and listed on
a national securities exchange registered under Section 6 of the Exchange Act,
or quoted in a U.S. automated inter-dealer quotation system.
(ee) None of the Company or the Subsidiaries has taken, nor will any
of them take, directly or indirectly, any action designed to, or that might be
reasonably expected to, cause or result in stabilization or manipulation of the
price of the Notes.
Any certificate signed by any officer of the Company and delivered
to the Initial Purchaser or to counsel for the Initial Purchaser shall be deemed
a joint and several representation and warranty by the Company and each of the
Subsidiaries to the Initial Purchaser as to the matters covered thereby.
3. Purchase, Sale and Delivery of the Notes. On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to
purchase from the Company the Notes at a purchase price of 95.75% of their
principal amount. One or more certificates in definitive form for the Notes that
the Initial Purchaser has agreed to purchase hereunder, and in such denomination
or denominations and registered in such name or names as the Initial Purchaser
requests upon notice to the Company at least 36 hours prior to the Closing Date,
shall be delivered by or on behalf of the Company to the Initial Purchaser,
against payment by or on behalf of the Initial Purchaser of the purchase price
therefor by wire transfer (same day funds) to such account or accounts as the
Company shall specify prior to the Closing Date, or by such means as the parties
hereto shall agree prior to the Closing Date. Such delivery of and payment for
the Notes shall be made at the offices of Cahill Gordon & Reindel, 80 Pine
Street, New York, New York at 9:00 A.M., New York time, on June 21, 1999, or at
such other place, time or date as the Initial Purchaser,
<PAGE>
-12-
on the one hand, and the Company, on the other hand, may agree upon, such time
and date of delivery against payment being herein referred to as the "Closing
Date." The Company will make such certificate or certificates for the Notes
available for checking and packaging by the Initial Purchaser at the offices of
Deutsche Bank Securities, Inc. in New York, New York, or at such other place as
Deutsche Bank Securities, Inc. may designate, at least 24 hours prior to the
Closing Date.
4. Offering by the Initial Purchaser. The Initial Purchaser proposes
to make an offering of the Notes at the price and upon the terms set forth in
the Memorandum, as soon as practicable after this Agreement is entered into and
as in the judgment of the Initial Purchaser is advisable.
5. Covenants of the Company. The Company covenants and agrees with
the Initial Purchaser that:
(a) The Company will not amend or supplement the Memorandum or any
amendment or supplement thereto of which the Initial Purchaser shall not
previously have been advised and furnished a copy for a reasonable period of
time prior to the proposed amendment or supplement and as to which the Initial
Purchaser shall not have given its consent. The Company will promptly, upon the
reasonable request of the Initial Purchaser or counsel for the Initial
Purchaser, make any amendments or supplements to the Memorandum that may be
necessary or advisable in connection with the resale of the Notes by the Initial
Purchaser.
(b) The Company will cooperate with the Initial Purchaser in
arranging for the qualification of the Notes for offering and sale under the
securities or "Blue Sky" laws of which jurisdictions as the Initial Purchaser
may designate and will continue such qualifications in effect for as long as may
be necessary to complete the resale of the Notes; provided, however, that in
connection therewith, the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction or subject itself to taxation in excess of a nominal dollar amount
in any such jurisdiction where it is not then so subject.
(c) If, at any time prior to the completion of the distribution by
the Initial Purchaser of the Notes or the Private Exchange Notes, any event
occurs or information becomes known as a result of which the Memorandum as then
amended or supplemented would include any untrue statement of a material fact,
or omit to state a material fact necessary to make the
<PAGE>
-13-
statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Memorandum to comply with applicable law, the Company
will promptly notify the Initial Purchaser thereof and will prepare, at the
expense of the Company, an amendment or supplement to the Memorandum that
corrects such statement or omission or effects such compliance.
(d) The Company will, without charge, provide to the Initial
Purchaser and to counsel for the Initial Purchaser as many copies of the
Preliminary Memorandum and the Memorandum or any amendment or supplement thereto
as the Initial Purchaser may reasonably request.
(e) The Company will apply the net proceeds from the sale of the
Notes as set forth under "Use of Proceeds" in the Memorandum.
(f) For so long as any of the Notes remain outstanding, the Company
will furnish to the Initial Purchaser copies of all reports and other
communications (financial or otherwise) furnished by the Company to the Trustee
or to the holders of the Notes and, as soon as available, copies of any reports
or financial statements furnished to or filed by the Company with the Commission
or any national securities exchange on which any class of securities of the
Company may be listed.
(g) Prior to the Closing Date, the Company will furnish to the
Initial Purchaser, as soon as they have been prepared, a copy of any unaudited
interim financial statements of the Company for any period subsequent to the
period covered by the most recent financial statements appearing in the
Memorandum.
(h) None of the Company or any of its Affiliates will sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
"security" (as defined in the Act) which could be integrated with the sale of
the Notes in a manner which would require the registration under the Act of the
Notes.
(i) The Company will not, nor will the Company permit any of the
Subsidiaries to, engage in any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Act) in
connection with the offering of the Notes or in any manner involving a public
offering within the meaning of Section 4(2) of the Act.
<PAGE>
-14-
(j) For so long as any of the Notes remain outstanding, the Company
will make available at its expense, upon request, to any holder of such Notes
and any prospective purchasers thereof the information specified in Rule
144A(d)(4) under the Act, unless the Company is then subject to Section 13 or
15(d) of the Exchange Act.
(k) The Company will use its best efforts to (i) permit the Notes to
be designated PORTAL securities in accordance with the rules and regulations
adopted by the NASD relating to trading in the Private Offerings, Resales and
Trading through Automated Linkages market (the "Portal Market") and (ii) permit
the Notes to be eligible for clearance and settlement through The Depository
Trust Company.
6. Expenses. The Company agrees to pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to (i) the printing, word processing or other production of documents
with respect to the transactions contemplated hereby, including any costs of
printing the Memorandum and any amendment or supplement thereto, and any "Blue
Sky" memoranda, (ii) all arrangements relating to the delivery to the Initial
Purchaser of copies of the foregoing documents, (iii) the fees and disbursements
of the counsel, the accountants and any other experts or advisors retained by
the Company, (iv) preparation (including printing), issuance and delivery to the
Initial Purchaser of the Notes, (v) the qualification of the Notes under state
securities and "Blue Sky" laws, including filing fees and fees and disbursements
of counsel for the Initial Purchaser relating thereto, (vi) expenses in
connection with any meetings with prospective investors in the Notes, (vii) fees
and expenses of the Trustee including fees and expenses of counsel, (viii) all
expenses and listing fees incurred in connection with the application for
quotation of the Notes on the PORTAL Market and (ix) any fees charged by
investment rating agencies for the rating of the Notes. If the sale of the Notes
provided for herein is not consummated because any condition to the obligations
of the Initial Purchaser set forth in Section 7 hereof is not satisfied, because
this Agreement is terminated or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
their part to be performed or satisfied hereunder (other than solely by reason
of a default by the Initial Purchaser of its obligations hereunder after all
conditions hereunder have been satisfied in accordance herewith), the Com-
<PAGE>
-15-
pany agrees to promptly reimburse the Initial Purchaser upon demand for all
out-of-pocket expenses (including fees, disbursements and charges of Cahill
Gordon & Reindel, counsel for the Initial Purchaser) that shall have been
incurred by the Initial Purchaser in connection with the proposed purchase and
sale of the Notes.
7. Conditions of the Initial Purchaser's Obligations. The obligation
of the Initial Purchaser to purchase and pay for the Notes shall, in its sole
discretion, be subject to the satisfaction or waiver of the following conditions
on or prior to the Closing Date:
(a) The Initial Purchaser shall have received an opinion in form and
substance satisfactory to the Initial Purchaser, dated the Closing Date, of
Kirkland & Ellis, counsel for the Company, substantially in the form of Exhibit
B hereto. In rendering such opinion, Kirkland & Ellis shall have received and
may rely upon such certificates and other documents and information as they may
reasonably request to pass on such matters. In addition, in rendering their
opinion, Kirkland & Ellis may state that their opinion is limited to matters of
Illinois, New York, Delaware corporate and federal law. Such opinion of Kirkland
& Ellis shall be rendered to the Initial Purchaser at the request of the Company
and shall so state therein.
(b) On the Closing Date, the Initial Purchaser shall have received
the opinion, in form and substance satisfactory to the Initial Purchaser, dated
as of the Closing Date and addressed to the Initial Purchaser, of Cahill Gordon
& Reindel, counsel for the Initial Purchaser, with respect to certain legal
matters relating to this Agreement and such other related matters as the Initial
Purchaser may reasonably require. In rendering such opinion, Cahill Gordon &
Reindel shall have received and may rely upon such certificates and other
documents and information as it may reasonably request to pass upon such
matters.
(c) The Initial Purchaser shall have received from the Independent
Accountants a comfort letter or letters dated the date hereof and the Closing
Date, in form and substance satisfactory to counsel for the Initial Purchaser.
(d) The representations and warranties of the Company contained in
this Agreement shall be true and correct on and as of the date hereof and on and
as of the Closing Date as if made on and as of the Closing Date; the statements
of the
<PAGE>
-16-
Company's officers made pursuant to any certificate delivered in accordance with
the provisions hereof shall be true and correct on and as of the date made and
on and as of the Closing Date; the Company shall have performed all covenants
and agreements and satisfied all conditions on their part to be performed or
satisfied hereunder at or prior to the Closing Date; and, except as described in
the Memorandum (exclusive of any amendment or supplement thereto after the date
hereof), subsequent to the date of the most recent financial statements in such
Memorandum, there shall have been no event or development, and no information
shall have become known, that, individually or in the aggregate, has or would be
reasonably likely to have a Material Adverse Effect.
(e) The sale of the Notes hereunder shall not be enjoined
(temporarily or permanently) on the Closing Date.
(f) Other than as disclosed in the Memorandum, subsequent to the
date of the most recent financial statements in the Memorandum (exclusive of any
amendment or supplement thereto after the date hereof), none of the Company or
any of the Subsidiaries shall have sustained any loss or interference with
respect to its business or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any strike, labor
dispute, slow down or work stoppage or from any legal or governmental
proceeding, order or decree, which loss or interference, individually or in the
aggregate, has or would be reasonably likely to have a Material Adverse Effect.
(g) The Initial Purchaser shall have received a certificate of the
Company, dated the Closing Date, signed on behalf of the Company by its Chairman
of the Board, President or any Executive Vice President and the Chief Financial
Officer, to the effect that:
(i) The representations and warranties of the Company contained in
this Agreement are true and correct on and as of the date hereof and on
and as of the Closing Date, and the Company has performed all covenants
and agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to the Closing Date;
(ii) At the Closing Date, since the date hereof or since the date of
the most recent financial statements in the Memorandum (exclusive of any
amendment or supplement thereto after the date hereof), no event or
development
<PAGE>
-17-
has occurred, and no information has become known, that, individually or
in the aggregate, has or would be reasonably likely to have a Material
Adverse Effect; and
(iii) The sale of the Notes hereunder has not been enjoined
(temporarily or permanently).
(h) The Company shall have received all necessary consents or
waivers from the requisite lenders under the Credit Facility (as defined in the
Offering Memorandum).
(i) The Company shall have received from each initial purchaser of
the Notes from the Initial Purchaser an agreement to treat the receipt of the
delayed draw special payment relating to such purchaser's agreement to schedule
the closing date seven business days from the date of the Memorandum as ordinary
income for tax purposes.
(j) On the Closing Date, the Initial Purchaser shall have received
the Registration Rights Agreement executed by the Company and such agreement
shall be in full force and effect at all times from and after the Closing Date.
On or before the Closing Date, the Initial Purchaser and counsel for
the Initial Purchaser shall have received such further documents, opinions,
certificates, letters and schedules or instruments relating to the business,
corporate, legal and financial affairs of the Company and the Subsidiaries as
they shall have heretofore reasonably requested from the Company.
All such documents, opinions, certificates, letters, schedules or
instruments delivered pursuant to this Agreement will comply with the provisions
hereof only if they are reasonably satisfactory in all material respects to the
Initial Purchaser and counsel for the Initial Purchaser. The Company shall
furnish to the Initial Purchaser such conformed copies of such documents,
opinions, certificates, letters, schedules and instruments in such quantities as
the Initial Purchaser shall reasonably request.
8. Offering of Notes; Restrictions on Transfer. The Initial
Purchaser represents and warrants that it is a QIB. The Initial Purchaser agrees
with the Company that (i) it has not and will not solicit offers for, or offer
or sell, the Notes by any form of general solicitation or general advertising
(as those terms are used in Regulation D under the Act) or in any manner
involving a public offering within the meaning of
<PAGE>
-18-
Section 4(2) of the Act; and (ii) it has and will solicit offers for the Notes
only from, and will offer the Notes only to (A) in the case of offers inside the
United States, persons whom the Initial Purchaser reasonably believes to be QIBs
or, if any such person is buying for one or more institutional accounts for
which such person is acting as fiduciary or agent, only when such person has
represented to the Initial Purchaser that each such account is a QIB, to whom
notice has been given that such sale or delivery is being made in reliance on
Rule 144A, and, in each case, in transactions under Rule 144A and (B) in the
case of offers outside the United States, to persons other than U.S. persons
("foreign purchasers," which term shall include dealers or other professional
fiduciaries in the United States acting on a discretionary basis for foreign
beneficial owners (other than an estate or trust)); provided, however, that, in
the case of this clause (B), in purchasing such Notes such persons are deemed to
have represented and agreed as provided under the caption "Transfer
Restrictions" contained in the Memorandum.
9. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless the Initial Purchaser, and each person, if any, who
controls the Initial Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities to which the Initial Purchaser or such controlling person may become
subject under the Act, the Exchange Act or otherwise, insofar as any such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon:
(i) any untrue statement or alleged untrue statement of any material
fact contained in the Memorandum or any amendment or supplement thereto or
any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to qualify the
Notes under the securities or "Blue Sky" laws thereof or filed with any
securities association or securities exchange (each an "Application"); or
(ii) the omission or alleged omission to state, in the Memorandum or
any amendment or supplement thereto or any Application, a material fact
required to be stated therein or necessary to make the statements therein
not misleading,
<PAGE>
-19-
and will reimburse, as incurred, the Initial Purchaser and each such controlling
person for any legal or other expenses incurred by the Initial Purchaser or such
controlling person in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, the Company will not be liable
in any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in the Memorandum or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
written information concerning the Initial Purchaser furnished to the Company by
the Initial Purchaser specifically for use therein. This indemnity agreement
will be in addition to any liability that the Company may otherwise have to the
indemnified parties. The Company shall not be liable under this Section 9 for
any settlement of any claim or action effected without its prior written
consent, which shall not be unreasonably withheld.
(b) The Initial Purchaser agrees to indemnify and hold harmless the
Company, their directors, their officers and each person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer or controlling person may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material fact
contained in the Memorandum or any amendment or supplement thereto or any
Application, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in any Memorandum or any amendment or
supplement thereto or any Application, or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
concerning such Initial Purchaser, furnished to the Company by the Initial
Purchaser specifically for use therein; and subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action in respect thereof. This indemnity agreement will be
in addition to any liability that
<PAGE>
-20-
the Initial Purchaser may otherwise have to the indemnified parties. The Initial
Purchaser shall not be liable under this Section 9 for any settlement of any
claim or action effected without its consent, which shall not be unreasonably
withheld. The Company shall not, without the prior written consent of the
Initial Purchaser, effect any settlement or compromise of any pending or
threatened proceeding in respect of which the Initial Purchaser is or could have
been a party, or indemnity could have been sought hereunder by the Initial
Purchaser, unless such settlement (A) includes an unconditional written release
of the Initial Purchaser, in form and substance reasonably satisfactory to the
Initial Purchaser, from all liability on claims that are the subject matter of
such proceeding and (B) does not include any statement as to an admission of
fault, culpability or failure to act by or on behalf of the Initial Purchaser.
