AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2004
333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 2511 20-0640002
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
(212) 246-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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ROBERT GIARDINA
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
(212) 246-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
JOSHUA N. KORFF, ESQ.
KIRKLAND & ELLIS LLP
CITIGROUP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
(212) 446-4800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: The exchange will occur as soon as practicable after the effective date
of this Registration Statement.
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: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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11% Senior Discount Notes due 2014.............. $124,807,000 $15,821.02
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE 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.
SUBJECT TO COMPLETION, DATED APRIL 5, 2004
PROSPECTUS ,
TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
$213,000,000
EXCHANGE OFFER FOR
11% SENIOR DISCOUNT NOTES DUE 2014
Offer for all outstanding 11% Senior Discount Notes due 2014 (which we refer to
as the "Old Notes") in aggregate principal amount at maturity of $213,000,000 in
exchange for up to $213,000,000 aggregate principal amount at maturity of 11%
Senior Discount Notes due 2014 (which we refer to as the "New Notes") have been
registered under the Securities Act of 1933, as amended.
MATERIAL TERMS OF EXCHANGE OFFER:
- This exchange offers expires at 5:00 p.m., New York City time on ,
2004, unless we extend this date.
- We will not receive any proceeds from the exchange offer.
- We can amend or terminate the exchange offer.
MATERIAL TERMS OF NEW NOTES:
- The terms of the New Notes to be issued in the exchange offer are
substantially identical to the currently outstanding notes, or Old Notes,
except that the transfer restrictions and registration rights relating to the
Old Notes will not apply to the New Notes.
- There is no existing public market for the Old Notes or the New Notes.
However, you may trade the Old Notes and the New Notes in the PORTAL market.
FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER BEFORE
PARTICIPATING IN THIS EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF
THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
----
Forward-Looking Statements............ ii
Industry and Market Data.............. ii
Prospectus Summary.................... 1
Risk Factors.......................... 11
The Exchange Offer.................... 20
Transactions.......................... 29
Use of Proceeds....................... 30
Capitalization........................ 31
Selected Consolidated Financial and
Other Data.......................... 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 46
Management............................ 60
PAGE
----
Security Ownership and Certain
Beneficial Owners................... 65
Certain Relationships and Related
Transactions........................ 67
Description of Other Indebtedness..... 68
Description of Exchange Notes......... 70
Certain United States Federal Income
Tax Considerations.................. 105
Legal Matters......................... 105
Experts............................... 105
Available Information................. 105
Index to Financial Statements......... F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR 11% SENIOR DISCOUNT NOTES DUE
2014.
EACH BROKER-DEALER THAT RECEIVES NEW SECURITIES FOR ITS OWN ACCOUNT
PURSUANT TO THE EXCHANGE OFFER MUST ACKNOWLEDGE THAT IT WILL DELIVER A
PROSPECTUS IN CONNECTION WITH ANY RESALE OF THESE NEW SECURITIES. BY SO
ACKNOWLEDGING 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.
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 NEW SECURITIES RECEIVED IN
EXCHANGE FOR SECURITIES WHERE THOSE SECURITIES WERE ACQUIRED BY THIS
BROKER-DEALER AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING
ACTIVITIES. WE HAVE AGREED THAT, STARTING ON THE EXPIRATION DATE AND ENDING ON
THE CLOSE OF BUSINESS 180 DAYS AFTER THE EXPIRATION DATE, WE WILL MAKE THIS
PROSPECTUS AVAILABLE TO ANY BROKER-DEALER FOR USE IN CONNECTION WITH ANY SUCH
RESALE.
i
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
prospectus, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "should", "could",
"expect", "intend", "estimate", "anticipate", "believe" or "continue", "plan",
"potential", "predicts" or the negative thereof or variations thereon or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by any forward-looking statements. These risks and uncertainties
include, but are not limited to, the following:
- general economic and business conditions, both nationally and in those
areas in which we operate;
- competition;
- changes in our business strategy or plans;
- changes in exchange rates;
- the loss of any of our management or key personnel;
- changes in our policy regarding interest rate and currency movements;
- the availability and cost of raw materials; and
- the availability of capital and trade credit to fund our business.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
Important factors that could cause actual results to differ materially from
our expectations, or "cautionary statements," are disclosed under "Risk Factors"
and elsewhere in this prospectus, including, without limitation, in conjunction
with the forward-looking statements included in this prospectus. All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the
cautionary statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
INDUSTRY AND MARKET DATA
Industry and market data used throughout this prospectus were obtained
through surveys and studies conducted by third parties, industry and general
publications and internal company research. We have not independently verified
market and industry data from third-party sources. We believe internal company
estimates are reasonable and market definitions are appropriate. Neither such
estimates nor these definitions have been verified by any independent sources.
ii
PROSPECTUS SUMMARY
The following summary contains basic information about us and the
prospectus. It likely does not contain all the information that is important to
you. Because it is a summary, it does not contain all the information that you
should consider before tendering your Old Notes. We encourage you to read this
entire document and the documents we have referred you to. As used herein, "Town
Sports," the "Company," "we," "us," and "our" refer to Town Sports International
Holdings, Inc. ("TSI Holdings") and its subsidiaries and "TSI, Inc." refers to
Town Sports International, Inc. TSI Holdings is a holding company with no
material assets or operations other than its ownership of the common stock of
TSI, Inc., and was formed to serve as the issuer of the Old Notes.
OUR COMPANY
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 the third largest
fitness club operator in the United States, as measured by number of clubs. As
of December 31, 2003, we operated 129 clubs that collectively served
approximately 342,000 members. Our goal is to provide the premier health club
network in each of the major metropolitan regions we serve. To optimize
convenience to our members, we cluster clubs near the highest concentrations of
our target members' areas of both employment and residence. Our clusters of
clubs serve densely populated major metropolitan regions in which a high
percentage of the population commutes to work. Our target member is
college-educated, typically between the ages of 21 and 50 and earns an annual
income of between $50,000 and $150,000. Our revenues, operating income and cash
flows from operations for the year ended December 31, 2003 were $342.5 million,
$44.0 million and $58.3 million, respectively.
We are the largest fitness club operator in Manhattan with 36 locations
(more than twice as large as our nearest competitor) and have a total of 86
clubs under the New York Sports Clubs ("NYSC") brand name within the New York
metropolitan region. We operate 19 clubs in the Boston region and 15 clubs in
the Washington, D.C. region under our Boston Sports Club ("BSC") and Washington
Sports Club ("WSC") brand names, respectively, and have begun establishing a
similar cluster in the Philadelphia region with six clubs under our Philadelphia
Sports Club ("PSC") brand name. In addition, we operate three clubs in
Switzerland. We employ localized brand names for our clubs to create an image
and atmosphere consistent with the local community and to foster recognition as
a local network of quality fitness clubs rather than a national chain.
Over our 30-year operating history, we have developed and refined a model
club format that allows us to cost effectively construct and efficiently operate
our fitness clubs. Our model club ranges in size from approximately 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. Some clubs also feature additional
amenities, including swimming pools, squash or tennis courts and physical
therapy centers. Our locker rooms generally include a sauna and steam room. We
offer members a variety of other value-added services for which we receive
additional fees, including personal training, Group Exclusives, massage and
Sports Club for Kids.