(c) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action for which such indemnified
party is entitled to indemnification under this Section 9, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 9, notify the indemnifying party of the commencement
thereof in writing; but the omission to so notify the indemnifying party (i)
will not relieve it from any liability under paragraph (a) or (b) above unless
and to the extent such failure results in the forfeiture by the indemnifying
party of substantial rights and defenses and (ii) will not, in any event,
relieve the indemnifying party from any obligations to any indemnified party
other than the indemnification obligation provided in paragraphs (a) and (b)
above. In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, that if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have been advised by counsel that there may be one or more legal defenses
available to it and/or other indemnified parties that are different from or
additional to those available to the indemnifying party, or (iii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a
<PAGE>
-21-
reasonable time after receipt by the indemnifying party of notice of the
institution of such action, then, in each such case, the indemnifying party
shall not have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 9 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the immediately preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Initial Purchaser
in the case of paragraph (a) of this Section 9 or the Company in the case of
paragraph (b) of this Section 9, representing the indemnified parties under such
paragraph (a) or paragraph (b), as the case may be, who are parties to such
action or actions) or (ii) the indemnifying party has authorized in writing the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the prior written consent of the indemnifying party (which consent shall
not be unreasonably withheld), unless such indemnified party waived in writing
its rights under this Section 9, in which case the indemnified party may effect
such a settlement without such consent.
(d) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 9 is unavailable to, or insufficient
to hold harmless, an indemnified party in respect of any losses, claims, damages
or liabilities (or actions in respect thereof), each indemnifying party, in
order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits re-
<PAGE>
-22-
ceived by the indemnifying party or parties on the one hand and the indemnified
party on the other from the offering of the Notes or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law, not
only such relative benefits but also the relative fault of the indemnifying
party or parties on the one hand and the indemnified party on the other in
connection with the statements or omissions or alleged statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof). The relative benefits received by the Company on the one hand
and the Initial Purchaser on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (before deducting expenses)
received by the Company bear to the total discounts and commissions received by
such Initial Purchaser. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand, or such Initial
Purchaser on the other, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission or
alleged statement or omission, and any other equitable considerations
appropriate in the circumstances. The Company and the Initial Purchaser agree
that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation or by any other method of
allocation that does not take into account the equitable considerations referred
to in the first sentence of this paragraph (d). Notwithstanding any other
provision of this paragraph (d), the Initial Purchaser shall not be obligated to
make contributions hereunder that in the aggregate exceed the total discounts,
commissions and other compensation received by such Initial Purchaser under this
Agreement, less the aggregate amount of any damages that such Initial Purchaser
has otherwise been required to pay by reason of the untrue or alleged untrue
statements or the omissions or alleged omissions to state a material fact, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this paragraph (d),
each person, if any, who controls the Initial Purchaser within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act shall have the same
rights to contribution as the Initial Purchaser, and each director of the
Company, each officer of the Company and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company.
<PAGE>
-23-
10. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Initial Purchaser set forth in this Agreement or made by or on
behalf of them pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, the Initial Purchaser or any controlling person
referred to in Section 9 hereof and (ii) delivery of and payment for the Notes.
The respective agreements, covenants, indemnities and other statements set forth
in Sections 6, 9 and 15 hereof shall remain in full force and effect, regardless
of any termination or cancellation of this Agreement.
11. Termination. (a) This Agreement may be terminated in the sole
discretion of the Initial Purchaser by notice to the Company given prior to the
Closing Date in the event that the Company shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Closing Date:
(i) any of the Company or the Subsidiaries shall have sustained any
loss or interference with respect to its businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any strike, labor dispute, slow down or work
stoppage or any legal or governmental proceeding, which loss or
interference, in the sole judgment of the Initial Purchaser, has had or
has a Material Adverse Effect, or there shall have been, in the sole
judgment of the Initial Purchaser, any event or development that,
individually or in the aggregate, has or could be reasonably likely to
have a Material Adverse Effect (including without limitation a change in
control of the Company or the Subsidiaries), except in each case as
described in the Memorandum (exclusive of any amendment or supplement
thereto);
(ii) trading in securities generally on the New York Stock Exchange,
American Stock Exchange or the Nasdaq National Market shall have been
suspended or minimum or maximum prices shall have been established on any
such exchange or market;
(iii) a banking moratorium shall have been declared by New York or
United States authorities;
<PAGE>
-24-
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, or (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or any other national or international
calamity or emergency, or (C) any material change in the financial markets
of the United States which, in the case of (A), (B) or (C) above and in
the sole judgment of the Initial Purchaser, makes it impracticable or
inadvisable to proceed with the offering or the delivery of the Notes as
contemplated by the Memorandum; or
(v) any securities of the Company shall have been downgraded or
placed on any "watch list" for possible downgrading by any nationally
recognized statistical rating organization.
(b) Termination of this Agreement pursuant to this Section 11 shall
be without liability of any party to any other party except as provided in
Section 10 hereof.
12. Information Supplied by the Initial Purchaser. The statements
set forth in the last paragraph on the front cover page and in the third and
fourth sentences of the third paragraph under the heading "Private Placement" in
the Memorandum (to the extent such statements relate to the Initial Purchaser)
constitute the only information furnished by the Initial Purchaser to the
Company for the purposes of Sections 2(a) and 9 hereof.
13. Notices. All communications hereunder shall be in writing and,
if sent to the Initial Purchaser, shall be mailed or delivered to Deutsche Bank
Securities, Inc., 130 Liberty Street, New York, New York 10006, Attention:
Corporate Finance Department; if sent to the Company, shall be mailed or
delivered to the Company at 888 Seventh Avenue, New York, New York, Attention:
President; with a copy to Kirkland & Ellis, 153 East 53rd Street, New York, NY
10022, Attention:
Joshua N. Korff.
All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; and one business
day after being timely delivered to a next-day air courier.
14. Successors. This Agreement shall inure to the benefit of and be
binding upon the Initial Purchaser, the Com-
<PAGE>
-25-
pany and their respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained; this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person except that (i) the indemnities of the Company contained in Section 9 of
this Agreement shall also be for the benefit of any person or persons who
control the Initial Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act and (ii) the indemnities of the Initial Purchaser
contained in Section 9 of this Agreement shall also be for the benefit of the
directors of the Company, its officers and any person or persons who control the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Notes from the Initial Purchaser will be deemed a
successor because of such purchase.
15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED WHOLLY THEREIN, WITHOUT GIVING EFFECT TO ANY
PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between the Company
and the Initial Purchaser.
Very truly yours,
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ Richard Pyle
------------------------------------
Name: Richard Pyle
Title: Chief Financial Officer
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
DEUTSCHE BANK SECURITIES, INC.
By: /s/ Arthur B. Schoen, Jr.
------------------------------------
Name: Arthur B. Schoen, Jr.
Title: MD
<PAGE>
SCHEDULE 1
Subsidiaries of the Company
Jurisdiction of
Name Incorporation
- ---- -------------
<PAGE>
SCHEDULE 1
List of Subsidiaries
- --------------------------------------------------------------------------------
Company Name Formation Qualification
- ------------ --------- -------------
- --------------------------------------------------------------------------------
I. Parent
- --------------------------------------------------------------------------------
Town Sports International, Inc. ("TSI") NY ---
- --------------------------------------------------------------------------------
II. Subsidiaries
- --------------------------------------------------------------------------------
1. TSI Alexandria, LLC DE VA
- --------------------------------------------------------------------------------
2. TSI Allston, Inc. DE MA
- --------------------------------------------------------------------------------
3. TSI Arthro-Fitness Services, Inc. NY N/A
- --------------------------------------------------------------------------------
4. TSI Battery Park, Inc. NY N/A
- --------------------------------------------------------------------------------
5. TSI Bethesda, LLC DE MD
- --------------------------------------------------------------------------------
6. TSI Broadway, Inc. NY N/A
- --------------------------------------------------------------------------------
7. TSI 217 Broadway, Inc. NY N/A
- --------------------------------------------------------------------------------
8. TSI Brooklyn Belt, Inc. NY N/A
- --------------------------------------------------------------------------------
9. TSI Brunswick, Inc. DE NJ
- --------------------------------------------------------------------------------
10. TSI Bullfinch, Inc. DE MA
- --------------------------------------------------------------------------------
11. TSI Cash Management, Inc. NY CT
- --------------------------------------------------------------------------------
12. TSI Centreville, LLC DE VA
- --------------------------------------------------------------------------------
13. TSI Cherry Hill, LLC DE NJ
- --------------------------------------------------------------------------------
14. TSI Cobble Hill, Inc. NY N/A
- --------------------------------------------------------------------------------
15. TSI Colonia, LLC DE NJ
- --------------------------------------------------------------------------------
16. TSI Commack, Inc. NY N/A
- --------------------------------------------------------------------------------
17. TSI Copley, Inc. DE MA
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
18. TSI Croton, Inc. NY N/A
- --------------------------------------------------------------------------------
19. TSI Danbury, Inc. DE CT
- --------------------------------------------------------------------------------
20. TSI Dupont Circle, Inc. DE DC
- --------------------------------------------------------------------------------
21. TSI Dupont II, Inc. DE DC
- --------------------------------------------------------------------------------
22. TSI East Meadow, Inc. NY N/A
- --------------------------------------------------------------------------------
23. TSI East 23, Inc. NY N/A
- --------------------------------------------------------------------------------
24. TSI East 34, Inc. NY N/A
- --------------------------------------------------------------------------------
25. TSI East 36, Inc. NY N/A
- --------------------------------------------------------------------------------
26. TSI East 41, Inc. NY N/A
- --------------------------------------------------------------------------------
27. TSI East 51, Inc. NY N/A
- --------------------------------------------------------------------------------
28. TSI East 59, Inc. NY N/A
- --------------------------------------------------------------------------------
29. TSI East 76, Inc. NY N/A
- --------------------------------------------------------------------------------
30. TSI East 86, Inc. NY N/A
- --------------------------------------------------------------------------------
31. TSI East 9l, Inc. NY N/A
- --------------------------------------------------------------------------------
32. TSI East 94. Inc. NY N/A
- --------------------------------------------------------------------------------
33. TSI Fairfax, LLC DE VA
- --------------------------------------------------------------------------------
34. TSI Fenway, Inc. DE MA
- --------------------------------------------------------------------------------
35. TSI Fifth Avenue, Inc. DE N/A
- --------------------------------------------------------------------------------
36. TSI First Avenue, Inc. NY N/A
- --------------------------------------------------------------------------------
37. TSI Forest Hills, Inc. NY N/A
- --------------------------------------------------------------------------------
38. TSI Fort Lee, LLC DE NJ
- --------------------------------------------------------------------------------
39. TSI Framingham, Inc. DE MA
- --------------------------------------------------------------------------------
40. TSI Franklin Park, LLC DE NJ
- --------------------------------------------------------------------------------
2
<PAGE>
18. TSI Croton, Inc. NY N/A
- --------------------------------------------------------------------------------
41. TSI Freehold, Inc. DE NJ
- --------------------------------------------------------------------------------
42. TSI Germantown, LLC DE MD
- --------------------------------------------------------------------------------
43. TSI Glover, Inc. DE DC
- --------------------------------------------------------------------------------
44. TSI Great Neck, Inc. NY N/A
- --------------------------------------------------------------------------------
45. TSI Greenwich, Inc. DE CT
- --------------------------------------------------------------------------------
46. TSI Greenwich Street, Inc. NY N/A
- --------------------------------------------------------------------------------
47. TSI Herald, Inc. NY N/A
- --------------------------------------------------------------------------------
48. TSI Hoboken, Inc. DE NJ
- --------------------------------------------------------------------------------
49. TSI Holdings (CIP), Inc. DE NY
- --------------------------------------------------------------------------------
50. TSI Holdings (DC), Inc. DE DC
- --------------------------------------------------------------------------------
51. TSI Holdings (IP), Inc. DE N/A
- --------------------------------------------------------------------------------
52. TSI Holdings (MD), Inc. DE MD
- --------------------------------------------------------------------------------
53. TSI Holdings (NJ), Inc. DE N/A
- --------------------------------------------------------------------------------
54. TSI Holdings (PA), Inc. DE N/A
- --------------------------------------------------------------------------------
55. TSI Holdings (VA), Inc. DE N/A
- --------------------------------------------------------------------------------
56. TSI International, Inc. DE N/A
- --------------------------------------------------------------------------------
57. TSI Larchmont, Inc. NY N/A
- --------------------------------------------------------------------------------
58. TSI Lexington, Inc. NY N/A
- --------------------------------------------------------------------------------
59. TSI Lincoln, Inc. NY N/A
- --------------------------------------------------------------------------------
60. TSI M Street, Inc. DE DC
- --------------------------------------------------------------------------------
61. TSI Madison, Inc. NY N/A
- --------------------------------------------------------------------------------
62. TSI Mahwah, LLC DE NJ
- --------------------------------------------------------------------------------
63. TSI Mamaroneck, Inc. NY N/A
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
18. TSI Croton, Inc. NY N/A
- --------------------------------------------------------------------------------
64. TSI Marlboro, Inc. DE NJ
- --------------------------------------------------------------------------------
65. TSI Matawan, Inc. DE NJ
- --------------------------------------------------------------------------------
66. TSI Merrifield, Inc. DE VA
- --------------------------------------------------------------------------------
67. TSI Nanuet, Inc. NY N/A
- --------------------------------------------------------------------------------
68. TSI Norwalk, Inc. DE CT
- --------------------------------------------------------------------------------
69. TSI Oceanside, Inc. NY N/A
- --------------------------------------------------------------------------------
70. TSI Old Bridge, Inc. DE NJ
- --------------------------------------------------------------------------------
71. TSI Parsippany, LLC DE NJ
- --------------------------------------------------------------------------------
72. TSI Plainsboro, LLC DE NJ
- --------------------------------------------------------------------------------
73. TSI Princeton, LLC DE NJ
- --------------------------------------------------------------------------------
74. TSI Ramsey, Inc. NJ N/A
- --------------------------------------------------------------------------------
75. TSI Rittenhouse, LLC DE PA
- --------------------------------------------------------------------------------
76. TSI Rockville, LLC DE MD
- --------------------------------------------------------------------------------
77. TSI Rodin Place, LLC DE PA
- --------------------------------------------------------------------------------
78. TSI Scarsdale, Inc. NY N/A
- --------------------------------------------------------------------------------
79. TSI Seaport, Inc. NY N/A
- --------------------------------------------------------------------------------
80. TSI Sheridan, Inc. NY N/A
- --------------------------------------------------------------------------------
81. TSI Society Hill, LLC DE PA
- --------------------------------------------------------------------------------
82. TSI Soho, Inc. NY N/A
- --------------------------------------------------------------------------------
83. TSI Somerset, LLC DE NJ
- --------------------------------------------------------------------------------
84. TSI Springfield, LLC DE NJ
- --------------------------------------------------------------------------------
85. TSI Stamford Downtown, Inc. DE CT
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
18. TSI Croton, Inc. NY N/A
- --------------------------------------------------------------------------------
86. TSI Stamford Post, Inc. DE CT
- --------------------------------------------------------------------------------
87. TSI Stamford Rinks, Inc. DE CT
- --------------------------------------------------------------------------------
88. TSI Stamford - Summer, Inc. DE CT
- --------------------------------------------------------------------------------
89. TSI Staten Island, Inc. NY N/A
- --------------------------------------------------------------------------------
90. TSI Sterling, LLC DE VA
- --------------------------------------------------------------------------------
91. TSI Syosset, Inc. NY N/A
- --------------------------------------------------------------------------------
92. TSI Wall Street, Inc. NY N/A
- --------------------------------------------------------------------------------
93. TSI Washington, Inc. DE DC
- --------------------------------------------------------------------------------
94. TSI West Caldwell, LLC DE NJ
- --------------------------------------------------------------------------------
95. TSI West 14, Inc. NY N/A
- --------------------------------------------------------------------------------
96. TSI West 23, Inc. NY N/A
- --------------------------------------------------------------------------------
97. TSI West 38, Inc. NY N/A
- --------------------------------------------------------------------------------
98. TSI West 52, Inc. NY N/A
- --------------------------------------------------------------------------------
99. TSI West 73, Inc. NY N/A
- --------------------------------------------------------------------------------
100. TSI West 76, Inc. NY N/A
- --------------------------------------------------------------------------------
101. TSI West 80, Inc. NY N/A
- --------------------------------------------------------------------------------
102. TSI West 125, Inc. NY N/A
- --------------------------------------------------------------------------------
103. TSI Weymouth, Inc. DE MA
- --------------------------------------------------------------------------------
104. TSI White Plains, Inc. NY N/A
- --------------------------------------------------------------------------------
105. TSI Whitestone, Inc. NY N/A
- --------------------------------------------------------------------------------
5
EXHIBIT A
[FORM OF REGISTRATION RIGHTS AGREEMENT]
<PAGE>
- -------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated as of June 21, 1999
Between
TOWN SPORTS INTERNATIONAL, INC.