THE TRANSACTIONS
TSI Holdings was formed to serve as issuer of the Old Notes.
In connection with the issuance of the Old Notes we redeemed our preferred
stock and paid a shareholder dividend to holders of our common stock.
We refer to these transactions, collectively, as the "transactions."
1
Our corporate structure immediately following the transactions is as
follows:
[FLOW CHART]
Our company is incorporated under the laws of the State of Delaware. 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
web site: www.mysportsclubs.com that provides information about club locations,
program offerings and on-line promotions. Information contained on this web
site, however, is not incorporated into or otherwise a part of this prospectus.
TSI, Inc. currently files periodic and other reports with the SEC.
Information filed with the SEC is available on the SEC website at
http://www.sec.gov. Such information, however, is not incorporated into or
otherwise a part of this prospectus.
PURPOSE OF THE EXCHANGE OFFER
On February 4, 2004, we sold, through a private placement exempt from the
registration requirements of the Securities Act, $213,000,000 of aggregate
principal amount at maturity of our 11% Senior Discount Notes due 2014. We refer
to these notes as "Old Notes" in this prospectus.
Simultaneously with the private placement, we entered into a registration
rights agreement with the initial purchaser of the Old Notes. Under the
registration rights agreement, we are required to use our best efforts to cause
a registration statement for substantially identical Notes, which will be issued
in exchange for the Old Notes, to become effective on or within 210 days of
issuance of the Old Notes. We refer to the notes to be registered under this
exchange offer registration statement as "New Notes" and collectively with the
Old Notes, we refer to them as the "Notes" in this prospectus. You may exchange
your Old Notes for New Notes in this exchange offer. You should read the
discussion under the headings "-- Summary of the Exchange Offer," "The Exchange
Offer" and "Description of the New Notes" for further information regarding the
New Notes.
2
We did not register the Old Notes under the Securities Act or any state
securities law, nor do we intend to after the exchange offer. As a result, the
Old Notes may only be transferred in limited circumstances under the securities
laws. If the holders of the Old Notes do not exchange their Old Notes in the
exchange offer, they lose their right to have the Old Notes registered under the
Securities Act, subject to certain limitations. Anyone who still holds Old Notes
after the exchange offer may be unable to resell their Old Notes.
However, we believe that holders of the New Notes may resell the New Notes
without complying with the registration and prospectus delivery provisions of
the Securities Act, if they meet certain conditions. You should read the
discussion under the headings "-- Summary of the Exchange Offer" and "The
Exchange Offer" for further information regarding the exchange offer and resales
of the New Notes.
3
SUMMARY OF THE EXCHANGE OFFER
THE INITIAL OFFERING OF OLD NOTES... We sold the Old Notes on January 28,
2004 to Deutsche Bank Securities. We
refer to Deutsche Bank Securities in
this prospectus as the "initial
purchaser." The initial purchaser
subsequently resold the Old Notes to
(1) qualified institutional buyers
pursuant to Rule 144A under the
Securities Act and (2) outside the
United States in accordance with
Regulation S under the Securities Act.
REGISTRATION RIGHTS AGREEMENT....... Simultaneously with the initial sale
of the outstanding securities, we
entered into a registration rights
agreement for the exchange offer. In
the registration rights agreement, we
agreed, among other things, (i) to
file a registration statement with the
SEC as soon as practicable after the
issuance of the Old Notes, but in no
event later than 120 days after the
issuance of the Old Notes and (ii) to
use our reasonable best efforts to
cause such registration statement to
be declared effective by the SEC at
the earliest possible time, but in no
event later than 210 days after the
issuance of the Old Notes. We also
agreed to use our reasonable best
efforts to cause the exchange offer to
be consummated on the earliest
practicable day after the registration
statement is declared effective, but
in no event later than 30 days after
the exchange registration statement is
declared effective, unless required by
the Securities Act or the Exchange
Act. The exchange offer is intended to
satisfy our obligations under the
registration rights agreement. After
the exchange offer is complete, you
will no longer be entitled to any
exchange or registration rights with
respect to your Old Notes.
THE EXCHANGE OFFER.................. We are offering the exchange Notes,
which are being registered under the
Securities Act, in exchange for your
Old Notes. To be exchanged, an Old
Note must be properly tendered and
accepted. All Old Notes that are
validly tendered and not validly
withdrawn will be exchanged. We will
issue New Notes promptly after the
expiration of the exchange offer.
RESALES............................. We believe that the New Notes issued
in the exchange offer may be offered
for resale, resold and otherwise
transferred by you without compliance
with the registration and prospectus
4
delivery provisions of the Securities
Act provided that:
- the New Notes are being
acquired in the ordinary course
of your business;
- you are not participating, do
not intend to participate, and
have no arrangement or
understanding with any person
to participate, in the
distribution of the New Notes
issued to you in the exchange
offer; and
- you are not an affiliate of
ours.
If any of these conditions are not
satisfied and you transfer any New
Notes issued to you in the exchange
offer without delivering a prospectus
meeting the requirements of the
Securities Act or without an exemption
from registration of your New Notes
from these requirements, you may incur
liability under the Securities Act. We
will not assume, nor will we indemnify
you against, any such liability.
Each broker-dealer that is issued New
Notes in the exchange offer for its
own account in exchange for Old Notes
that were acquired by that
broker-dealer as a result of
market-making or other trading
activities, must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of the New
Notes. A broker-dealer may use this
prospectus for an offer to resell,
resale or other retransfer of the New
Notes issued to it in the exchange
offer.
EXPIRATION DATE..................... The exchange offer will remain open
for at least 20 full business days and
will expire at 5:00 p.m., New York
City time, on , 2004, unless
we decide to extend the expiration
date.
CONDITIONS TO THE EXCHANGE OFFER.... The exchange offer is not subject to
any conditions other than that the
exchange offer not violate applicable
law or any applicable interpretation
of the staff of the SEC, that no
proceedings have been instituted or
threatened against us which would
impair our ability to proceed with the
exchange offer, and that we have
received all necessary governmental
approvals to proceed with the exchange
offer.
PROCEDURES FOR TENDERING OLD
NOTES............................... We issued the Old Notes as global
securities. When the Old Notes were
issued, we deposited the global
securities representing the Old Notes
with The Bank of New York, as
custodian for the Depository Trust
Company, known as DTC,
5
acting as book-entry depositary. The
Bank of New York issued a
certificateless depositary interest in
each global security we deposited with
it, which together represent a 100%
interest in the Old Notes, to DTC.
Beneficial interests in the Old Notes,
which are held by direct or indirect
participants in DTC through the
certificateless depositary interests,
are shown on records maintained in
book-entry form by DTC.
You may tender your Old Notes through
book-entry transfer in accordance with
DTC's Automated Tender Offer Program,
known as ATOP. To tender your Old
Notes by a means other than book-entry
transfer, a letter of transmittal must
be completed and signed according to
the instructions contained in the
letter of transmittal. The letter of
transmittal and any other documents
required by the letter of transmittal
must be delivered to the exchange
agent by mail, facsimile, hand
delivery or overnight carrier. In
addition, you must deliver the Old
Notes to the exchange agent or comply
with the procedures for guaranteed
delivery. See "The Exchange
Offer -- Procedures for Tendering Old
Notes" for more information.