as Issuer
and
DEUTSCHE BANK SECURITIES, INC.
as Initial Purchaser
- --------------------------------------------------------------------------------
$40,000,000
9 3/4% SENIOR NOTES DUE 2004
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions..........................................................1
2. Exchange Offer.......................................................5
3. Shelf Registration...................................................9
4. Additional Interest.................................................10
5. Registration Procedures.............................................12
6. Registration Expenses...............................................23
7. Indemnification.....................................................24
8. Rule 144 and 144A...................................................28
9. Underwritten Registrations..........................................29
10. Miscellaneous.......................................................29
(a) No Inconsistent Agreements....................................29
(b) Adjustments Affecting Registrable Notes.......................29
(c) Amendments and Waivers........................................29
(d) Notices.......................................................30
(e) Successors and Assigns........................................31
(f) Counterparts..................................................31
(g) Headings......................................................31
(h) Governing Law.................................................31
(i) Severability..................................................32
(j) Securities Held by the Company or Its Affiliates..............32
(k) Third Party Beneficiaries.....................................32
(l) Entire Agreement..............................................32
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is dated as of
June 21, 1999 between Town Sports International, Inc., a New York corporation
(the "Company") and Deutsche Bank Securities, Inc. (the "Initial Purchaser").
This Agreement is entered into in connection with the Purchase
Agreement, dated as of June 10, 1999, between the Company and the Initial
Purchaser (the "Purchaser Agreement") that provides for the sale by the Company
to the Initial Purchaser of $40,000,000 aggregate principal amount of the
Company's 9 3/4% Senior Notes due 2004 (the "Notes"). In order to induce the
Initial Purchaser to enter into the Purchase Agreement, the Company has agreed
to provide the registration rights set forth in this Agreement for the benefit
of the Initial Purchaser and its direct and indirect transferees and assigns.
The execution and delivery of this Agreement is a condition to the Initial
Purchaser's obligation to purchase the Notes under the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the
following meanings:
Additional Interest: See Section 4(a) hereof.
Advice: See the last paragraph of Section 5 hereof.
Agreement: See the first introductory paragraph hereto.
Applicable Period: See Section 2(b) hereof.
Closing Date: The Closing Date as defined in the Purchase Agreement.
Company: See the first introductory paragraph hereto.
Effectiveness Date: The date that is 150 days after the Issue Date.
Effectiveness Period: See Section 3(a) hereof.
<PAGE>
-2-
Event Date: See Section 4(b) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
Exchange Notes: See Section 2(a) hereof.
Exchange Offer: See Section 2(a) hereof.
Exchange Registration Statement: See Section 2(a) hereof.
Filing Date: Within 45 days after the Issue Date.
Holder: Any holder of a Registrable Note or Registrable Notes.
Indemnified Person: See Section 7(c) hereof.
Indemnifying Person: See Section 7(c) hereof.
Indenture: The Indenture, dated as of October 16, 1997 between the
Company and United States Trust Company of New York, as Trustee, pursuant to
which the Notes are being issued as amended or supplemented from time to time in
accordance with the terms thereof.
Initial Purchaser: See the first introductory paragraph hereto.
Inspectors: See Section 5(o) hereof.
Issue Date: The date on which the Notes were sold to the Initial
Purchaser pursuant to the Purchase Agreement.
NASD: See Section 5(t) hereof.
Notes: See the second introductory paragraph hereto.
Participant: See Section 7(a) hereof.
Participating Broker-Dealer: See Section 2(b) hereof.
Person: An individual, trustee, corporation, partnership, limited
liability company, joint stock company, trust,
<PAGE>
-3-
unincorporated association, union, business association, firm or other legal
entity.
Private Exchange: See Section 2(b) hereof.
Private Exchange Notes: See Section 2(b) hereof.
Prospectus: The prospectus included in any Registration Statement
(including, without limitation, any prospectus subject to completion and a
prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, and all other amendments and supplements to the
Prospectus, with respect to the terms of the offering of any portion of the
Registrable Notes covered by such Registration Statement including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.
Purchase Agreement: See the second introductory paragraph hereto.
Records: See Section 5(o) hereof.
Registrable Notes: Each Note upon original issuance of the Notes and
at all times subsequent thereto, each Exchange Note as to which Section 2(c)(v)
hereof is applicable upon original issuance and at all times subsequent thereto
and each Private Exchange Note upon original issuance thereof and at all times
subsequent thereto, until in the case of any such Note, Exchange Note or Private
Exchange Note, as the case may be, the earliest to occur of (i) a Registration
Statement (other than, with respect to any Exchange Note as to which Section
2(c)(v) hereof is applicable, the Exchange Registration Statement) covering such
Note, Exchange Note or Private Exchange Note, as the case may be, has been
declared effective by the SEC and such Note, Exchange Note or Private Exchange
Note, as the case may be, has been disposed of in accordance with such effective
Registration Statement, (ii) such Note, Exchange Note or Private Exchange Note,
as the case may be, is sold in compliance with Rule 144, (iii) such Note has
been exchanged for an Exchange Note or Exchange Notes pursuant to an Exchange
Offer and is entitled to be resold without complying with the prospectus
delivery requirements of the Securities Act or (iv) such Note, Exchange Note or
Private Exchange Note, as the case may be, ceases to be outstanding for purposes
of the Indenture.
<PAGE>
-4-
Registration Statement: Any registration statement of the Company,
including, but not limited to, the Exchange Registration Statement and any
registration statement filed in connection with a Shelf Registration, filed with
the SEC pursuant to the provisions of this Agreement, including the Prospectus,
amendments and supplements to such registration statement, including
post-effective amendments, all exhibits and all material incorporated by
reference or deemed to be incorporated by reference in such registration
statement.
Rule 144: Rule 144 promulgated under the Securities Act, as such
Rule may be amended from time to time, or any similar rule (other than Rule
144A) or regulation hereafter adopted by the SEC providing for offers and sales
of securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
Rule 144A: Rule 144A promulgated under the Securities Act, as such
Rule may be amended from time to time, or any similar rule (other than Rule 144)
or regulation hereafter adopted by the SEC.
Rule 415: Rule 415 promulgated under the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
Shelf Notice: See Section 2(c) hereof.
Shelf Registration: See Section 3(a) hereof.
TIA: The Trust Indenture Act of 1939, as amended.
Trustee: The trustee under the Indenture and, if existent, the
trustee under any indenture governing the Exchange Notes and Private Exchange
Notes (if any).
Underwritten Registration or Underwritten Offering: A registration
in which securities of the Company are sold to an underwriter for reoffering to
the public.
<PAGE>
-5-
2. Exchange Offer
(a) The Company shall file with the SEC no later than the Filing
Date an offer to exchange (the "Exchange Offer") any and all of the Registrable
Notes (other than the Private Exchange Notes, if any) for a like aggregate
principal amount of debt securities of the Company that are identical in all
material respects to the Notes (the "Exchange Notes") (and that are entitled to
the benefits of the Indenture or a trust indenture that is identical in all
material respects to the Indenture (other than such changes to the Indenture or
any such identical trust indenture as are necessary to comply with any
requirements of the SEC to effect or maintain the qualification thereof under
the TIA) and that, in either case, has been qualified under the TIA), except
that the Exchange Notes (other than Private Exchange Notes, if any) shall have
been registered pursuant to an effective Registration Statement under the
Securities Act and shall contain no restrictive legend thereon. The Exchange
offer shall be registered under the Securities Act on the appropriate form (the
"Exchange Registration Statement") and shall comply with all applicable tender
offer rules and regulations under the Exchange Act. The Company agrees to use
its best efforts to (x) cause the Exchange Registration Statement to be declared
effective under the Securities Act on or before the Effectiveness Date; (y) keep
the Exchange Offer open for at least 20 business days (or longer if required by
applicable law) after the date that notice of the Exchange Offer is mailed to
Holders; and (z) consummate the Exchange Offer on or prior to the 30th day
following the day the Exchange Registration Statement is declared effective by
the SEC. If after such Exchange Registration Statement is declared effective by
the SEC, the Exchange Offer or the issuance of the Exchange Notes thereunder is
interfered with by any stop order, injunction or other order or requirement of
the SEC or any other governmental agency or court, such Exchange Registration
Statement shall be deemed not to have become effective for purposes of this
Agreement. Each Holder who participates in the Exchange Offer will be required
to represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that at the time of the consummation of the
Exchange Offer such Holder will have no arrangement or understanding with any
Person to participate in the distribution of the Exchange Notes in violation of
the provisions of the Securities Act and that such Holder is not an affiliate of
the Company within the meaning of the Securities Act and is not acting on behalf
of any persons or entities who could not truthfully make the foregoing
representations. Upon consummation of the Exchange Offer in accordance with this
Section 2, the provisions of this Agreement
<PAGE>
-6-
shall continue to apply, mutatis mutandis, solely with respect to Registrable
Notes that are Private Exchange Notes and Exchange Notes held by Participating
Broker-Dealers, and the Company shall have no further obligation to register
Registrable Notes (other than Private Exchange Notes and other than in respect
of any Exchange Notes as to which clause 2(c)(v) hereof applies) pursuant to
Section 3 hereof. No securities other than the Exchange Notes shall be included
in the Exchange Registration Statement.
(b) The Company shall include within the Prospectus contained in the
Exchange Registration Statement a section entitled "Plan of Distribution,"
reasonably acceptable to the Initial Purchaser, that shall contain a summary
statement of the positions taken or policies made by the Staff of the SEC with
respect to the potential "underwriter" status of any broker-dealer that is the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange
Notes received by such broker-dealer in the Exchange Offer (a "Participating
Broker-Dealer"), whether such positions or policies have been publicly
disseminated by the staff of the SEC or such positions or policies, in the
judgment of the Initial Purchaser, represent the prevailing views of the Staff
of the SEC. Such "Plan of Distribution" section shall also expressly permit the
use of the Prospectus by all Persons subject to the prospectus delivery
requirements of the Securities Act, including all Participating Broker-Dealers,
and include a statement describing the means by which Participating
Broker-Dealers may resell the Exchange Notes.
The Company shall use its best efforts to keep the Exchange
Registration Statement effective and to amend and supplement the Prospectus
contained therein in order to permit such Prospectus to be lawfully delivered by
all Persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as is necessary to comply with applicable law in
connection with any resale of the Exchange Notes; provided, however, that such
period shall not exceed 180 days after the consummation of the Exchange Offer
(or such longer period if extended pursuant to the last paragraph of Section 5
hereof) (the "Applicable Period").
If, following the date hereof, there has been announced a change in
SEC policy with respect to exchange offers such as the Exchange Offer, that in
the reasonable opinion of counsel to the Company, raises a substantial question
as to whether the Exchange Offer is permitted by applicable federal law, the
Company hereby agrees to seek a no-action letter or
<PAGE>
-7-
other favorable decision from the SEC allowing the Company to consummate the
Exchange Offer. The Company hereby agrees to pursue the issuance of such a
decision to the SEC staff level. In connection with the foregoing, the Company
hereby agrees to take all such other actions as may be requested by the SEC or
otherwise required in connection with the issuance of such decision, including,
without limitation, (A) participating in telephonic conferences with the SEC,
(B) delivering to the SEC staff an analysis prepared by counsel to the Company
setting forth the legal bases, if any, upon which such counsel has concluded
that such an Exchange Offer should be permitted and (C) diligently pursuing a
resolution (which need not be favorable) by the SEC staff.
If, prior to consummation of the Exchange Offer, the Initial
Purchaser holds any Notes acquired by it and having, or that are reasonably
likely to be determined to have, the status of an unsold allotment in the
initial distribution, the Company, upon the request of the Initial Purchaser
simultaneously with the delivery of the Exchange Notes in the Exchange Offer,
shall issue and deliver to the Initial Purchaser in exchange (the "Private
Exchange") for such Notes held by the Initial Purchaser a like principal amount
of debt securities of the Company that are identical in all material respects to
the Exchange Notes (the "Private Exchange Notes") (and that are issued pursuant
to the same indenture as the Exchange Notes), except for the placement of a
restrictive legend on such Private Exchange Notes. The Private Exchange Notes
shall bear the same CUSIP number as the Exchange Notes.
Interest on the Exchange Notes and the Private Exchange Notes will
accrue from the last interest payment date on which interest was paid on the
Notes surrendered in exchange therefor or, if no interest has been paid on the
Notes, from the Issue Date.
In connection with the Exchange Offer, the Company shall:
(1) mail to each Holder a copy of the Prospectus forming part of the
Exchange Registration Statement, together with an appropriate letter of
transmittal and related documents;
(2) utilize the services of a depositary for the Exchange Offer with
an address in the Borough of Manhattan, The City of New York;
<PAGE>
-8-
(3) permit Holders to withdraw tendered Notes at any time prior to
the close of business, New York time, on the last business day on which
the Exchange Offer shall remain open; and
(4) otherwise comply in all material respects with all applicable
laws, rules and regulations.
As soon as practicable after the close of the Exchange Offer or the
Private Exchange, as the case may be, the Company shall:
(1) accept for exchange all Notes properly tendered and not validly
withdrawn pursuant to the Exchange Offer or the Private Exchange;
(2) deliver to the Trustee for cancellation all Notes so accepted
for exchange; and
(3) cause the Trustee to authenticate and deliver promptly to each
Holder of Notes, Exchange Notes or Private Exchange Notes, as the case may
be, equal in principal amount to the Notes of such Holder so accepted for
exchange.
The Exchange Notes and the Private Exchange Notes may be issued
under (i) the Indenture or (ii) an indenture identical in all material respects
to the Indenture, which in either event shall provide that (1) the Exchange
Notes shall not be subject to the transfer restrictions set forth in the
Indenture and (2) the Private Exchange Notes shall be subject to the transfer
restrictions set forth in the Indenture. The Indenture or such indenture shall
provide that the Exchange Notes, the Private Exchange Notes and the Notes shall
vote and consent together on all matters as one class and that neither the
Exchange Notes, the Private Exchange Notes or the Notes will have the right to
vote or consent as a separate class on any matter.
(c) If, (i) because of any change in law or in currently prevailing
interpretations of the Staff of the SEC, the Company is not permitted to effect
an Exchange Offer, (ii) the Exchange Offer is not consummated within 30 days
from the effective date of the Exchange Offer Registration Statement, (iii) the
holder of Private Exchange Notes so requests at any time after the consummation
of the Private Exchange, (iv) the Holders of not less than a majority in
aggregate principal amount of the Registrable Notes determine that the interests
of the Holders would be materially adversely affected by consumma-
<PAGE>
-9-
tion of the Exchange Offer or (v) in the case of any Holder that participates in
the Exchange Offer, such Holder does not receive Exchange Notes on the date of
the exchange that may be sold without restriction under state and federal
securities laws (other than due solely to the status of such Holder as an
affiliate of the Company within the meaning of the Securities Act), then the
Company shall promptly deliver written notice thereof (the "Shelf Notice") to
the Trustee and in the case of clauses (i), (ii) and iv), all Holders, in the
case of clause (iii), the Holders of the Private Exchange Notes and in the case
of clause (v), the affected Holder, and shall file a Shelf Registration pursuant
to Section 3 hereof.
3. Shelf Registration
If a Shelf Notice is delivered as contemplated by Section 2(c)
hereof, then:
(a) Shelf Registration. The Company shall as promptly as reasonably
practicable file with the SEC a Registration Statement for an offering to be
made on a continuous basis pursuant to Rule 415 covering all of the Registrable
Notes (the "Shelf Registration"). If the Company shall not have yet filed an
Exchange Registration Statement, the Company shall use its best efforts to file
with the SEC the Shelf Registration on or prior to the Filing Date. The Shelf
Registration shall be on Form S-1 or another appropriate form permitting
registration of such Registrable Notes for resale by Holders in the manner or
manners designated by them (including, without limitation, one or more
Underwritten Offerings). The Company shall not permit any securities other than
the Registrable Notes to be included in the Shelf Registration.
The Company shall use its best efforts to cause the Shelf
Registration to be declared effective under the Securities Act on or prior to
the Effectiveness Date and to keep the Shelf Registration continuously effective
under the Securities Act until the date that is two years from the Issue Date
(the "Effectiveness Period"), or such shorter period ending when all Registrable
Notes covered by the Shelf Registration have been sold in the manner set forth
and as contemplated in the Shelf Registration.
(b) Withdrawal of Stop Orders. If the Shelf Registration ceases to
be effective for any reason at any time during the Effectiveness Period (other
than because of the sale of all of the securities registered thereunder), the
Company shall
<PAGE>
-10-
use its best efforts to obtain the prompt withdrawal of any order suspending the
effectiveness thereof.
(c) Supplements and Amendments. The Company shall promptly
supplement and amend the Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if reasonably
requested by the Holders of a majority in aggregate principal amount of the
Registrable Notes covered by such Registration Statement or by any underwriter
of such Registrable Notes.
4. Additional Interest
(a) The Company and the Initial Purchaser agree that the Holders of
Registrable Notes will suffer damages if the Company fails to fulfill its
obligations under Section 2 or Section 3 hereof and that it would not be
feasible to ascertain the extent of such damages with precision. Accordingly,
the Company agrees to pay, as liquidated damages, additional interest on the
Notes ("Additional Interest") under the circumstances and to the extent set
forth below (without duplication):
(i) if neither the Exchange Registration Statement nor the Shelf
Registration has been filed on or prior to the Filing Date, Additional
Interest shall accrue on the Notes over and above the stated interest at a
rate of 0.50% per annum for the first 90 days immediately following the
Filing Date, such Additional Interest rate increasing by an additional
0.50% per annum at the beginning of each subsequent 90-day period;
(ii) if (A) neither the Exchange Registration Statement nor the
Shelf Registration is declared effective by the SEC on or prior to the
Effectiveness Date or (B) notwithstanding that the Company has consummated
or will consummate an exchange offer the Company is required to file a
Shelf Registration Statement and such Shelf Registration Statement is not
declared effective by the SEC on or prior to the 60th day following the
date such Shelf Registration Statement was filed, then, commencing on the
day after either such required the effectiveness date, Additional Interest
shall be accrued on the Notes included or that should have been included
in such Registration Statement over and above the stated interest at a
rate of 0.50% per annum for the first 90 days immediately following the
effectiveness date, such Additional Interest rate
<PAGE>
-11-
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; and
(iii) if either (A) the Company has not exchanged Exchange Notes for
all Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to the 30th day after the date on which the Exchange
Offer Registration Statement was declared effective or (B) the Exchange
Registration Statement ceases to be effective at any time prior to the
time that the Exchange Offer is consummated or (C) if applicable, the
Shelf Registration has been declared effective and such Shelf Registration
ceases to be effective at any time during the Effectiveness Period, then
Additional Interest shall be accrued on the Notes (over and above any
interest otherwise payable on the Notes) at a rate of 0.50% per annum on
(x) the 31st day after such effective date, in the case of (A) above, or
(y) the day the Exchange Registration Statement ceases to be effective
without being declared effective within five business days in the case of
(B) above, or (z) the day such Shelf Registration ceases to be effective,
in the case of (C) above, such Additional Interest rate increasing by an
additional 0.50% per annum at the beginning of each such subsequent 90-day
period (it being understood and agreed that, notwithstanding any provision
to the contrary, so long as any Note that is the subject of a Shelf Notice
is then covered by an effective Shelf Registration Statement, no
Additional interest shall accrue on such Note);
provided, however, that the Additional Interest rate on any affected Note may
not exceed at any one time in the aggregate 2.0% per annum; and provided,
further, that (1) upon the filing of the Exchange Registration Statement or a
Shelf Registration (in the case of clause (i) of this Section 4(a)), (2) upon
the-effectiveness of the Exchange Registration Statement or the Shelf
Registration (in the case of clause (ii) of this Section 4(a)), or (3) upon the
exchange of Exchange Notes for all Notes tendered (in the case of clause
(iii)(A) of this Section 4(a)), or upon the effectiveness of the Exchange
Registration Statement that had ceased to remain effective (in the case of
(iii)(B) of this Section 4(a)) or upon the effectiveness of the Shelf
Registration that had ceased to remain effective (in the case of (iii)(C) of
this Section 4(a)), Additional Interest on the affected Notes as a result of
such clause (or the relevant subc1ause thereof), as the case may be, shall cease
to accrue.
<PAGE>
-12-
(b) The Company shall notify the Trustee within one business day
after each and every date on which an event occurs in respect of which
Additional Interest is required to be paid (an "Event Date"). Any amounts of
Additional Interest due pursuant to (a)(i), (a)(ii) or (a)(iii) of this Section
4 will be payable in cash semi-annually on each April 15 and October 15 (to the
holders of record on the April 1 and October 1 immediately preceding such
dates), commencing with the first such date occurring after any such Additional
Interest commences to accrue. The amount of Additional Interest will be
determined by multiplying the applicable Additional Interest rate by the
principal amount of the Registrable Notes, multiplied by a fraction, the
numerator of which is the number of days such Additional Interest rate was
applicable during such period (determined on the basis of a 360-day year
consisting of twelve 30-day months and, in the case of a partial month, the
actual number of days elapsed) and the denominator of which is 360.
5. Registration Procedures
In connection with the filing of any Registration Statement pursuant
to Sections 2 or 3 hereof, the Company shall effect such registrations to permit
the sale of the securities covered thereby in accordance with the intended
method or methods of disposition thereof, and pursuant thereto and in
connec-tion with any Registration Statement filed by the Company hereunder, the
Company shall:
(a) Prepare and file with the SEC on or prior to the Filing Date, a
Registration Statement or Registration Statements as prescribed by
Sections 2 or 3 hereof, and use its best efforts to cause each such
Registration Statement to become effective and remain effective as
provided herein; provided, however, that, if (1) such filing is pursuant
to Section 3 hereof or (2) a Prospectus contained in an Exchange
Registration Statement filed pursuant to Section 2 hereof is required to
be delivered under the Securities Act by any Participating Broker-Dealer
who seeks to sell Exchange Notes during the Applicable Period, before
filing any Registration Statement or Prospectus or any amendments or
supplements thereto, the Company shall furnish to and afford the Holders
of the Registrable Notes covered by such Registration Statement or each
such Participating Broker-Dealer, as the case may be, their counsel and
the managing underwriters, if any, a reasonable opportunity to review
copies of all such documents (including copies of any documents to be
incorporated by reference therein and all exhibits thereto) proposed to be
<PAGE>
-13-
filed (in each case at least five business days prior to such filing). The
Company shall not file any Registration Statement or Prospectus or any
amendments or supplements thereto if the Holders of a majority in
aggregate principal amount of the Registrable Notes covered by such
Registration Statement, or any such Participating Broker-Dealer, as the
case may be, or their counsel, or the managing underwriters, if any, shall
reasonably object.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Shelf Registration or Exchange Registration Statement,
as the case may be, as may be necessary to keep such Registration
Statement continuously effective for the Effectiveness Period or the
Applicable Period, as the case may be; cause the related Prospectus to be
supplemented by any prospectus supplement required by applicable law, and
as so supplemented to be filed pursuant to Rule 424 (or any similar
provisions then in force) promulgated under the Securities Act; and comply
with the provisions of the Securities Act and the Exchange Act applicable
to it with respect to the disposition of all securities covered by such
Registration Statement as so amended or in such Prospectus as so
supplemented and with respect to the subsequent resale of any securities
being sold by a Participating Broker-Dealer covered by any such
Prospectus; the Company shall be deemed not to have used their respective
best efforts to keep a Registration Statement effective during the
Applicable Period if the Company voluntarily takes any action that would
result in selling Holders of the Registrable Notes covered thereby or
Participating Broker-Dealers seeking to sell Exchange Notes not being able
to sell such Registrable Notes or such Exchange Notes during that period,
unless such action is required by applicable law or unless the Company
complies with this Agreement, including without limitation, the provisions
of paragraph 5(k) hereof and the last paragraph of this Section 5.
(c) If (1) a Shelf Registration is filed pursuant to Section 3
hereof or (2) a Prospectus contained in an Exchange Registration Statement
filed pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, notify the selling Holders of
Registrable Notes, or each such Participating Broker-Dealer, as the case
may be, their counsel and the managing underwriters, if any, promptly (but
in any event within two business days) and confirm such
<PAGE>
-14-
notice in writing, (i) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to a
Registration Statement or any post-effective amendment, when the same has
become effective under the Securities Act (including in such notice a
written statement that any Holder may, upon request, obtain, at the sole
expense of the Company, one conformed copy of such Registration Statement
or post-effective amendment including financial statements and schedules,
documents incorporated or deemed to be incorporated by reference and
exhibits), (ii) of the issuance by the SEC of any stop order suspending
the effectiveness of a Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus or the initiation of
any proceedings for that purpose, (iii) if at any time when a prospectus
is required by the Securities Act to be delivered in connection with sales
of the Registrable Notes or resales of Exchange Notes by Participating
Broker-Dealers the representations and warranties of the Company contained
in any agreement (including any underwriting agreement), contemplated by
Section 5(n) hereof cease to be true and correct, (iv) of the receipt by
the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of a Registration Statement
or any of the Registrable Notes or the Exchange Notes to be sold by any
Participating Broker-Dealer for offer or sale in any jurisdiction, or the
initiation or written threat of any proceeding for such purpose, (v) of
the happening of any event, the existence of any condition or any
information becoming known that makes any statement made in such
Registration Statement or related Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material
respects or that requires the making of any changes in or amendments or
supplements to such Registration Statement, Prospectus or documents so
that, in the case of the Registration Statement, it will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and that in the case of the Prospectus, it will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading and (vi) of the Company's determination that a
post-effective amendment to a Registration Statement would be appropriate.
<PAGE>
-15-
(d) Use its reasonable best efforts to prevent the issuance of any
order suspending the effectiveness of a Registration Statement or of any
order preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification) of any of the Registrable
Notes or the Exchange Notes for sale in any jurisdiction and, if any such
order is issued, to use their best efforts to obtain the withdrawal of any
such order at the earliest possible moment.
(e) If a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriter or underwriters, if any, or the
Holders of a majority in aggregate principal amount of the Registrable
Notes being sold in connection with an underwritten offering, (i) promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or underwriters, if any, such
Holders or counsel for any of them determine is reasonably necessary to be
included therein, (ii) make all required filings of such prospectus
supplement or such post-effective amendment as soon as practicable after
the Company has received notification of the matters to be incorporated in
such prospectus supplement or post-effective amendment and (iii)
supplement or make amendments to such Registration Statement.
(f) If (1) a Shelf Registration is filed pursuant to Section 3
hereof or (2) a Prospectus contained in an Exchange Registration Statement
filed pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, furnish to each selling
Holder of Registrable Notes and to each such Participating Broker-Dealer
who so requests and to their respective counsel and each managing
underwriter, if any, at the sole expense of the Company, one conformed
copy of the Registration Statement or Registration Statements and each
post-effective amendment thereto, including financial statements and
schedules and, if requested, all documents incorporated or deemed to be
incorporated therein by reference and all exhibits.
(g) If (1) a Shelf Registration is filed pursuant to Section 3
hereof or (2) a Prospectus contained in an Exchange Registration Statement
filed pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, deliver to
<PAGE>
-16-
each selling Holder of Registrable Notes, or each such Participating
Broker-Dealer, as the case may be, their respective counsel and the
underwriters, if any, at the sole expense of the Company, as many copies
of the Prospectus or Prospectuses (including each form of preliminary
prospectus) and each amendment or supplement thereto and any documents
incorporated by reference therein as such Persons may reasonably request;
and, subject to the last paragraph of this Section 5, the Company hereby
consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders of Registrable Notes or each such
Participating Broker-Dealer, as the case may be, and the underwriters or
agents, if any, and dealers, if any, in connection with the offering and
sale of the Registrable Notes covered by, or the sale by Participating
Broker-Dealers of the Exchange Notes pursuant to, such Prospectus and any
amendment or supplement thereto.
(h) Prior to any public offering of Registrable Notes or Exchange
Notes or any delivery of a Prospectus contained in the Exchange
Registration Statement by any Participating Broker-Dealer who seeks to
sell Exchange Notes during the Applicable Period, to use their best
efforts to register or qualify and to cooperate with the selling Holders
of Registrable Notes or each such Participating Broker-Dealer, as the case
may be, the managing underwriter or underwriters, if any, and their
respective counsel in connection with the registration or qualification
(or exemption from such registration or qualification) of such Registrable
Notes for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any selling Holder,
Participating Broker-Dealer or the managing underwriter or underwriters
reasonably request in writing; provided, however, that where Exchange
Notes held by Participating Broker-Dealers or Registrable Notes are
offered other than through an Underwritten Offering, the Company agrees to
cause its counsel to perform Blue Sky investigations and file
registrations and qualifications required to be filed pursuant to this
Section 5(h); keep each such registration or qualification (or exemption
therefrom) effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or things
reasonably necessary or advisable to enable the disposition in such
jurisdictions of the Exchange Notes held by Participating Broker-Dealers
or the Registrable Notes covered by the applicable Registration Statement;
provided,
<PAGE>
-17-
however, that the Company shall not be required to (A) qualify generally
to do business in any jurisdiction where it is not then so qualified, (B)
take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or (C) subject itself to
taxation in any such jurisdiction where it is not then so subject.
(i) If a Shelf Registration is filed pursuant to Section 3 hereof,
cooperate with the selling Holders of Registrable Notes and the managing
underwriter or underwriters, if any, to facilitate the timely preparation
and delivery of certificates representing Registrable Notes to be sold,
which certificates shall not bear any restrictive legends and shall be in
a form eligible for deposit with The Depository Trust Company; and enable
such Registrable Notes to be in such denominations and registered in such
names as the managing underwriter or underwriters, if any, or Holders may
reasonably request.
(j) Use its best efforts to cause the Registrable Notes covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
Holders thereof or the underwriter or underwriters, if any, to consummate
the disposition of such Registrable Notes, except as may be required
solely as a consequence of the nature of such selling Holder's business,
in which case the Company will cooperate in all reasonable respects with
the filing of such Registration Statement and the granting of such
approvals.