Do not send letters of transmittal and
certificates representing Old Notes to
us. Send these documents only to the
exchange agent. See "The Exchange
Offer -- Exchange Agent" for more
information.
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.............................. If you are the beneficial owner of
book-entry interests and your name
does not appear on a security position
listing of DTC as the holder of the
book-entry interests or if you are a
beneficial owner of Old Notes that are
registered in the name of a broker,
dealer, commercial bank, trust company
or other nominee and you wish to
tender the book-entry interests or Old
Notes in the exchange offer, you
should contact the person in whose
name your book-entry interests or Old
Notes are registered promptly and
instruct that person to tender on your
behalf.
WITHDRAWAL RIGHTS................... You may withdraw the tender of your
Old Notes at any time prior to 5:00
p.m., New York City time on
, 2004, or a later time if
we choose to extend this exchange
offer. Any Old Notes not accepted by
us for exchange for any reason will be
returned to you at our expense
promptly after the expiration or
termination of the exchange offer.
6
FEDERAL INCOME TAX CONSIDERATIONS... The exchange of Old Notes will not be
a taxable event for United States
federal income tax purposes. See
"Certain United States Federal Income
Tax Considerations."
USE OF PROCEEDS..................... We will not receive any proceeds from
the issuance of the New Notes pursuant
to the exchange offer. We will pay all
of our expenses incident to the
exchange offer.
EXCHANGE AGENT...................... The Bank of New York is serving as the
exchange agent in connection with the
exchange offer.
7
THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes, except that the New Notes will be registered under the Securities
Act. As a result, the New Notes will not bear legends restricting their transfer
and will not contain the registration rights and liquidated damage provisions
contained in the Old Notes. The New Notes represent the same debt as the Old
Notes. The Old Notes and the New Notes are governed by the same indenture and
are together considered a "series" of securities under that indenture.
Issuer........................ Town Sports International Holdings, Inc.
The New Notes................. $213,000,000 principal amount at maturity of
11.00% Senior Discount Notes due 2014.
Maturity...................... February 1, 2014.
Interest...................... Prior to February 1, 2009, interest will accrue
on the Notes in the form of an increase in the
accreted value of such Notes. Thereafter, cash
interest on the Notes will accrue and be
payable semiannually in arrears on February 1
and August 1 of each year, commencing on August
1, 2009, at a rate of 11% per annum. The Notes
will have an initial accreted value of $585.95
per $1,000 principal amount at maturity of
Notes. The accreted value of each Note will
increase from the date of issuance until
February 1, 2009 at a rate of 11% per annum
compounded semi-annually, reflecting the
accrual of non-cash interest, such that on
February 1, 2009 the accreted value will equal
the principal amount at maturity.
Original Issue Discount....... Because the Old Notes were issued at a
substantial discount from their principal
amount, the New Notes should be treated as
being issued with substantial original issue
discount for United States federal income tax
purposes. Thus, although cash interest will not
be payable on the Notes prior to August 1,
2009, interest will accrue from the issue date
of the Notes based on the yield to maturity of
the Notes and will generally be included as
interest income (including for periods ending
prior to February 1, 2009) for U.S. federal
income tax purposes in advance of receipt of
the cash payments to which income is
attributable. See "Certain United States
Federal Income Tax Considerations."
Denominations................. $1,000 minimum and $1,000 integral multiples
thereof.
Ranking....................... The Notes will be our unsecured senior
obligations and will rank senior to all of our
existing and future subordinated debt and pari
passu to all of our existing and future senior
debt. The Notes will effectively rank junior to
any of our secured debt to the extent of the
value of the assets securing that debt. The
Notes will be structurally subordinated and
effectively rank junior to any debt of TSI,
Inc. As of December 31, 2003, TSI, Inc. had
$261.9 million of debt outstanding, excluding
approximately $48.3 million that, subject to
certain limitations, we had available to borrow
under our senior secured revolving credit
facility.
8
Optional Redemption........... We may redeem any of the Notes at any time on
or after February 1, 2009, in whole or in part,
in cash at the redemption prices described in
this prospectus, plus accrued and unpaid
interest and additional interest, if any, to
the date of redemption.
In addition, before February 1, 2007, we may
redeem up to 35% of the aggregate principal
amount at maturity of Notes with the net
proceeds of certain public equity offerings of
TSI Holdings. We may make that redemption only
if, after the redemption, at least 65% of the
aggregate principal amount of Notes remains
outstanding. See "Description of New
Notes -- Optional Redemption."
Change of Control............. Upon a change of control, we will be required
to make an offer to purchase each holder's
Notes at a price equal to 101% of the principal
amount at maturity thereof, plus accrued and
unpaid interest and additional interest, if
any, to the date of purchase. See "Description
of New Notes -- Repurchase at the Option of
Holders -- Change of Control."
Asset Sales................... We may have to use the net cash proceeds from
selling assets to offer to purchase your New
Notes at their face amount, plus accrued but
unpaid interest.
Covenants..................... The indenture governing the New Notes limits
what we (and most or all of our subsidiaries)
may do. The provisions of the indenture limits
our ability to:
- incur additional indebtedness;
- create certain liens;
- permit payment or dividend restrictions
on certain of our subsidiaries;
- pay dividends on, redeem or repurchase
our capital stock;
- make investments;
- sell assets;
- engage in transactions with affiliates;
and
- sell all or substantially all of our
assets or consolidate or merge with or
into other companies.
These covenants are subject to a number of
important exceptions.
Risk Factors.................. You should carefully consider all of the
information in this prospectus and, in
particular, you should evaluate the specific
risk factors set forth under "Risk Factors."
For more complete information about the Notes, see the "Description of New
Notes" section of this prospectus.
9
SUMMARY HISTORICAL AND OTHER CONSOLIDATED FINANCIAL DATA
Set forth below are the summary historical and other consolidated financial
data as of December 31, 2002 and 2003 and for the years ended December 31, 2001,
2002 and 2003 of TSI, Inc. The consolidated statement of operations data,
balance sheet data and other financial data for years ended December 31, 2001,
2002 and 2003 were derived from our audited consolidated financial statements
included elsewhere in this offering memorandum. The club and membership data,
for all periods presented, were derived from our unaudited books and records.
The information contained in this table should be read in conjunction with
"Selected Consolidated Financial and Other Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and accompanying notes thereto appearing elsewhere in this offering
memorandum. All amounts are presented in thousands except club and membership
data.