(k) If (1) a Shelf Registration is filed pursuant to Section 3
hereof or (2) a Prospectus contained in an Exchange Registration Statement
filed pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, upon the occurrence of any
event contemplated by paragraph 5(c)(v) or 5(c)(vi), hereof, as promptly
as practicable prepare and (subject to Section 5(a) hereof) file with the
SEC, at the Company's sole expense, a supplement or post-effective
amendment to the Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be incorporated
therein by reference, or file any other required document so that, as
thereafter delivered to the purchasers of the Registrable Notes being sold
thereunder or to the purchasers of the Exchange Notes to
<PAGE>
-18-
whom such Prospectus will be delivered by a Participating Broker-Dealer,
any such Prospectus will not contain an un-true statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(l) Use its best efforts to cause the Registrable Notes covered by a
Registration Statement or the Exchange Notes, as the case may be, to be
rated with the appropriate rating agencies, if so requested by the Holders
of a majority in aggregate principal amount of Registrable Notes covered
by such Registration Statement or the Exchange Notes, as the case may be,
or the managing underwriter or underwriters, if any.
(m) Prior to the effective date of the first Registration Statement
relating to the Registrable Notes, (i) provide the Trustee with
certificates for the Registrable Notes or Exchange Notes, as the case may
be, in a form eligible for deposit with The Depository Trust Company and
(ii) provide a CUSIP number for the Registrable Notes or Exchange Notes,
as the case may be.
(n) In connection with any Underwritten Offering of Registrable
Notes pursuant to a Shelf Registration, enter into an underwriting
agreement as is customary in Underwritten Offerings of debt securities
similar to the Notes and take all such other actions as are reasonably
requested by the managing underwriter or underwriters in order to expedite
or facilitate the registration or the disposition of such Registrable
Notes and, in such connection, (i) make such representations and
warranties to, and covenants with, the underwriters with respect to the
business of the Company and its subsidiaries (including any acquired
business, properties or entity, if applicable) and the Registration
Statement, Prospectus and documents, if any, incorporated or deemed to be
incorporated by reference therein, in each case, as are customarily made
by issuers to underwriters in Underwritten Offerings of debt securities
similar to the Notes, and confirm the same in writing if and when
requested; (ii) obtain the written opinion of counsel to the Company and
written updates thereof in form, scope and substance reasonably
satisfactory to the managing underwriter or underwriters, addressed to the
underwriters covering the matters customarily covered in opinions
requested in Underwritten Offerings of debt similar to the Notes and such
other matters
<PAGE>
-19-
as may be reasonably requested by the managing underwriter or
underwriters; (iii) obtain "cold comfort" letters and updates thereof in
form, scope and substance reasonably satisfactory to the managing
underwriter or underwriters from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included or incorporated by
reference in the Registration Statement), addressed to each of the
underwriters, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
Underwritten Offerings of debt securities similar to the Notes and such
other matters as reasonably requested by the managing underwriter or
underwriters; and (iv) if an underwriting agreement is entered into, the
same shall contain indemnification provisions and procedures no less
favorable than those set forth in Section 7 hereof (or such other
provisions and procedures acceptable to Holders of a majority in aggregate
principal amount of Registrable Notes covered by such Registration
Statement and the managing underwriter or underwriters or agents) with
respect to all parties to be indemnified pursuant to said Section. The
above shall be done at each closing under such underwriting agreement, or
as and to the extent required thereunder.
(o) If (1) a Shelf Registration is filed pursuant to Section 3
hereof or (2) a Prospectus contained in an Exchange Registration Statement
filed pursuant to Section 2 hereof is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, make available for inspection
by any selling Holder of such Registrable Notes being sold, or each such
Participating Broker-Dealer, as the case may be, any underwriter
participating in any such disposition of Registrable Notes, if any, and
any attorney, accountant or other agent retained by any such selling
Holder or each such Participating Broker-Dealer, as the case may be, or
underwriter (collectively, the "Inspectors"), at the offices where
normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and instruments of the Company and
its subsidiaries (collectively, the "Records") as shall be reasonably
necessary to enable them to exercise any applicable due diligence
responsibilities, and cause the respective officers,
<PAGE>
-20-
directors and employees of the Company and its subsidiaries to supply all
information reasonably requested by any such Inspector in connection with
such Registration Statement. Records that the Company determines, in good
faith, to be confidential and any Records that it notifies the Inspectors
are confidential shall not be disclosed by the Inspectors unless (i) the
disclosure of such Records is necessary to avoid or correct a misstatement
or omission in such Registration statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, (iii) disclosure of such information is, in the
opinion of counsel for any Inspector, necessary or advisable in connection
with any action, claim, suit or proceeding, directly or indirectly,
involving or potentially involving such Inspector and arising out of,
based upon, relating to or involving this Agreement or any transactions
contemplated hereby or arising hereunder or (iv) the information in such
Records has been made generally available to the public. Each selling
Holder of such Registrable Securities and each such Participating
Broker-Dealer will be required to agree that information obtained by it as
a result of such inspections shall be deemed confidential and shall not be
used by it as the basis for any market transactions in the securities of
the Company unless and until such information is generally available to
the public. Each selling Holder of such Registrable Notes and each such
Participating Broker-Dealer will be required to further agree that it
will, upon learning that disclosure of such Records is sought in a court
of competent jurisdiction, give notice to the Company and allow the
Company to undertake appropriate action to prevent disclosure of the
Records deemed confidential at the Company's sole expense.
(p) Provide an indenture trustee for the Registrable Notes or the
Exchange Notes, as the case may be, and cause the Indenture or the trust
indenture provided for in Section 2(a) hereof, as the case may be, to be
qualified under the TIA not later than the effective date of the Exchange
Offer or the first Registration Statement relating to the Registrable
Notes; and in connection therewith, cooperate with the trustee under any
such indenture and the Holders of the Registrable Notes, to effect such
changes to such indenture as may be required for such indenture to be so
qualified in accordance with the terms of the TIA; and execute, and use
its reasonable best efforts to cause such trustee to execute, all
documents as may be required to effect such changes and all other forms
and documents
<PAGE>
-21-
required to be filed with the SEC to enable such indenture to be so
qualified in a timely manner.
(q) Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than 45 days after the end of any fiscal quarter (or 90 days
after the end of any fiscal year) (i) commencing at the end of any fiscal
quarter in which Registrable Notes are sold to underwriters in a firm
commitment or best efforts Underwritten Offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of a Registration
Statement, which statements shall cover said fiscal periods.
(r) Upon consummation of an Exchange Offer or a Private Exchange,
obtain an opinion of counsel to the Company, who may, at the Company's
election, be internal counsel to the Company, in a form customary for
underwritten transactions, addressed to the Trustee for the benefit of all
Holders of Registrable Notes participating in the Exchange Offer or the
Private Exchange, as the case may be, that the Exchange Notes or Private
Exchange Notes, as the case may be, and the related indenture constitute
legal, valid and binding obligations of the Company, enforceable against
the Company in accordance with its respective terms, subject to customary
exceptions and qualifications.
(s) if an Exchange Offer or a Private Exchange is to be consummated,
upon delivery of the Registrable Notes by Holders to the Company (or to
such other Person as directed by the Company) in exchange for the Exchange
Notes or the Private Exchange Notes, as the case may be, the Company shall
mark, or cause to be marked, on such Registrable Notes that such
Registrable Notes are being cancelled in exchange for the Exchange Notes
or the Private Exchange Notes, as the case may be; in no event shall such
Registrable Notes be marked as paid or otherwise satisfied.
(t) Cooperate with each seller of Registrable Notes covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Notes and their respective counsel in
connec-
<PAGE>
-22-
tion with any filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD").
(u) Use its best efforts to take all other steps necessary or
advisable to effect the registration of the Registrable Notes covered by a
Registration Statement contemplated hereby.
The Company may require each seller of Registrable Notes as to which
any registration is being effected to furnish to the Company such information
regarding such seller and the distribution of such Registrable Notes as the
Company may, from time to time, reasonably request. The Company may exclude from
such registration the Registrable Notes of any seller who unreasonably fails to
furnish such information within a reasonable time after receiving such request
and in such event shall have no further obligation under this Agreement
(including, without limitation, obligations under Section 4 hereof) with respect
to such seller or any subsequent holder of such Registrable Notes. Each seller
as to which any Shelf Registration is being effected agrees to furnish promptly
to the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such seller not materially
misleading.
Each Holder of Registrable Notes and each Participating
Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes
to be sold by such Participating Broker-Dealer, as the case may be, that, upon
actual receipt of any notice from the Company of the happening of any event of
the kind described in Sections 5(c)(ii), 5(c)(iv), 5(c)(v) or 5(c)(vi) hereof,
such Holder will forthwith discontinue disposition of such Registrable Notes
covered by such Registration Statement or Prospectus or Exchange Notes to be
sold by such Holder or Participating Broker-Dealer, as the case may be, until
such Holder's or Participating Broker-Dealer's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 5(k) hereof, or until
it is advised in writing (the "Advice") by the Company that the use of the
applicable Prospectus may be resumed, and has received copies of any amendments
or supplements thereto. In the event that the Company shall give any such
notice, each of the Effectiveness Period and the Applicable Period shall be
extended by the number of days during such periods from and including the date
of the giving of such notice to and including the date when each seller of
Registrable Notes covered by such Registration Statement or Exchange Notes to be
sold by such Participating Broker-
<PAGE>
-23-
Dealer, as the case may be, shall have received (x) the copies of the
supplemented or amended Prospectus contemplated by Section 5(k) hereof or (y)
the Advice.
6. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company
whether or not the Exchange Offer or a Shelf Registration is filed or becomes
effective, including, without limitation, (i) all registration and filing fees
(including, without limitation, (A) fees with respect to filings required to be
made with the NASD in connection with an Underwritten Offering and (B) fees and
expenses of compliance with state securities or Blue Sky laws (including,
without limitation, reasonable fees and disbursements of counsel in connection
with Blue Sky qualifications of the Registrable Notes or Exchange Notes and
determination of the eligibility of the Registrable Notes or Exchange Notes for
investment under the laws of such jurisdictions (x) where the holders of
Registrable Notes are located, in the case of the Exchange Notes, or (y) as
provided in Section 5(h) hereof, in the case of Registrable Notes or Exchange
Notes to be sold by a Participating Broker-Dealer during the Applicable
Period)), (ii) printing expenses, including, without limitation, expenses of
printing certificates for Registrable Notes or Exchange Notes in a form eligible
for deposit with The Depository Trust Company and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriter or
underwriters, if any, by the Holders of a majority in aggregate principal amount
of the Registrable Notes included in any Registration Statement or sold by any
Participating Broker-Dealer, as the case may be, (iii) messenger, telephone and
delivery expenses, (iv) fees and disbursements of counsel for the Company and
fees and disbursements of special counsel for the sellers of Registrable Notes
(subject to the provisions of Section 6(b) hereof), (v) fees and disbursements
of all independent certified public accountants referred to in Section 5(n)(iii)
hereof (including, without limitation, the expenses of any special audit and
"cold comfort" letters required by or incident to such performance), (vi) rating
agency fees, if any, and any fees associated with making the Registrable Notes
or Exchange Notes eligible for trading through the Depository Trust Company,
(vii) Securities Act liability insurance, if the Company desires such insurance,
(viii) fees and expenses of all other Persons retained by the Company, (ix)
internal expenses of the Company (including, without limitation, all salaries
and expenses of officers and employees of the Company performing legal or
accounting du-
<PAGE>
-24-
ties), (x) the expense of any annual audit, (xi) the fees and expenses incurred
in connection with the listing of the securities to be registered on any
securities exchange, if applicable, and (xii) the expenses relating to printing,
word processing and distributing of all Registration Statements, underwriting
agreements, securities sales agreements, indentures and any other documents
necessary to comply with this Agreement.
(b) The Company shall reimburse the Holders of the Registrable Notes
being registered in a Shelf Registration for the reasonable fees and
disbursements of not more than one counsel chosen by the Holders of a majority
in aggregate principal amount of the Registrable Notes to be included in such
Registration Statement. All other out-of-pocket costs incurred by such Holders
shall be the responsibility of such Holders.
7. Indemnification
(a) The Company agrees to indemnify and hold harmless each Holder of
Registrable Notes offered pursuant to a Shelf Registration Statement and each
Participating Broker-Dealer selling Exchange Notes during the Applicable Period,
the officers and directors of each such Person or its affiliates, and each other
Person, if any, who controls any such Person or its affiliates within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act (each, a "Participant"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, the reasonable legal
fees and other expenses actually incurred in connection with any suit, action or
proceeding or any claim asserted) caused by, arising out of or based upon any
untrue statement or alleged untrue-statement of a material fact contained in any
Registration Statement pursuant to which the offering of such Registrable Notes
or Exchange Notes, as the case may be, is registered (or any amendment thereto)
or related Prospectus (or any amendments or supplements thereto) or any related
preliminary prospectus, or caused by, arising out of or based upon any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Company will not be required to indemnify a Participant if (i) such
losses, claims, damages or liabilities are caused by any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Participant furnished to the Company
in writing by or on behalf of such Participant expressly for use therein or (ii)
if such Participant sold to the
<PAGE>
-25-
person asserting the claim the Registrable Notes or Exchange Notes that are the
subject of such claim and such untrue statement or omission or alleged untrue
statement or omission was contained or made in any preliminary prospectus and
corrected in the Prospectus or any amendment or supplement thereto and the
Prospectus does not contain any other untrue statement or omission or alleged
untrue statement or omission of a material fact that was the subject matter of
the related proceeding and it is established by the Company in the related
proceeding that such Participant failed to deliver or provide a copy of the
Prospectus (as amended or supplemented) to such Person with or prior to the
confirmation of the sale of such Registrable Notes or Exchange Notes sold to
such Person if required by applicable law, unless such failure to deliver or
provide a copy of the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5 of this Agreement.
(b) Each Participant agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Company's directors and officers and each
Person who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Participant, but only (i) with
reference to information relating to such Participant furnished to the Company
in writing by or on behalf of such Participant expressly for use in any
Registration Statement or Prospectus, any amendment or supplement thereto or any
preliminary prospectus or (ii) with respect to any untrue statement or
representation made by such Participant in writing to the Company. The liability
of any Participant under this paragraph shall in no event exceed the proceeds
received by such Participant from sales of Registrable Notes or Exchange Notes
giving rise to such obligations.
(c) If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any Person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs, such Person (the "Indemnified Person") shall promptly
notify the Person against whom such indemnity may be sought (the "Indemnifying
Person") in writing, and the Indemnifying Person, upon request of the
Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Person may reasonably designate in such proceeding and shall pay
the reasonable fees and expenses actually incurred by such counsel related to
such proceeding; provided, however, that the failure to so notify the
Indemnifying Person
<PAGE>
-26-
shall not relieve it of any obligation or liability that it may have hereunder
or otherwise (unless and only to the extent that such failure directly results
in the loss or compromise of any material rights or defenses by the Indemnifying
Person and the Indemnifying Person was not otherwise aware of such action or
claim). In any such proceeding, any Indemnified Person shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Person unless (i) the Indemnifying Person and
the Indemnified Person shall have mutually agreed in writing to the contrary,
(ii) the Indemnifying Person shall have failed within a reasonable period of
time to retain counsel reasonably satisfactory to the Indemnified Person or
(iii) the named parties in any such proceeding (including any impleaded parties)
include both the Indemnifying Person and the Indemnified Person and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. It is understood that,
unless there exists a conflict among Indemnified Persons, the Indemnifying
Person shall not, in connection with any one such proceeding or separate but
substantially similar related proceeding in the same jurisdiction arising out of
the same general allegations, be liable for the fees and expenses of more than
one separate firm (in addition to any local counsel) for all Indemnified
Persons, and that all such fees and expenses shall be reimbursed promptly as
they are incurred. Any such separate firm for the Participants and such control
Persons of Participants shall be designated in writing by Participants who sold
a majority in interest of Registrable Notes and Exchange Notes sold by all such
Participants and any such separate firm for the Company, its directors, its
officers and such control Persons of the Company shall be designated in writing
by the Company. The Indemnifying Person shall not be liable for any settlement
of any proceeding effected without its prior written consent, but if settled
with such consent or if there be a final non-appealable judgment for the
plaintiff for which the Indemnified Person is entitled to indemnification
pursuant to this Agreement, the Indemnifying Person agrees to indemnify and hold
harmless each Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an Indemnified Person shall have requested an Indemnifying Person
to reimburse the Indemnified Person for reasonable fees and expenses actually
incurred by counsel as contemplated by the third sentence of this paragraph, the
Indemnifying Person agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such Indemnifying Person of the
aforesaid
<PAGE>
-27-
request and (ii) such Indemnifying Person shall not have reimbursed the
Indemnified Person in accordance with such request prior to the date of such
settlement; provided, however, that the Indemnifying Person shall not be liable
for any settlement effected without its consent pursuant to this sentence if the
Indemnifying Person is contesting, in good faith, the request for reimbursement.
No Indemnifying Person shall, without the prior written consent of the
Indemnified Person, effect any settlement or compromise of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party, and indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement (A) includes an unconditional written
release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (B) does not include any statement as
to an admission of fault, culpability or failure to act by or on behalf of any
Indemnified Person.
(d) If the indemnification provided for in the first and second
paragraphs of this Section 7 is for any reason unavailable to, or insufficient
to hold harmless, an Indemnified Person in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Person under
such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such Indemnified Person as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
the relative fault of the Indemnifying Person or Persons on the one hand and the
Indemnified Person or Persons on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof). The relative
fault of the parties shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or such Participant or such other
Indemnified Person, as the case may be, on the other, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances.
(e) The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by pro rata allocation
(even if the Participants were
<PAGE>
-28-
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an Indemnified
Person as a result of the losses, claims, damages and liabilities referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any reasonable legal or other expenses actually
incurred by such Indemnified Person in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 7, in no event shall a Participant be required to contribute any amount
in excess of the amount by which proceeds received by such Participant from
sales of Registrable Notes or Exchange Notes, as the case may be, exceeds the
amount of any damages that such Participant has otherwise been required to pay
or has paid by reason of such untrue or alleged untrue statement or omission or
alleged omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(f) The indemnity and contribution agreements contained in this
Section 7 will be in addition to any liability that the Indemnifying Persons may
otherwise have to the Indemnified Persons referred to above.
8. Rule 144 and 144A
The Company covenants that it will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder in a timely manner in accordance with
the requirements of the Securities Act and the Exchange Act and, if at any time
the Company is not required to file such reports, it will, upon the request of
any Holder of Registrable Notes, make publicly available annual reports and such
information, documents and other reports of the type specified in Sections 13
and 15(d) of the Exchange Act. The Company further covenants for so long as any
Registrable Notes remain outstanding, to make available to any Holder or
beneficial owner of Registrable Notes in connection with any sale thereof and
any prospective purchaser of such Registrable Notes from such Holder or
beneficial owner the information required by Rule 144A(d)(4) under the
Securities Act in order to permit resales of such Registrable Notes pursuant to
Rule 144A.
<PAGE>
-29-
9. Underwritten Registrations
If any of the Registrable Notes covered by any Shelf Registration
are to be sold in an Underwritten Offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Holders of a majority in aggregate principal amount of such Registrable
Notes included in such offering and reasonably acceptable to the Company.
No Holder of Registrable Notes may participate in any Underwritten
Registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
10. Miscellaneous
(a) No Inconsistent Agreements. The Company has not, as of the date
hereof, and shall not, after the date of this Agreement, enter into any
agreement with respect to any of the Company's securities that is inconsistent
with the rights granted to the Holders of Registrable Notes in this Agreement or
otherwise conflicts with the provisions hereof. The Company has not entered and
will not enter into any agreement with respect to any of its securities that
will grant to any Person piggyback registration rights with respect to a
Registration Statement.
(b) Adjustments Affecting Registrable Notes. The Company shall not,
directly or indirectly, take any action with respect to the Registrable Notes as
a class that would adversely effect the ability of the Holders of Registrable
Notes to include such Registrable Notes in a registration undertaken pursuant to
this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, otherwise than with the prior written
consent of the Holders of not less than a majority in aggregate principal of the
then outstanding Registrable Notes. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders of Registrable Notes whose
securities
<PAGE>
-30-
are being sold pursuant to a Registration Statement and that does not directly
or indirectly affect, impair, limit or compromise the rights of other Holders of
Registrable Notes may be given by Holders of at least a majority in aggregate
principal amount of the Registrable Notes being sold by such Holders pursuant to
such Registration Statement; provided, however, that the provisions of this
sentence may not be amended, modified or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(d) Notices. All notices and other communications (including without
limitation any notices or other communications to the Trustee) provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next-day air courier or facsimile:
1. if to a Holder of the Registrable Notes or any Participating
Broker-Dealer, at the most current address of such Holder or Participating
Broker-Dealer, as the case may be, set forth on the records of the
registrar under the Indenture, with a copy in like manner to the Initial
Purchaser as follows:
DEUTSCHE BANK SECURITIES, INC.
130 Liberty Street
New York, New York 10006
Facsimile No.: (212) 250-7200
Attention: Corporate Finance Department
with a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Facsimile No.: (212) 269-5420
Attention: William M. Hartnett, Esq.
2. if to the Initial Purchaser, at the addresses specified in
Section 10(d)(1);
3. if to the Company, at the address as follows:
TOWN SPORTS INTERNATIONAL, INC.
888 Seventh Avenue
New York, NY 10106
Facsimile No.: (212) 246-8422
Attention: General Counsel
<PAGE>
-31-
with a copy to:
Kirkland & Ellis
153 East 53rd Street, 39th Floor
New York, NY 10022
Facsimile No.: (212) 446-4900
Attention: Joshua N. Korff, Esq.
All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally, delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address and in the manner specified in such Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto; provided, however, that this Agreement shall not inure to the benefit of
or be binding upon a successor or assign of a Holder unless and to the extent
such successor or assign holds Registrable Notes.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO
THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of compe-
<PAGE>
-32-
tent jurisdiction to be invalid, illegal, void or unenforceable, the remainder
of the terms, provisions, covenants and restrictions set forth herein shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
(j) Securities Held by the Company or Its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable Notes is
required hereunder, Registrable Notes held by the Company or its affiliates (as
such term is defined in Rule 405 under the Securities Act) shall not be counted
in determining whether such consent or approval was given by the Holders of such
required percentage.
(k) Third Party Beneficiaries. Holders of Registrable Notes and
Participating Broker-Dealers are intended third party beneficiaries of this
Agreement and this Agreement may be enforced by such Persons.
(l) Entire Agreement. This Agreement, together with the Purchase
Agreement and the Indenture, is intended by the parties as a final and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein and any and all prior oral or
written agreements, representations, or warranties, contracts, understandings,
correspondence, conversations and memoranda between the Initial Purchaser on the
one hand and the Company on the other, or between or among any agents,
representatives, parents, subsidiaries, affiliates, predecessors in interest or
successors in interest with respect to the subject matter hereof and thereof are
merged herein and replaced hereby.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ Richard Pyle
------------------------------
Name: Richard Pyle
Title: Chief Financial Officer
DEUTSCHE BANK SECURITIES, INC.
By: /s/ Arthur B. Schoen Jr.
-----------------------------
Name: Arthur Schoen
Title: Managing Director
<PAGE>
EXHIBIT 5.1
LETTERHEAD OF KIRKLAND & ELLIS
July 9, 1999
Town Sports International, Inc.
888 Seventh Avenue
New York, New York 10106
Re: Series B 9 3/4% Senior Notes due 2004
Ladies and Gentlemen:
We are acting as special counsel to Town Sports International, Inc., a New
York corporation (the "Company") in connection with the proposed registration by
the Company of up to $40,000,000 in aggregate principal amount of the Company's
Series B 9 3/4% Senior Notes due 2004 (the "Exchange Notes"), pursuant to a
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission (the "Commission") on July 9, 1999 under the Securities Act of 1933,
as amended (the "Securities Act") (such Registration Statement, as amended or
supplemented, is hereinafter referred to as the "Registration Statement"), for
the purpose of effecting an exchange offer (the "Exchange Offer") for the
Company's Series A 9 3/4% Senior Notes due 2004 (the "Old Notes"). The Exchange
Notes are to be issued pursuant to the Indenture (the "Indenture"), dated as of
October 16, 1997, between the Company and United States Trust Company of New
York, as Trustee, in exchange for and in replacement of the Company's
outstanding Old Notes, of which $40,000,000 in aggregate principal amount is
outstanding.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate
records and other instruments as we have deemed necessary for the purposes of
this opinion, including (i) the corporate and organizational documents of
the Company, (ii) minutes and records of the corporate proceedings of the
Company with respect to the issuance of the Exchange Notes, (iii) the
Registration Statement and exhibits thereto and (iv) the Registration Rights
Agreement, dated as of June 21, 1999, between the Company and Deutsche Bank
Securities, Inc.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have
1
<PAGE>
Town Sports International, Inc.
July 9, 1999
Page 2
also assumed the genuineness of the signatures of persons signing all documents
in connection with which this opinion is rendered, the authority of such persons
signing on behalf of the parties thereto other than the Company, and the due
authorization, execution and delivery of all documents by the parties thereto
other than the Company. As to any fact material to the opinions expressed herein
which we have not independently established or verified, we have relied upon
statements and representations of officers and other representatives of the
Company.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that:
(1) The Company is a corporation existing and in good standing under the
laws of the state of New York.
(2) The sale and issuance of the Exchange Notes has been validly authorized
by the Company.
(3) When the Exchange Notes are issued pursuant to the Exchange Offer, the
Exchange Notes will constitute valid and binding obligations of the Company and
the Indenture will be enforceable in accordance with its terms.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement or
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) except for purposes of the opinion in paragraph 1, any
laws except the laws of the State of New York.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of the rules and regulations of
the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.
2
<PAGE>
Town Sports International, Inc.
July 9, 1999
Page 3
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York be changed by legislative action, judicial
decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Yours very truly,
KIRKLAND & ELLIS
3
<PAGE>
Exhibit 10.4
THIRD AMENDMENT
THIRD AMENDMENT (this "Amendment"), dated as of June 9, 1999,
among TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the "Borrower"),
the various lending institutions party to the Credit Agreement referred to below
(the "Banks"), and BANKERS TRUST COMPANY, as administrative agent (the
"Administrative Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement referred to below.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Administrative Agent
are parties to an Amended and Restated Credit Agreement, dated as of October 16,
1997, (the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
to permit an additional $40,000,000 of indebtedness under the Senior Notes;
NOW, THEREFORE, it is agreed that as of the Third Amendment
Effective Date (as defined below):
1. Section 8.04(b) of the Credit Agreement is hereby amended
by (i) deleting Section 8.04(b) in its entirety and (ii) replacing it with the
following new Section 8.04(b) as set forth below:
(b) Indebtedness of the Borrower incurred under the Senior
Notes not to exceed (x) $125,000,000 in aggregate principal amount for Senior
Notes in effect on the Restatement Effective Date and (y) $40,000,000 in
aggregate principal amount for any additional Senior Notes issued thereafter;
2. The definition of Senior Notes contained in Section 10 of
the Credit Agreement is hereby amended by (i) deleting the definition in its
entirety and (ii) replacing it with a new definition as set forth below:
"Senior Notes" shall mean the Borrower's unsecured 9.75% Notes
due December 16, 2004 as in effect on the Restatement Effective Date and any
additional Notes issued thereafter to the extent permitted under Section
8.04(b)(y) as may be amended, modified or supplemented pursuant to the terms
hereof and thereof.
<PAGE>
3. In order to induce the Banks to enter into this Third
Amendment, the Borrower hereby represents and warrants that on the Third
Amendment Effective Date, both before and after giving effect to this Third
Amendment and the transactions contemplated hereby, (1) no Default or Event of
Default shall exist and (2) all of the representations and warranties contained
in the Credit Documents shall be true and correct in all material respects, with
the same effect as though such representations and warranties had been made on
and as of the Third Amendment Effective Date (it being understood that any
representation or warranty made as of a specific date shall be true and correct
in all material respects as of such specific date).
4. This Third Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
5. This Third Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.
6. THIS THIRD AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
7. This Third Amendment shall become effective as of the date
hereof (the "Third Amendment Effective Date") when the Borrower, the Required
Banks (including each Bank whose Commitment is increased pursuant hereto) and
the Administrative Agent shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of telecopier) the
same to the Administrative Agent.
-2-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
Address: TOWN SPORTS INTERNATIONAL, INC.
888 Seventh Avenue
25th Floor
New York, New York 10106
Telephone: (212) 246-6700
Facsimile: (212) 246-8422
By /s/ Richard Pyle
-----------------------------
Attention: Richard Pyle Title: CFO
One Bankers Trust Plaza - 34th Floor BANKERS TRUST COMPANY,
New York, New York 10006 Individually and as Administrative
Telephone: (212) 250-5175 Agent
Facsimile: (212) 250-7218
By /s/ Mary Kay Coyle
-----------------------------
Attention: Patricia M. Hogan Title:
565 Fifth Avenue BANK OF SCOTLAND
New York, New York 10017
Telephone: (212) 450-0871
Facsimile: (212) 557-9460
By /s/ Annie Glynn
-----------------------------
Attention: Title:
-3-
<PAGE>
EXHIBIT 12.1
TOWN SPORTS INTERNATIONAL, INC.
ALL FIGURES $'000, EXCEPT COVERAGE RATIOS
COMPUTATION OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS FOR THE THREE MONTHS
FOR THE YEARS ENDED MAY 31, ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
Earnings available for fixed charges:
Income (loss) before income taxes....... $ 1,177 $ (1,179) $ 2,278 $ 1,758 $ (959) $ 993 $ 819
Less: income from investments accounted
for by the equity method.............. 331 179 128 112 192 (20) 47
Add: Cash distributions from investments
accounted for by the equity method.... 124 41 198 72 208 10 10
Add: Fixed charges, net of capitalized
interest.............................. 3,275 5,244 11,431 6,011 9,493 3,402 4,199
--------- --------- --------- --------- --------- --------- ---------
Total............................... $ 4,245 $ 3,927 $ 13,779 $ 7,729 $ 8,550 $ 4,425 $ 4,981
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges
Interest (includes amortization of debt
expense).............................. $ 1,012 $ 2,570 $ 7,130 $ 3,796 $ 5,551 $ 2,268 $ 2,168
Interest portion of rent expense........ 2,263 2,674 4,301 2,215 3,942 1,134 2,031
Capitalized interest.................... 46 28 526 65 308 276 143
--------- --------- --------- --------- --------- --------- ---------
Total............................... $ 3,321 $ 5,272 $ 11,957 $ 6,076 $ 9,801 $ 3,678 $ 4,342
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Coverage (deficit):
Earnings to fixed charges............... 1.3x $ (1,345) 1.2x 1.3x $ (1,251) 1.2x 1.1x
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
SUBSIDIARIES Exhibit 21.1
- ------------ -------------
<TABLE>
<CAPTION>
Subsidiary Form Owner
- ---------- ---- -----
<S> <C> <C>
TSI Alexandria, LLC Limited Liability Company Town Sports International, Inc.
TSI 217 Broadway, Inc. Corporation Town Sports International, Inc.
TSI Allston, Inc. Corporation Town Sports International, Inc.
TSI Arthro Fitness Services, Inc. Corporation Town Sports International, Inc.
TSI Battery Park, Inc. Corporation Town Sports International, Inc.
TSI Bethesda, LLC Limited Liability Company TSI Holdings (MD), Inc.
TSI Broadway, Inc. Corporation Town Sports International, Inc.