YEARS ENDED DECEMBER 31,
------------------------------
2001 2002 2003
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $281,633 $319,427 $342,541
Operating expenses.......................................... 252,677 281,334 298,576
Operating income............................................ 28,956 38,093 43,965
Interest expense, net of interest income.................... 14,527 16,421 23,226
Income tax provision........................................ 6,853 9,709 5,537
Income from continuing operations........................... 7,576 11,963 7,429
Net income.................................................. 7,046 10,507 7,429
AS OF DECEMBER 31,
-----------------------
2002 2003
------------ --------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,551 $ 40,802
Total assets................................................ 314,250 362,199
Long-term debt and capital lease obligations, including
current installments...................................... 160,943 261,877
Redeemable senior preferred stock........................... 62,125 --
Series A redeemable preferred stock......................... 34,841 39,890
Series B preferred stock.................................... 303 9,961
Stockholders' deficit....................................... (31,740) (34,294)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
OTHER DATA:
Non-cash rental lease expense, net
of non-cash income.............. $ 3,061 $ 2,976 $ 4,224 $ 1,670 $ 1,650
Cash provided by (used in):
Operating activities............ 29,496 40,573 44,348 50,805 58,253
Investing activities............ (55,078) (70,048) (58,358) (40,182) (42,734)
Financing activities............ 33,553 5,715 16,103 (10,530) 19,732
YEARS ENDED DECEMBER 31,
----------------------------
2001 2002 2003
------- -------- -------
CLUB AND MEMBERSHIP DATA:
Total clubs operated at end of period(1).................... 119 129 129
Members at end of period(2)................................. 317,000 342,000 342,000
Mature club revenue increase(3)............................. 12.3% 4.1% 1.6%
------------
(1) Includes all clubs wholly-owned or partly-owned and managed. (We operate two
partly-owned clubs under the Washington Sports Club brand name as of
December 31, 2003).
(2) Represents members at clubs wholly-owned or partly-owned and managed.
(3) We define mature clubs as those clubs operated by us for more than 24
months.
10
RISK FACTORS
You should carefully consider the following risk factors as well as the
other information and data included in this prospectus prior to making a
decision on whether to exchange your Old Notes for New Notes. The risks
described below are not the only risk facing us. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business operations. Any
of the following risks could materially adversely affect our business, financial
condition or results of operations. In such case, you may lose all or part of
your original investment.
RISK FACTORS RELATED TO THE NEW NOTES
Because there is no public market for the New Notes, you may not be able to
sell your New Notes.
The New Notes will be registered under the Securities Act, but will
constitute a new issue of securities with no established trading market, and
uncertainty exists with regard to:
- the liquidity of any trading market that may develop;
- the ability of holders to sell their New Notes; or
- the price at which the holders would be able to sell their New Notes.
If a trading market were to develop, the New Notes might trade at higher or
lower prices than their principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar securities
and our financial performance.
We understand that the initial purchaser presently intends to make a market
in the New Notes. However, it is not obligated to do so, and any market-making
activity with respect to the New Notes may be discontinued at any time without
notice. In addition, any market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act, and may be limited during
the exchange offer or the pendency of an applicable shelf registration
statement. An active trading market might not exist for the New Notes and any
trading market that does develop might not be liquid.
In addition, any holder of Old Notes who tenders in the exchange offer for
the purpose of participating in a distribution of the New Notes may be deemed to
have received restricted securities, and if so, will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Your Old Notes will not be accepted for exchange if you fail to follow the
exchange offer procedures.
We will issue New Notes pursuant to this exchange offer only after a timely
receipt of your Old Notes, a properly completed and duly executed letter of
transmittal and all other required documents. Therefore, if you want to tender
your Old Notes, please allow sufficient time to ensure timely delivery. If we do
not receive your Old Notes, letter of transmittal and other required documents
by the expiration date of the exchange offer, we will not accept your Old Notes
for exchange. We are under no duty to give notification of defects or
irregularities with respect to the tenders of Old Notes for exchange. If there
are defects or irregularities with respect to your tender of Old Notes, we will
not accept your Old Notes for exchange.
If you do not exchange your Old Notes, your Old Notes will continue to be
subject to the existing transfer restrictions and you may be unable to sell your
Old Notes.
We did not register the Old Notes, nor do we intend to do so following the
exchange offer. Old Notes that are not tendered will therefore continue to be
subject to the existing transfer restrictions and may be transferred only in
limited circumstances under the securities laws. If
11
you do not exchange your Old Notes, you will lose your right to have your Old
Notes registered under the federal securities laws. As a result, if you hold Old
Notes after the exchange offer, you may be unable to sell your Old Notes.
If a large number of outstanding Old Notes are exchanged for New Notes
issued in the exchange offer, it may be difficult for holders of outstanding Old
Notes that are not exchanged in the exchange offer to sell their Old Notes,
since those Old Notes may not be offered or sold unless they are registered or
there are exemptions from registration requirements under the Securities Act or
state laws that apply to them. In addition, if there are only a small number of
Old Notes outstanding, there may not be a very liquid market in those Old Notes.
There may be few investors that will purchase unregistered securities in which
there is not a liquid market.
If you exchange your Old Notes, you may not be able to resell the New Notes
you receive in the exchange offer without registering them and delivering a
prospectus.
You may not be able to resell New Notes you receive in the exchange offer
without registering those New Notes or delivering a prospectus. Based on
interpretations by the Commission in no-action letters, we believe, with respect
to New Notes issued in the exchange offer, that:
- holders who are not "affiliates" of TSI Holdings, Inc. within the meaning
of Rule 405 of the Securities Act;
- holders who acquire their New Notes in the ordinary course of business;
and
- holders who do not engage in, intend to engage in, or have arrangements
to participate in a distribution (within the meaning of the Securities
Act) of the New Notes;
do not have to comply with the registration and prospectus delivery requirements
of the Securities Act.
Holders described in the preceding sentence must tell us in writing at our
request that they meet these criteria. Holders that do not meet these criteria
could not rely on interpretations of the SEC in no-action letters, and would
have to register the New Notes they receive in the exchange offer and deliver a
prospectus for them. In addition, holders that are broker-dealers may be deemed
"underwriters" within the meaning of the Securities Act in connection with any
resale of New Notes acquired in the exchange offer. Holders that are
broker-dealers must acknowledge that they acquired their outstanding New Notes
in market-making activities or other trading activities and must deliver a
prospectus when they resell Notes they acquire in the exchange offer in order
not to be deemed an underwriter.
RISKS RELATED TO THE NOTES
Our substantial leverage may impair our financial condition and we may incur
significant additional debt.
We currently have, and after the issuance of the Notes will have, a
substantial amount of debt. As of December 31, 2003, after giving effect to this
offering, our total consolidated debt would have been $386.7 million. See
"Capitalization" for additional information.
Our substantial debt could have important consequences to you, including:
- making it more difficult for us to satisfy our obligations with respect
to the Notes;
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions of clubs and other
general corporate requirements;
12
- requiring a substantial portion of our cash flow from operations for the
payment of interest on our debt and reducing our ability to use our cash
flow to fund working capital, capital expenditures, acquisitions of new
clubs and general corporate requirements; and
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate.
These limitations and consequences may place us at a competitive disadvantage to
other less-leveraged competitors.
Subject to specified limitations, the indenture will permit us and our
subsidiaries to incur substantial additional debt. In addition, as of December
31, 2003, subject to certain limitations, we were able to borrow up to $50.0
million (less any standby letter of credit issuances) under our senior secured
revolving credit facility. If new debt is added to our and our subsidiaries'
current debt levels, the related risks that we and they now face could
intensify. See "Description of Other Indebtedness -- Senior Secured Revolving
Credit Facility" for additional information.
Servicing our debt will require a significant amount of cash, and our ability
to generate sufficient cash depends upon many factors, some of which are beyond
our control.
Our ability to make payments on and refinance our debt and to fund planned
capital expenditures depends on our ability to generate cash flow in the future.
To some extent, this is subject to general economic, financial, competitive,
legislative and regulatory factors and other factors that are beyond our
control. We may be unable to continue to generate cash flow from operations at
current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may have to refinance all or a
portion of our existing debt or obtain additional financing. We cannot assure
you that any refinancing of this kind would be possible or that any additional
financing could be obtained. The inability to obtain additional financing could
have a material adverse effect on our financial condition and on our ability to
meet our obligations to you under the Notes.
TSI Holdings is the sole obligor under the Notes. Its subsidiaries, including
TSI, Inc., do not guarantee TSI Holdings' obligations under the Notes and do
not have any obligation with respect to the Notes; the Notes are structurally
subordinated to the debt and liabilities of TSI Holdings' subsidiaries,
including TSI, Inc. and are effectively subordinated to any of our future
secured debt.
TSI Holdings has no operations of its own and derives all of its revenues
and cash flow from its subsidiaries. TSI Holdings' subsidiaries are separate and
distinct legal entities and have no obligation contingent or otherwise, to pay
amounts due under the Notes or to make any funds available to pay those amounts,
whether by dividend, distribution, loan or other payments.
The Notes are structurally subordinated to all debt and liabilities,
including trade payables, of TSI Holdings' subsidiaries, including TSI, Inc. You
are only entitled to participate with all other holders of the TSI Holdings'
indebtedness and liabilities in the assets of the TSI Holdings' subsidiaries
remaining after the TSI Holdings' subsidiaries have paid all of their debt and
liabilities. TSI Holdings' subsidiaries may not have sufficient funds or assets
to permit payments to TSI Holdings in amounts sufficient to permit TSI Holdings
to pay all or any portion of its indebtedness and other obligations, including
its obligations on the Notes. At December 31, 2003, the aggregate debt of TSI
Holdings' subsidiaries equaled $261.9 million and the aggregate amount of trade
payables, accrued liabilities and other balance sheet liabilities (other than
debt) of TSI Holdings' subsidiaries equaled $58.0 million. In addition, on
December 31, 2003, TSI, Inc. had $48.3 million of additional borrowings
available under its $50.0 million credit facility after giving effect to $1.7
million of outstanding letters of credit.
13
The indenture governing TSI, Inc.'s existing senior notes and TSI, Inc.'s
credit facility permit us and/or our subsidiaries to incur additional
indebtedness, including secured indebtedness, under certain circumstances. See
"Description of Other Indebtedness." If we incur any secured debt in the future,
holders of such secured debt will have claims that are prior to your claims as
holders of the Notes to the extent of the value of the assets securing that
other debt. In the event of a bankruptcy, liquidation or reorganization or
similar proceeding relating to us, holders of secured debt will have a prior
claim to the assets that constitute their collateral.
TSI Holdings may not have access to the cash flow and other assets of its
subsidiaries that may be needed to make payments on the Notes.
TSI Holdings' operations are conducted through its subsidiaries and its
ability to make payment on the Notes is dependent on the earnings and the
distribution of funds from its subsidiaries. However, none of its subsidiaries
is obligated to make funds available to TSI Holdings for payment on the Notes.
In addition, the terms of the indenture governing TSI, Inc.'s existing senior
notes and of TSI, Inc.'s credit facility significantly restrict TSI, Inc. and
its subsidiaries from paying dividends and otherwise transferring assets to TSI
Holdings. Furthermore, TSI Holdings' subsidiaries are permitted under the terms
of TSI, Inc.'s credit facility and other indebtedness (including under the
indenture) to incur additional indebtedness that may severely restrict or
prohibit the making of distributions, the payment of dividends or the making of
loans by such subsidiaries to TSI Holdings.
We cannot assure you that the agreements governing the current and future
indebtedness of TSI Holdings' subsidiaries will permit TSI Holdings'
subsidiaries to provide TSI, Inc. with sufficient dividends, distributions or
loans to fund scheduled interest and principal payments on the Notes when due.
See "Description of Indebtedness."
Original Issue Discount -- You will be required to include original issue
discount in your gross income for federal income tax purposes.
The Notes were issued at a substantial discount from their principal amount
at maturity. Although cash interest will not accrue on the Notes prior to
February 1, 2009, original issue discount (the difference between the stated
redemption price at maturity and the issue price of the Notes) will accrue from
the issue date of the Notes. Consequently, a holder of a Note will have income
for tax purposes arising from such original issue discount prior to the receipt
of cash in respect of such income. See "Certain U.S. Federal Income Tax
Considerations."
If a bankruptcy case is commenced by or against TSI Holdings under the
United States Bankruptcy Code, the claim of a holder of any of the Notes with
respect to the principal amount thereof may be limited to an amount equal to the
sum of:
- The initial offering price allocable to the Notes;
- That portion of the original issue discount which is not deemed to
constitute "unmatured interest" for purposes of the Bankruptcy Code; and
- Any original issue discount that was not amortized as of any such
bankruptcy filing would constitute "unmatured interest."
Covenant restrictions under our indebtedness may limit our ability to operate
our business and, in such an event, we may not have sufficient assets to pay
amounts due to you on the Notes.
The indenture governing the Notes and certain of our other agreements
regarding our indebtedness will contain, among other things, covenants that may
restrict our ability to finance future operations or capital needs or to engage
in other business activities. The indenture and
14
certain of our other agreements regarding our indebtedness will restrict, among
other things, our ability and the ability of our restricted subsidiaries to:
- borrow money;
- pay dividends or make distributions;
- purchase or redeem stock;
- make investments and extend credit;
- engage in transactions with affiliates;
- engage in sale-leaseback transactions;
- consummate certain asset sales;
- effect a consolidation or merger or sell, transfer, lease or otherwise
dispose of all or substantially all of our assets; and
- create liens on our assets.
In addition, our senior secured revolving credit facility requires us to
maintain specified financial ratios and satisfy certain financial condition
tests that may require that we take action to reduce our debt or to act in a
manner contrary to our business objectives. Events beyond our control, including
changes in general economic and business conditions, may affect our ability to
meet those financial ratios and financial condition tests. We may be unable to
meet those tests or that the lenders will waive any failure to meet those tests.
A breach of any of these covenants would result in a default under the
indenture, our senior secured revolving credit facility and the indenture
governing the senior notes issued by TSI, Inc. If an event of default under our
senior secured revolving credit facility occurs, the lenders could elect to
declare all amounts outstanding thereunder, together with accrued interest, to
be immediately due and payable. If an event of default occurs under the
indenture governing the senior notes issued by TSI, Inc., the noteholders could
elect to declare due all amounts outstanding thereunder, together with accrued
interest. If any such event should occur, we might not have sufficient assets to
pay amounts due on the Notes. As a result, you may receive less than the full
amount you would be otherwise entitled to receive on the Notes. See "Description
of Other Indebtedness--Senior Secured Revolving Credit Facility" and
"Description of Notes" for additional information.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture.
Upon a change of control, subject to certain conditions, we are required to
offer to repurchase all outstanding Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase.