TSI Brooklyn Belt, Inc. Corporation Town Sports International, Inc.
TSI Brunswick, Inc. Corporation Town Sports International, Inc.
TSI Bulfinch, Inc. Corporation Town Sports International, Inc.
TSI Cash Management, Inc. Corporation Town Sports International, Inc.
TSI Centreville, Inc. Corporation Town Sports International, Inc.
TSI Cherry Hill, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Cobble Hill, Inc. Corporation Town Sports International, Inc.
TSI Colonia, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Commack, Inc. Corporation Town Sports International, Inc.
TSI Connecticut Avenue, Inc. Corporation TSI Holdings (DC), Inc.
TSI Copley, Inc. Corporation Town Sports International, Inc.
TSI Croton, Inc. Corporation Town Sports International, Inc.
TSI Danbury, Inc. Corporation Town Sports International, Inc.
TSI Dupont Circle, Inc. Corporation TSI Holdings (DC), Inc.
TSI Dupont II, Inc. Corporation TSI Holdings (DC), Inc.
TSI East 23, Inc. Corporation Town Sports International, Inc.
TSI East 34, Inc. Corporation Town Sports International, Inc.
TSI East 36, Inc. Corporation Town Sports International, Inc.
TSI East 41, Inc. Corporation Town Sports International, Inc.
TSI East 51, Inc. Corporation Town Sports International, Inc.
TSI East 59, Inc. Corporation Town Sports International, Inc.
TSI East 76, Inc. Corporation Town Sports International, Inc.
TSI East 86, LLC Limited Liability Company Town Sports International, Inc.
TSI East 91, Inc. Corporation Town Sports International, Inc.
TSI East Meadow, Inc Corporation Town Sports International, Inc.
TSI Fairfax, LLC Limited Liability Company TSI Holdings (VA), Inc.
TSI Fenway, Inc. Corporation Town Sports International, Inc.
TSI Fifth Avenue, Inc. Corporation Town Sports International, Inc.
TSI First Avenue, Inc. Corporation Town Sports International, Inc.
TSI Forest Hills, Inc. Corporation Town Sports International, Inc.
TSI Fort Lee, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Framingham, Inc. Corporation Town Sports International, Inc.
TSI Franklin Park, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Freehold, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Garden City, Inc. Corporation Town Sports International, Inc.
<PAGE>
<S> <C> <C>
TSI Germantown, LLC Limited Liability Company TSI Holdings (MD), Inc.
TSI Glover, Inc. Corporation TSI Holdings (DC), Inc.
TSI Great Neck, Inc. Corporation Town Sports International, Inc.
TSI Greenwich, Inc. Corporation Town Sports International, Inc.
TSI Herald, Inc. Corporation Town Sports International, Inc.
TSI Hoboken, LLC Limited Liability Company Town Sports International, Inc.
TSI Holdings (CIP), Inc. Corporation Town Sports International, Inc.
TSI Holdings (DC), Inc. Corporation Town Sports International, Inc.
TSI Holdings (IP), Inc. Corporation Town Sports International, Inc.
TSI Holdings (MD), Inc. Corporation Town Sports International, Inc.
TSI Holdings (NJ), Inc. Corporation Town Sports International, Inc.
TSI Holdings (PA), Inc. Corporation Town Sports International, Inc.
TSI Holdings (VA), Inc. Corporation Town Sports International, Inc.
TSI International, Inc. Corporation Town Sports International, Inc.
TSI Larchmont, Inc. Corporation Town Sports International, Inc.
TSI Lexington, Inc. Corporation Town Sports International, Inc.
TSI Lincoln, Inc. Corporation Town Sports International, Inc.
TSI M Street, Inc. Corporation TSI Holdings (DC), Inc.
TSI Madison, Inc. Corporation Town Sports International, Inc.
TSI Mahwah, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Marlboro, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Mamaroneck, Inc. Corporation Town Sports International, Inc.
TSI Matawan, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Merrifield, Inc. Corporation Town Sports International, Inc.
TSI Nanuet, Inc. Corporation Town Sports International, Inc.
TSI Norwalk, Inc. Corporation Town Sports International, Inc.
TSI Oceanside, Inc. Corporation Town Sports International, Inc.
TSI Old Bridge, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Parsippany, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Plainsboro, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Princeton, LLC Limited Liability Company TSI Brunswick, Inc.
TSI Ramsey, Inc. Corporation TSI Holdings (NJ), Inc.
TSI Reade Street, Inc. Corporation Town Sports International, Inc.
TSI Rittenhouse, LLC Limited Liability Company TSI Holdings (PA), Inc.
TSI Rockville, LLC Limited Liability Company TSI Holdings (MD), Inc.
TSI Rodin Place, LLC Limited Liability Company TSI Holdings (PA), Inc.
TSI Scarsdale, Inc. Corporation Town Sports International, Inc.
TSI Seaport, Inc. Corporation Town Sports International, Inc.
TSI Sheridan, Inc. Corporation Town Sports International, Inc.
TSI Society Hill, LLC Limited Liability Company TSI Holdings (PA), Inc.
TSI Soho, Inc. Corporation Town Sports International, Inc.
TSI Somerset, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Springfield, LLC Limited Liability Company TSI Holdings (NJ), Inc.
TSI Stamford Downtown, Inc. Corporation Town Sports International, Inc.
TSI Stamford Post, Inc. Corporation Town Sports International, Inc.
TSI Stamford Rinks, Inc. Corporation Town Sports International, Inc.
<PAGE>
<S> <C> <C>
TSI Stamford Summer, Inc. Corporation Town Sports International, Inc.
TSI Staten Island, Inc. Corporation Town Sports International, Inc.
TSI Sterling, LLC Limited Liability Company TSI Holdings (VA), Inc.
TSI Syosset, Inc. Corporation Town Sports International, Inc.
TSI Wall Street, Inc. Corporation Town Sports International, Inc.
TSI Washington, Inc. Corporation TSI Holdings (DC), Inc.
TSI West 125, Inc. Corporation Town Sports International, Inc.
TSI West 14, Inc. Corporation Town Sports International, Inc.
TSI West 23, Inc. Corporation Town Sports International, Inc.
TSI West 38, Inc. Corporation Town Sports International, Inc.
TSI West 52, Inc. Corporation Town Sports International, Inc.
TSI West 73, Inc. Corporation Town Sports International, Inc.
TSI West 76, Inc. Corporation Town Sports International, Inc.
TSI West 80, Inc. Corporation Town Sports International, Inc.
TSI West Caldwell, LLC Limited Liability Company TSI Holdings ( DC), Inc.
TSI Weymouth, Inc. Corporation Town Sports International, Inc.
TSI White Plains, Inc. Corporation Town Sports International, Inc.
TSI Whitestone, Inc. Corporation Town Sports International, Inc.
</TABLE>
<PAGE>
Exhibit 23.1
Letterhead of PricewaterhouseCoopers
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of our
reports dated February 16, 1999 related to the financial statements and
financial statement schedule of Town Sports International, Inc. and Subsidiaries
which appears in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
July 8, 1999
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
9 3/4% SENIOR NOTES DUE 2004
OF
TOWN SPORTS INTERNATIONAL, INC.
PURSUANT TO THE PROSPECTUS DATED , 1999
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1999 UNLESS EXTENDED (THE "EXPIRATION DATE").
PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS
If you desire to accept the Exchange Offer, this Letter of Transmittal should be
completed, signed, and submitted to the Exchange Agent:
<TABLE>
<S> <C> <C>
BY OVERNIGHT COURIER: BY HAND: BY REGISTERED OR CERTIFIED
United States Trust Company United States Trust Company MAIL:
of New York of New York United States Trust Company
770 Broadway, 13th Floor 111 Broadway of New York
New York, New York 10003 Lower Level P.O. Box 844
Attn: Corporate Trust New York, New York 10006 New York, New York
Services Attn: Corporate Trust Services 10276-0844
Attn: Corporate Trust
Services
Cooper Station
BY FACSIMILE:
212-780-0592
Attn: Corporate Trust Services
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO A LOCATION OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY ADDITIONAL
INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT 800-548-6565, OR
BY FACSIMILE AT (212) 780-0592.
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1999 (the "Prospectus") of Town Sports International, Inc., a New
York corporation (the "Issuer"), and this Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Issuer's offer (the "Exchange
Offer") to exchange $1,000 in principal amount of its Series B 9 3/4% Senior
Notes due 2004 (the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement, for each $1,000 in principal amount of its outstanding
9 3/4% Senior Notes due 2004 (the "Notes"), of which $40 million aggregate
principal amount is outstanding. Capitalized terms used but not defined herein
have the meanings ascribed to them in the Prospectus.
The undersigned hereby tenders the Notes described in Box 1 below (the
"TENDERED NOTES") pursuant to the terms and conditions described in the
Prospectus and this Letter of Transmittal. The undersigned is the registered
owner of all the Tendered Notes and the undersigned represents that it has
received from each beneficial owner of the Tendered Notes ("BENEFICIAL OWNERS")
a duly completed and executed form of "INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER" accompanying
this Letter of Transmittal, instructing the undersigned to take the action
described in this Letter of Transmittal.
Subject to, and effective upon, the acceptance for exchange of the Tendered
Notes, the undersigned hereby exchanges, assigns, and transfers to, or upon the
order of, the Issuer, all right, title, and interest in, to, and under the
Tendered Notes.
Please issue the Exchange Notes exchanged for Tendered Notes in the name(s)
of the undersigned. Similarly, unless otherwise indicated under "SPECIAL
DELIVERY INSTRUCTIONS" below (Box 3), please send or cause to be sent the
certificates for the Exchange Notes (and accompanying documents, as appropriate)
to the undersigned at the address shown below in Box 1.
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney in fact of the undersigned with
respect to the Tendered Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(i) deliver the Tendered
<PAGE>
Notes to the Issuer or cause ownership of the Tendered Notes to be transferred
to, or upon the order of, the Issuer, on the books of the registrar for the
Notes and deliver all accompanying evidences of transfer and authenticity to, or
upon the order of, the Issuer upon receipt by the Exchange Agent, as the
undersigned's agent, of the Exchange Notes to which the undersigned is entitled
upon acceptance by the Issuer of the Tendered Notes pursuant to the Exchange
Offer, and (ii) receive all benefits and otherwise exercise all rights of
beneficial ownership of the Tendered Notes, all in accordance with the terms of
the Exchange Offer.
The undersigned understands that tenders of Notes pursuant to the procedures
described under the caption "The Exchange Offer" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Issuer upon the terms and subject to the conditions of the Exchange
Offer, subject only to withdrawal of such tenders on the terms set forth in the
Prospectus under the caption "The Exchange Offer-Withdrawal of Tenders." All
authority herein conferred or agreed to be conferred shall survive the death or
incapacity of the undersigned and any Beneficial Owner(s), and every obligation
of the undersigned or any Beneficial Owners hereunder shall be binding upon the
heirs, representatives, successors, and assigns of the undersigned and such
Beneficial Owner(s).
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign, and transfer the Tendered Notes
and that the Issuer will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges, encumbrances, and adverse claims when
the Tendered Notes are acquired by the Issuer as contemplated herein. The
undersigned and each Beneficial Owner will, upon request, execute and deliver
any additional documents reasonably requested by the Issuer or the Exchange
Agent as necessary or desirable to complete and give effect to the transactions
contemplated hereby.
The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial Owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, (iii) except as otherwise disclosed in
writing herewith, neither the undersigned nor any Beneficial Owner is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Issuer, and
(iv) the undersigned and each Beneficial Owner acknowledge and agree that any
person participating in the Exchange Offer with the intention or for the purpose
of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended
(together with the rules and regulations promulgated thereunder, the "Securities
Act"), in connection with a secondary resale of the Exchange Notes acquired by
such person and cannot rely on the position of the Staff of the Securities and
Exchange Commission (the "Commission") set forth in the no-action letters that
are discussed in the section of the Prospectus entitled "The Exchange Offer." In
addition, by accepting the Exchange Offer, the undersigned hereby (i) represents
and warrants that, if the undersigned or any Beneficial Owner of the Notes is a
Participating Broker-Dealer, such Participating Broker-Dealer acquired the Notes
for its own account as a result of market-making activities or other trading
activities and has not entered into any arrangement or understanding with the
Company or any affiliate of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in the Exchange
Offer, and (ii) acknowledges that, by receiving New Notes for its own account in
exchange for Notes, where such Notes were acquired as a result of market-making
activities or other trading activities, such Participating Broker-Dealer will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes.
/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED HEREWITH.
/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
"USE OF GUARANTEED DELIVERY" BELOW (Box 4).
/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE
TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER
FACILITY AND COMPLETE "USE OF BOOK-ENTRY TRANSFER" BELOW (Box 5).
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES
BOX 1
DESCRIPTION OF NOTES TENDERED
(Attach additional signed pages, if necessary)
<TABLE>
<CAPTION>
Aggregate
Name(s) and Address(es) of Registered Note Holder(s), Certificate Principal Amount Aggregate
exactly as name(s) appear(s) on Note Certificate(s) Number(s) of Represented by Principal Amount
(Please fill in, if blank) Notes* Certificate(s) Tendered**
<S> <C> <C> <C>
TOTAL
</TABLE>
* Need not be completed by persons tendering by book-entry transfer.
** The minimum permitted tender is $1,000 in principal amount of Notes. All
other tenders must be in integral multiples of $1,000 of principal amount.
Unless otherwise indicated in this column, the principal amount of all
Note Certificates identified in this Box 1 or delivered to the Exchange
Agent herewith shall be deemed tendered. See Instruction 4.
<PAGE>
<TABLE>
<S> <C>
BOX 2
BENEFICIAL OWNER(S)
STATE OF PRINCIPAL RESIDENCE OF EACH PRINCIPAL AMOUNT OF TENDERED NOTES
BENEFICIAL OWNER OF TENDERED NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER
</TABLE>
BOX 3
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5, 6 AND 7)
TO BE COMPLETED ONLY IF EXCHANGE NOTES EXCHANGED FOR NOTES AND UNTENDERED NOTES
ARE TO BE SENT TO SOMEONE OTHER THAN THE UNDERSIGNED, OR TO THE UNDERSIGNED AT
AN ADDRESS OTHER THAN THAT SHOWN ABOVE.
Mail Exchange Note(s) and any untendered Notes to:
Name(s):
- --------------------------------------------------------------------------------
(please print)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(include Zip Code)
Tax Identification or
Social Security No.:
<PAGE>
BOX 4
USE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 2)
TO BE COMPLETED ONLY IF NOTES ARE BEING TENDERED BY MEANS OF A NOTICE OF
GUARANTEED DELIVERY.
Name(s) of Registered Holder(s):
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery: ____________________________
Name of Institution which Guaranteed Delivery:
- ------------------------------------------------
BOX 5
USE OF BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1)
TO BE COMPLETED ONLY IF DELIVERY OF TENDERED NOTES IS TO BE MADE BY BOOK-ENTRY
TRANSFER.