The source of funds for that purchase of Notes will be our available cash
or cash generated from our subsidiaries' operations or other sources, including
borrowing, sales of assets or sales of equity. There might not be sufficient
funds available at the time of any change of control to make required
repurchases of Notes tendered. In addition, the terms of our senior secured
revolving credit facility limit our ability to purchase your Notes. Our future
debt agreements may contain similar restrictions and provisions. If the holders
of the Notes exercise their right to require us to repurchase all of the Notes
upon a change of control, the financial effect of this repurchase could cause a
default under our other indebtedness, even if the change of control itself would
not cause a default. Accordingly, it is possible that we will not have
sufficient funds at the time of the change of control to make the required
repurchase of Notes or that restrictions in the indenture, our senior secured
revolving credit facility and the indenture governing the senior notes issued by
TSI, Inc. will not allow such repurchases. See "Description of Notes--Change of
Control" and "Description of Other Indebtedness--Senior Secured Revolving Credit
Facility" for additional information.
15
Federal and state statutes allow courts, under specific circumstances, to void
the Notes and require noteholders to return payments received from us.
Under the federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, the Notes could be voided, or claims in respect of the
Notes could be subordinated to all of our other debts if, among other things,
we, at the time we incurred the indebtedness evidenced by the Notes:
- were insolvent or rendered insolvent by reason of such indebtedness; or
- were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital; or
- intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they mature.
In addition, any payment by us pursuant to the Notes could be voided and
required to be returned to us, or to a fund for the benefit of our creditors.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, we would be considered
insolvent if:
- the sum of our debts, including contingent liabilities, were greater than
the fair saleable value of all our assets, or
- if the present fair saleable value of our assets were less than the
amount that would be required to pay our probable liability on existing
debts, including contingent liabilities, as they become absolute and
mature, or
- we could not pay our debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that we, after giving effect to the indebtedness
incurred in the offering and the application of the proceeds therefrom, will not
be insolvent, will not have unreasonably small capital for the business in which
we are engaged and will not have incurred debts beyond our ability to pay such
debts as they mature. There can be no assurance, however, as to what standard a
court would apply in making such determinations or that a court would agree with
our conclusions in this regard.
RISK FACTORS RELATED TO THE COMPANY
We may experience losses in our recently opened greenfield clubs.
We have opened a total of 11 new club locations that we have constructed
(or greenfield clubs) in the last 24 months. Upon opening a greenfield club, we
typically experience an initial period of club operating losses. Although we
often pre-sell memberships, such enrollment typically generates insufficient
revenue for the club to generate positive cash flow. As a result, a greenfield
club typically generates an operating loss in its first full year of operation
and substantially lower margins in its second full year of operations than a
mature club. These operating losses and lower 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
membership levels in three to four years. We may, at our discretion, accelerate
or expand our plans to open new greenfield clubs, which may adversely affect
results from operations temporarily.
16
Our inability to acquire additional capital on acceptable terms to finance
future expansion would adversely impact our competitive position.
The opening of greenfield clubs and the acquisition of existing clubs
requires considerable capital. 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. We cannot assure you that financing will be available or that it
will be available on acceptable terms. The inability to finance 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, which 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 our clubs will not materially 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 harm to our reputation, a decline in
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, membership levels might not 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.
Our geographic concentration heightens our exposure to adverse regional
developments.
As of December 31, 2003, we operated 86 fitness clubs in the New York
metropolitan market, 19 fitness clubs in the Boston market, 15 fitness clubs in
the Washington, D.C. market, six fitness clubs in the Philadelphia market and
three 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. In Manhattan we have
experienced a 0.8% decline in our mature club revenue and a similar decline in
mature club memberships during the year ended December 31, 2003, each of which
we attribute to the general economic conditions in the markets we serve as well
as to the continuing effects of the events of September 11, 2001. Our geographic
concentration might result in a material adverse effect on our business,
financial condition or results of operations in the future.
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 might not be able to compete effectively in the future in the
markets in which we operate. Competitors, which may include companies that 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
17
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."
We could be subject to claims related to health or safety risks at our clubs.
Use of our clubs poses some potential health or safety risks to members or
guests through exertion and use of our services and facilities including
exercise equipment. Claims against us for death or injury suffered by members or
their guests while exercising at a club might be asserted. We might not be able
to successfully defend such claim. Additionally, we might not be able to
maintain our general liability insurance on acceptable terms in the future or
that such insurance will provide adequate coverage against potential claims. A
claim has been filed against us by an individual for injuries sustained at one
of our club locations for two billion dollars in damages for personal injuries.
"Business -- Legal Proceedings."
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, Chairman; Robert Giardina, Chief Executive Officer;
Richard Pyle, Chief Financial Officer; Alexander Alimanestianu, Chief
Development Officer and Randy Stephen, Chief Operating Officer. 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 may not be able to attract and
retain sufficient qualified personnel to meet our business needs. See
"Management -- Directors and Executive Officers."
The interests of our controlling shareholder may be in conflict with your
interests as a holder of Notes.
Bruckmann, Rosser, Sherrill & Co., L.P. and certain of its affiliates
(collectively "BRS") own approximately 36.6% of our common stock on a fully
diluted basis and has 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 BRS, as our shareholder, in pursuing
acquisitions or otherwise, could be in conflict with the interests of the
holders of the Notes. See "Security Ownership and Certain Beneficial Owners" and
"Certain Relationships and Related Transactions."
We are subject to extensive government regulation and changes in these
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 that 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."
18
The occurrence of extraordinary events, such as war in Iraq or elsewhere may
increase the likelihood of a major terrorist attack in the United States, which
may adversely affect our clubs, resulting in a decrease in our revenues.
The United States is currently engaged in a military action in Iraq. Such
military action may increase the likelihood of another major terrorist attack in
the United States. Our geographic concentration in the major cities in the
Northeast and Mid-Atlantic regions and, in particular, the New York and
Washington, D.C. areas, heightens our exposure to such future terrorist attacks,
which may adversely affect our clubs and result in a decrease in our revenues.
Future terrorist attacks cannot be predicted, and their occurrence can be
expected to further negatively affect the United States economy generally, and
specifically the regional markets in which we operate.
19
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
Simultaneously with the sale of the Old Notes, we entered into a
registration rights agreement with Deutsche Bank. In the registration rights
agreement, we agreed, among other things, (i) to file a registration statement
with the SEC as soon as practicable after the issuance of the Old Notes, but in
no event later than 120 days after the issuance of the Old Notes and (ii) to use
our reasonable best efforts to cause such registration statement to be declared
effective by the SEC at the earliest possible time, but in no event later than
210 days after the issuance of the Old Notes. We also agreed to use our best
efforts to cause the exchange offer to be consummated on the earliest
practicable day after the registration statement is declared effective, but in
no event later than 30 days after the exchange registration statement is
declared effective, unless required by the Securities Act or the Exchange Act. A
copy of the registration rights agreement has been filed as an exhibit herewith.
We are conducting the exchange offer to satisfy our contractual obligations
under the registration rights agreement. The form and terms of the New Notes are
the same as the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act, and holders of the New Notes will not be
entitled to the payment of any additional amounts pursuant to the terms of the
registration rights agreement, as described below.
The registration rights agreements provides that, promptly after the
registration statement has been declared effective, we will offer to holders of
the Old Notes the opportunity to exchange their existing Notes for New Notes
having a principal amount, interest rate, maturity date and other terms
substantially identical to the principal amount, interest rate, maturity date
and other terms of their Old Notes. We will keep the exchange offer open for at
least 30 days (or longer if we are required to by applicable law) after the date
notice of the exchange offer is mailed to the holders of the Old Notes and use
our reasonable best efforts to complete the exchange offer no later than 30 days
after the exchange registration statement is declared effective. The New Notes
will be accepted for clearance through the DTC, Clearstream, Luxembourg and the
Euroclear System with a new CUSIP and ISIN number and common code. All of the
documentation prepared in connection with the exchange offer will be made
available at the offices of The Bank of New York, our exchange agent.
Based on existing interpretations of the Securities Act by the staff of the
SEC, we believe that the holders of the New Notes (other than holders who are
broker-dealers) may freely offer, sell and transfer the New Notes. However,
holders of Old Notes who are our affiliates, who intend to participate in the
exchange offer for the purpose of distributing the New Notes, or who are
broker-dealers who purchased the Old Notes from us for resale, may not freely
offer, sell or transfer the Old Notes, may not participate in the exchange offer
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any offer, sale or transfer of Old Notes.
Each holder of Old Notes who is eligible to and wishes to participate in
the exchange offer will be required to represent that it is not our affiliate,
that it is not a broker-dealer tendering securities directly acquired from us
for its own account and that it acquired the Old Notes and will acquire the New
Notes in the ordinary course of its business and that it has no arrangement with
any person to participate in the distribution of the New Notes. In addition, any
broker-dealer who acquired the Old Notes for its own account as a result of
market-making or other trading activities must deliver a prospectus (which may
be the prospectus contained in the registration statement if the broker-dealer
is not reselling an unsold allotment of Old Notes) meeting the requirements of
the Securities Act in connection with any resales of the New Notes. We will
agree to provide sufficient copies of the latest version of such prospectus to
such broker-dealers, if subject to similar prospectus delivery requirements for
a period ending
20
on the earlier of (i) 180 days from the date on which the exchange offer is
consummated (ii) the date on which a broker-dealer is no longer required to
deliver a prospectus in connection with market-making or other trading
activities.
If,
(i) we are not permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy; or
(ii) any Holder of Transfer Restricted Securities notifies us prior to the
20th day following consummation of the exchange offer that (a) it is prohibited
by law or Commission policy from participating in the Exchange Offer; (b) that
it may not resell the New Notes acquired by it in the exchange offer to the
public without delivering a prospectus and this prospectus is not appropriate or
available for such resales; or (c) that it is a broker-dealer and owns Old Notes
acquired directly from the Issuer or an affiliate of the Issuer,
then we shall promptly deliver to the holders and the trustee written
notice thereof, or give notice and shall file a shelf registration covering the
resale of the affected securities within 120 days after the shelf notice is
given to the holders and shall use our reasonable best efforts to cause the
shelf registration to be effective under the Securities Act on or prior to the
210th day after the shelf notice is given.
We will use our reasonable best efforts to keep effective the shelf
registration statement until the earlier of (i) two years following the
effective date of the initial shelf registration statement or (ii) the time when
all of the securities have been sold thereunder or are no longer restricted
securities.
In the event that a shelf registration statement is filed, we will provide
to each affected holder copies of the prospectus that is a part of the shelf
registration statement, notify each affected holder when the shelf registration
statement has become effective and take certain other actions as are required to
permit unrestricted resales of the securities. A holder that sells securities
pursuant to the shelf registration statement will be required to be named as a
selling security holder in the prospectus and to deliver a prospectus to
purchasers. A selling holder will also be subject to certain of the civil
liability provisions under the Securities Act in connection with sales and will
be bound by the provisions of the registration rights agreement that are
applicable to it, including certain indemnification rights and obligations.
If we are permitted under SEC rules to conduct the exchange offer and we
have not filed an exchange offer registration statement or a shelf registration
statement by a specified date, if the exchange offer registration statement or
the shelf registration statement is not declared effective by a specified date,
or if either we have not consummated the exchange offer within a specified
period of time or, if applicable, we do not keep the shelf registration
statement effective from a specified period of time, then, in addition to the
interest otherwise payable on the Notes, the interest that is accrued and
payable on the principal amount of the Old Notes will increase at a rate of
0.25% per annum with respect to each subsequent 90-day period until the
requirement is satisfied, up to a additional maximum amount of interest of 1.0%
per annum. Upon the filing of the registration statement, the effectiveness of
the exchange offer registration statement, the consummation of the exchange
offer or the effectiveness of the shelf registration statement, as the case may
be, the additional interest will cease to accrue from the date of filing,
effectiveness or consummation, as the case may be.
If a registration statement is declared effective and we fail to keep it
continuously effective or useable for resales for the period required by the
registration rights agreement, then from the day that the registration statement
ceases to be effective until the earlier of the date that the registration
statement is again deemed effective or is useable, the date that is the second
anniversary of our issuance of these securities (or, if Rule 144(k) under the
Securities Act is
21
amended to provide a shorter restrictive period, the shorter period) or the date
as of which all of the applicable securities are sold pursuant to the shelf
registration statement, the interest that is accrued and payable on the
principal amount of the existing Notes will increase at a rate of 0.25% per
annum with respect to each subsequent 90-day period until the requirement is
satisfied, up to a maximum amount of additional interest of 1.0% per annum.
Any additional amounts will be payable in cash on February 1 and August 1
of each year to the holders of record on the preceding February 1 and August 1,
respectively.
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 Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. We will issue $1,000 principal amount of
New Notes in exchange for each $1,000 principal amount of Old Notes accepted in
the exchange offer. Holders may tender some or all of their Old Notes pursuant
to the exchange offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the existing Notes except that:
(i) the New Notes bear a series B designation and a different CUSIP number
from the Old Notes;
(ii) the New Notes have been registered under the Securities Act and will
therefore not bear legends restricting their transfer; and
(iii) the holders of the New Notes will be deemed to have agreed to be
bound by the provisions of the registration rights agreement and each security
will bear a legend to that effect.
The New Notes will evidence the same debt as the outstanding securities and
will be entitled to the benefits of the indenture.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporations Law, or the indenture in connection with the
exchange offer. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
SEC.
We will be deemed to have accepted validly tendered Old Notes when, as and
if we have given oral or written notice of our acceptance to the exchange agent.
The exchange agent will act as agent for the tendering holders for the purpose
of receiving the New Notes from us.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of specified other events set forth in this
prospectus or otherwise, the certificates for any unaccepted Old Notes will be
returned, without expense, to the tendering holder as promptly as practicable
after the expiration date of the exchange offer.
Holders who tender Old 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 Old Notes
pursuant to the exchange offer. 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 exchange offer will remain open for at least 20 full business days. The
term "expiration date" will mean 5:00 p.m., New York City time, on ,
2004, unless we, in our sole
22
discretion, extend the exchange offer, in which case the term "expiration date"
will mean the latest date and time to which the exchange offer is extended.