Name of Tendering Institution: _________________________________________________
Account Number: ________________________________________________________________
Transaction Code Number: _______________________________________________________
<PAGE>
<TABLE>
<S> <C>
BOX 6
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5)
IN ADDITION, COMPLETE SUBSTITUTE FORM W-9
X --------------------------------------- Signature Guarantee
X --------------------------------------- (If required by Instruction 5)
(Signature of Registered Holder(s) or Authorized Signature
Authorized Signatory) X ---------------------------------------
Note: The above lines must be signed by the Name: ------------------------------------
registered holder(s) of Notes as their (please print)
name(s) appear(s) on the Notes or by Title: ------------------------------------
persons(s) authorized to become registered Name of Firm: ----------------------------
holder(s) (evidence of which authorization (Must be an Eligible Institution
must be transmitted with this Letter of as defined in Instruction 2)
Transmittal). If signature is by a trustee, Address: ----------------------------------
executor, administrator, guardian, ------------------------------------------
attorney-in-fact, officer, or other person ------------------------------------------
acting in a fiduciary or representative (include Zip Code)
capacity, such person must set forth his or Area Code and Telephone Number:
her full title below. See Instruction 5. ------------------------------------------
Name(s):---------------------------------- Dated: ----------------------------------
----------------------------------
Capacity: ----------------------------------
----------------------------------
Street Address:----------------------------
----------------------------------
----------------------------------
(include Zip Code)
Area Code and Telephone Number:
----------------------------------
Tax Identification or Social Security
Number:
----------------------------------
</TABLE>
BOX 7
BROKER-DEALER STATUS
<TABLE>
<S> <C>
Check this box if the Beneficial Owner of the Notes is a Participating Broker-Dealer
/ / and such Participating Broker-Dealer acquired the Notes for its own account as a
result of market-making activities or other trading activities.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
- -------------------------------------------------------------------------------------------
PAYOR'S NAME: TOWN SPORTS INTERNATIONAL, INC.
Name (if joint names, list first and circle the name of the person or
entity whose number you enter in Part 1 below. See instructions if
your name has changed.)
Address
SUBSTITUTE City, State and ZIP Code
FORM W-9 List account number(s) here (optional)
Department of the Part 1--PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION Social Security
Treasury NUMBER ("TIN") IN THE BOX AT RIGHT AND CERTIFY BY Number or TIN
SIGNING AND DATING BELOW
Part 2--Check the box if you are NOT subject to backup withholding
Internal Revenue under the provisions of section 3406(a)(1)(C) of the Internal Revenue
Service Code because (1) you have not been notified that you are subject to
backup withholding as a result of failure to report all interest or
dividends or (2) the Internal Revenue Service has notified you that
you are no longer subject to backup withholding. / /
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I Part 3--
CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM Awaiting TIN / /
IS TRUE, CORRECT AND COMPLETE.
SIGNATURE DATE
</TABLE>
Note: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES. A properly completed
and duly executed copy of this Letter of Transmittal, including Substitute Form
W-9, and any other documents required by this Letter of Transmittal must be
received by the Exchange Agent at its address set forth herein, and either
certificates for Tendered Notes must be received by the Exchange Agent at its
address set forth herein or such Tendered Notes must be transferred pursuant to
the procedures for book-entry transfer described in the Prospectus under the
caption "EXCHANGE OFFER--BOOK-ENTRY TRANSFER" (and a confirmation of such
transfer received by the Exchange Agent), in each case prior to 5:00 p.m., New
York City time, on the Expiration Date. The method of delivery of certificates
for Tendered Notes, this Letter of Transmittal and all other required documents
to the Exchange Agent is at the election and risk of the tendering holder and
the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. Instead of delivery by mail, it is recommended
that the Holder use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Notes should be sent to the Company. Neither the Issuer nor the
registrar is under any obligation to notify any tendering holder of the Issuer's
acceptance of Tendered Notes prior to the closing of the Exchange Offer.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Notes
but whose Notes are not immediately available, and who cannot deliver their
Notes, this Letter of Transmittal or any other documents required hereby to the
Exchange Agent prior to the Expiration Date must tender their Notes according to
the guaranteed delivery procedures set forth below, including completion of Box
4. Pursuant to such procedures: (i) such tender must be made by or through a
firm which is a member of a recognized Medallion Program approved by the
Securities Transfer Association Inc. (an "Eligible Institution") and the Notice
of Guaranteed Delivery must be signed by the holder; (ii) prior to the
Expiration Date, the Exchange Agent must have received from the holder and the
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of the Tendered Notes and the principal amount
of Tendered Notes, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, this Letter of Transmittal together with the certificate(s)
representing the Notes and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly completed
and executed Letter of Transmittal, as well as all other documents required by
this Letter of Transmittal and the certificate(s) representing all Tendered
Notes in proper form for transfer, must be received by the Exchange Agent within
five New York Stock Exchange trading days after the Expiration Date. Any holder
who wishes to tender Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery relating to such Notes prior to 5:00 p.m., New York City
time, on the Expiration Date. Failure to complete the guaranteed delivery
procedures outlined above will not, of itself, affect the validity or effect a
revocation of any Letter of Transmittal form properly completed and executed by
an Eligible Holder who attempted to use the guaranteed delivery process.
3. BENEFICIAL OWNER INSTRUCTIONS TO REGISTERED HOLDERS. Only a holder in
whose name Tendered Notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may execute
and deliver this Letter of Transmittal. Any Beneficial Owner of Tendered Notes
who is not the registered holder must arrange promptly with the registered
holder to execute and deliver this Letter of Transmittal on his or her behalf
through the execution and delivery to the registered holder of the INSTRUCTIONS
TO REGISTERED HOLDER AND/OR BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM
BENEFICIAL OWNER form accompanying this Letter of Transmittal.
4. PARTIAL TENDERS. Tenders of Notes will be accepted only in integral
multiples of $1,000 in principal amount. If less than the entire principal
amount of Notes held by the holder is tendered, the tendering
<PAGE>
holder should fill in the principal amount tendered in the column labeled
"Aggregate Principal Amount Tendered" of the box entitled "Description of Notes
Tendered" (Box 1) above. The entire principal amount of Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
If the entire principal amount of all Notes held by the holder is not tendered,
then Notes for the principal amount of Notes not tendered and Exchange Notes
issued in exchange for any Notes tendered and accepted will be sent to the
Holder at his or her registered address, unless a different address is provided
in the appropriate box on this Letter of Transmittal, as soon as practicable
following the Expiration Date.
5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the
registered holder(s) of the Tendered Notes, the signature must correspond with
the name(s) as written on the face of the Tendered Notes without alteration,
enlargement or any change whatsoever.
If any of the Tendered Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any Tendered
Notes are held in different names, it will be necessary to complete, sign and
submit as many separate copies of the Letter of Transmittal as there are
different names in which Tendered Notes are held.
If this Letter of Transmittal is signed by the registered holder(s) of
Tendered Notes, and Exchange Notes issued in exchange therefor are to be issued
(and any untendered principal amount of Notes is to be reissued) in the name of
the registered holder(s), then such registered holder(s) need not and should not
endorse any Tendered Notes, nor provide a separate bond power. In any other
case, such registered holder(s) must either properly endorse the Tendered Notes
or transmit a properly completed separate bond power with this Letter of
Transmittal, with the signature(s) on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any Tendered Notes, such Tendered Notes must be endorsed
or accompanied by appropriate bond powers, in each case, signed as the name(s)
of the registered holder(s) appear(s) on the Tendered Notes, with the
signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal or any Tendered Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Issuer, evidence satisfactory to the Issuer of their authority to so act must be
submitted with this Letter of Transmittal.
Endorsements on Tendered Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Tendered Notes are tendered (i) by a registered holder
who has not completed the box set forth herein entitled "Special Delivery
Instructions" (Box 3) or (ii) by an Eligible Institution.
6. SPECIAL DELIVERY INSTRUCTIONS. Tendering holders should indicate, in the
applicable box (Box 3), the name and address to which the Exchange Notes and/or
substitute Notes for principal amounts not tendered or not accepted for exchange
are to be sent, if different from the name and address of the person signing
this Letter of Transmittal. In the case of issuance in a different name, the
taxpayer identification or social security number of the person named must also
be indicated.
7. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any,
applicable to the exchange of Tendered Notes pursuant to the Exchange Offer. If,
however, a transfer tax is imposed for any reason other than the transfer and
exchange of Tendered Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or on any
other person) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with this
Letter of Transmittal, the amount of such transfer taxes will be billed directly
to such tendering holder.
<PAGE>
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Tendered Notes listed in this Letter of
Transmittal.
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that the
holder(s) of any Tendered Notes which are accepted for exchange must provide the
Issuer (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual, is his or her social
security number. If the Issuer is not provided with the correct TIN, the Holder
may be subject to backup withholding and a $50 penalty imposed by the Internal
Revenue Service. (If withholding results in an over-payment of taxes, a refund
may be obtained.) Certain holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.
To prevent backup withholding, each holder of Tendered Notes must provide
such holder's correct TIN by completing the Substitute Form W-9 set forth
herein, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN), and that (i) the holder has not been notified by the Internal
Revenue Service that such holder is subject to backup withholding as a result of
failure to report all interest or dividends or (ii) the Internal Revenue Service
has notified the holder that such holder is no longer subject to backup
withholding. If the Tendered Notes are registered in more than one name or are
not in the name of the actual owner, consult the "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for information on
which TIN to report.
The Issuer reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Issuer's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of Tendered Notes will be
determined by the Issuer in its sole discretion, which determination will be
final and binding. The Issuer reserves the right to reject any and all Notes not
validly tendered or any Notes the Issuer's acceptance of which would, in the
opinion of the Issuer or their counsel, be unlawful. The Issuer also reserves
the right to waive any conditions of the Exchange Offer or defects or
irregularities in tenders of Notes as to any ineligibility of any holder who
seeks to tender Notes in the Exchange Offer. The interpretation of the terms and
conditions of the Exchange Offer (including this Letter of Transmittal and the
instructions hereto) by the Issuer shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Notes
must be cured within such time as the Issuer shall determine. Neither the
Issuer, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Notes, nor
shall any of them incur any liability for failure to give such notification.
Tenders of Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify any of the conditions in the Exchange Offer in the case of any
Tendered Notes.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or
contingent tender of Notes or transmittal of this Letter of Transmittal will be
accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any tendering Holder whose
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated herein for further instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
indicated herein. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
<PAGE>
14. ACCEPTANCE OF TENDERED NOTES AND ISSUANCE OF NOTES; RETURN OF
NOTES. Subject to the terms and conditions of the Exchange Offer, the Issuer
will accept for exchange all validly tendered Notes as soon as practicable after
the Expiration Date and will issue Exchange Notes therefor as soon as
practicable thereafter. For purposes of the Exchange Offer, the Issuer shall be
deemed to have accepted tendered Notes when, as and if the Issuer has given
written or oral notice (immediately followed in writing) thereof to the Exchange
Agent. If any Tendered Notes are not exchanged pursuant to the Exchange Offer
for any reason, such unexchanged Notes will be returned, without expense, to the
undersigned at the address shown in Box 1 or at a different address as may be
indicated herein under "Special Delivery Instructions" (Box 3).
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the procedures
set forth in the Prospectus under the caption "The Exchange Offer."
<PAGE>
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
9 3/4% SENIOR NOTES DUE 2004
OF
TOWN SPORTS INTERNATIONAL, INC.
Pursuant to the Prospectus Dated , 1999
This form must be used by a holder of 9 3/4% Senior Notes due 2004 (the
"Notes") of Town Sports International, Inc., a New York corporation (the
"Company"), who wishes to tender Notes to the Exchange Agent pursuant to the
guaranteed delivery procedures described in "The Exchange Offer-- Guaranteed
Delivery Procedures" of the Company's Prospectus, dated , 1999 (the
"Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any
holder who wishes to tender Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date of the Exchange Offer.
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999 UNLESS EXTENDED (THE "EXPIRATION
DATE").
United States Trust Company of New York
(the "Exchange Agent")
<TABLE>
<CAPTION>
BY REGISTERED OR CERTIFIED
BY OVERNIGHT COURIER: BY HAND: MAIL:
<S> <C> <C>
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
770 Broadway, 13th Floor 111 Broadway P.O. Box 844
New York, New York 10003 Lower Level Cooper Station
Attn: Corporate Trust New York, New York 10006 New York, New York 10276-0844
Services Attn: Corporate Trust
Services
Attn: Corporate Trust
Services
BY FACSIMILE:
212-780-0592
Attn: Corporate Trust
Services
</TABLE>
DELIVERY OF THIS INSTRUMENT TO A LOCATION OTHER THAN AS SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
FOR ANY QUESTIONS REGARDING THIS NOTICE OF GUARANTEED DELIVERY OR FOR ANY
ADDITIONAL INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT
800-548-6565, OR BY FACSIMILE AT 212-780-0592.
<PAGE>
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus and in Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Notes listed below:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
CERTIFICATE NUMBER(S) (IF KNOWN) OF NOTES OR PRINCIPAL PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
<S> <C> <C>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PLEASE SIGN AND COMPLETE
<S> <C> <C> <C>
Signatures of Registered Holder(s) or
Authorized Signatory: Date: , 1999
Address:
Name(s) of Registered Holder(s): Area Code and Telephone No.
</TABLE>
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Notes or on a security position
listing as the owner of Notes, or by person(s) authorized to become Holder(s) by
endorsements and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
Please print name(s) and address(es)
Name(s): _______________________________________________________________________
________________________________________________________________________________
Capacity: ______________________________________________________________________
Address(es): ___________________________________________________________________
________________________________________________________________________________
3
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of the Letter of Transmittal
(or facsimile thereof), together with the Notes tendered hereby in proper form
for transfer (or confirmation of the book-entry transfer of such Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility described in the
prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures" and in the Letter of Transmittal) and any other required documents,
all by 5:00 p.m., New York City time, on the fifth New York Stock Exchange
trading day following the Expiration Date.
<TABLE>
<S> <C>
Name of firm
(Authorized Signature)
Address Name
(Please Print)
Title
(Include Zip Code)
Area Code and Tel. No. Dated , 1999
</TABLE>
DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST
BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
4
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. The method
of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Notes referred
to herein, the signature must correspond with the name(s) written on the face of
the Notes without alteration, enlargement, or any change whatsoever. If this
Notice of Guaranteed Delivery is signed by a participant of the Book-Entry
Transfer Facility whose name appears on a security position listing as the owner
of the Notes, the signature must correspond with the name shown on the security
position listing as the owner of the Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s) appears
on the Notes or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to the Exchange Agent at the address specified in the Prospectus. Holders may
also contact their broker, dealer, commercial bank, trust company, or other
nominee for assistance concerning the Exchange Offer.
5
<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
TOWN SPORTS INTERNATIONAL, INC.
9 3/4% SENIOR NOTES DUE 2004
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated
, 1999 (the "Prospectus") of Town Sports International Inc., a New
York corporation (the "Company"), and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to action to be taken by you relating to the Exchange
Offer with respect to the 9 3/4% Senior Notes due 2004 (the "Notes") held by you
for the account of the undersigned.
The aggregate face amount of the Notes held by you for the account of the
undersigned is (FILL IN AMOUNT):
$ of the 9 3/4% Senior Notes due 2004
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
/ / TO TENDER the following Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF NOTES TO BE TENDERED, IF ANY): $
/ / NOT TO TENDER any Notes held by you for the account of the undersigned.
If the undersigned instruct you to tender the Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representation and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
undersigned's principal residence is in the state of (FILL IN STATE) ,
(ii) the undersigned is acquiring the Exchange Notes in the ordinary course of
business of the undersigned, (iii) the undersigned is not participating, does
not participate, and has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes, (iv) the undersigned
acknowledges that any person participating in the Exchange Offer for the purpose
of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended (the
"Act"), in connection with a secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the position of the Staff of the
Securities and Exchange Commission set forth in no-action letters that are
discussed in the section of the Prospectus entitled "The Exchange Offer--Resales
of the Exchange Notes," and (v) the undersigned is not an "affiliate," as
defined in Rule 405 under the Act, of the Company; (b) to agree, on behalf of
the undersigned, as set forth in the Letter of Transmittal; and (c) to take such
other action as necessary under the Prospectus or the Letter of Transmittal to
effect the valid tender of such Notes.
SIGN HERE
Name of beneficial owner(s): _________________________________________________
Signature(s): ________________________________________________________________
Name (PLEASE PRINT): _________________________________________________________
Address: _____________________________________________________________________
_______________________________________
_______________________________________
Telephone number: ____________________________________________________________
Taxpayer Identification or Social Security Number: ___________________________
Date: ________________________________________________________________________