To extend the exchange offer, prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date, we will:
(1) notify the exchange agent of any extension by oral notice (promptly
confirmed in writing) or written notice, and
(2) mail to the registered holders an announcement of any extension.
We reserve the right, in our sole discretion,
(1) if any of the conditions below under the heading "-- Conditions" shall
have not been satisfied,
(A) to delay accepting any Old Notes,
(B) to extend the exchange offer, or
(C) to terminate the exchange offer, or
(2) to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders. We will give oral notice (promptly confirmed in writing) or written
notice of any delay, extension or termination to the exchange agent.
PROCEDURES FOR TENDERING OLD NOTES
Only a holder of Old Notes may tender Old 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 of the
letter of transmittal;
- have the signatures on the letter of transmittal guaranteed if required
by the letter of transmittal or transmit an agent's message in connection
with a book-entry transfer; and
- mail or otherwise deliver the letter of transmittal or the facsimile,
together with the Old Notes and any other required documents, to be
received by the exchange agent prior to 5:00 p.m., New York City time, on
the expiration date.
To tender Old Notes effectively, the holder must complete a letter of
transmittal or an agent's message and other required documents and the exchange
agent must receive all the documents prior to 5:00 p.m., New York City time, on
the expiration date. Delivery of the Old Notes shall be made by book-entry
transfer in accordance with the procedures described below. Confirmation of the
book-entry transfer must be received by the exchange agent prior to the
expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that the book-entry transfer facility
has received an express acknowledgment from the participant in the book-entry
transfer facility tendering the outstanding securities that the participant has
received and agrees:
(1) to participate in ATOP;
(2) to be bound by the terms of the letter of transmittal; and
(3) that we may enforce the agreement against the participant.
23
By executing the letter of transmittal, each holder will make to us the
representations set forth above in the fifth paragraph under the heading See
"-- Purpose of the Exchange Offer."
The tender by a holder and the acceptance of the tender by us will
constitute agreement between the holder and us in accordance with the terms and
subject to the conditions set forth in this prospectus and in the letter of
transmittal or agent's message.
The method of delivery of the existing Notes and the letter of transmittal
or agent's message and all other required documents to the exchange agent is
that 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 Old 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 them.
Any beneficial owner whose Old 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 the
registered holder to tender on the beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the letter of transmittal.
An institution that is a member firm of the Medallion system must guarantee
signatures on a letter of transmittal or a notice of withdrawal unless the Old
Notes are tendered:
(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 a member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the
registered holder of any existing Notes listed in that letter of transmittal,
the Old Notes must be endorsed or accompanied by a properly completed bond
power, signed by the registered holder as the registered holder's name appears
on the Old Notes. An institution that is a member firm of the Medallion System
must guarantee the signature.
If the letter of transmittal or any Old 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, the
person signing should so indicate when signing, and evidence satisfactory to us
of its 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
outstanding securities at DTC for the purpose of facilitating the exchange
offer, and subject to the establishment of this account, any financial
institution that is a participant in DTC's system may make book-entry delivery
of outstanding securities by causing DTC to transfer the Old Notes into the
exchange agent's account with respect to the Old Notes in accordance with DTC's
procedures for the transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the exchange agent's account at DTC, unless an
agent's message is received by the exchange agent in compliance with ATOP, 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 the procedures. Delivery of documents to DTC does not constitute
delivery to the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by us in our sole
24
discretion, which determination will be final and binding. We reserve the
absolute right to reject any and all Old Notes not properly tendered or any
existing Notes our acceptance of which 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 Old 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 Old Notes must be cured within the time we determine. Although we intend to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither we, the exchange agent nor any other person will incur any
liability for failure to give the notification. Tenders of Old Notes will not be
deemed to have been made until the defects or irregularities have been cured or
waived. Any Old 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 outstanding securities and:
(1) whose Old Notes are not immediately available;
(2) who cannot deliver their Old 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. they tender through an institution that is a member firm of the
Medallion System;
2. prior to the expiration date, the exchange agent receives from an
institution that is a member firm of the Medallion System a properly completed
and duly executed notice of guaranteed delivery by facsimile transmission, mail
or hand delivery setting forth the name and address of the holder, the
certificate number(s) of the Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made and guaranteeing that, within
three New York Stock Exchange trading days after the expiration date, the letter
of transmittal or facsimile thereof together with the certificate(s)
representing the Old Notes or a confirmation of book-entry transfer of the Old
Notes into the exchange agent's account at DTC, and any other documents required
by the letter of transmittal will be deposited by the member firm of the
Medallion System with the exchange agent; and
3. the exchange agent receives
(A) such properly completed and executed letter of transmittal or facsimile
of the letter of transmittal,
(B) the certificate(s) representing all tendered Old Notes in proper form
for transfer or a confirmation of book-entry transfer of the Old Notes into the
exchange agent's account at DTC, and
(C) all other documents required by the letter of transmittal
upon three New York Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, we will send a notice of guaranteed
delivery to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
25
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders may withdraw
tenders of Old Notes at any time prior to 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of Old Notes in the exchange offer, the
exchange agent must receive a letter or facsimile transmission notice of
withdrawal at its address set forth in this prospectus prior to 5:00 p.m., New
York City time, on the expiration date of the exchange offer. Any notice of
withdrawal must:
(1) specify the name of the person having deposited the Old Notes to be
withdrawn;
(2) identify the Old Notes to be withdrawn, including the certificate
number(s) and principal amount of the Old Notes, or, in the case of Old Notes
transferred by book-entry transfer, the name and number of the account at DTC to
be credited;
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the Old Notes were tendered, including any
required signature guarantees, or be accompanied by documents of transfer
sufficient to have the trustee with respect to the Old Notes register the
transfer of the Old Notes into the name of the person withdrawing the tender;
and
(4) specify the name in which any Old Notes are to be registered, if
different from that of the person depositing the Old Notes to be withdrawn.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of such notices. Our determination will be final and
binding on all parties. We will not deem Old Notes so withdrawn to have been
validly tendered for purposes of the exchange offer. We will not issue New Notes
for withdrawn Old Notes unless you validly retender the withdrawn Old Notes. We
will return any Old Notes which have been tendered but which are not accepted
for exchange to the holder of the Old Notes at our cost as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer. You
may retender properly withdrawn Old Notes by following one of the procedures
described above under "-- Procedures for Tendering Old Notes" at any time prior
to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or issue New Notes for, any Old Notes, and may
terminate or amend the exchange offer as provided in this prospectus before the
acceptance of the Old 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 development has occurred in any existing action or
proceeding which may be harmful to us or any of our subsidiaries; or
(2) the exchange offer violates any applicable law or any applicable
interpretation by the staff of the SEC; or
(3) any governmental approval has not been obtained, which we believe, in
our sole discretion, is necessary for the consummation of the exchange offer as
outlined in this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may
(1) refuse to accept any Old Notes and return all tendered Old Notes to the
tendering holders;
26
(2) extend the exchange offer and retain all Old Notes tendered prior to
the expiration of the exchange offer, subject, however, to the rights of holders
to withdraw their Old Notes (see "-- Withdrawal of Tenders"; or
(3) waive the unsatisfied conditions with respect to the exchange offer and
accept all properly tendered Old Notes that have not been withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as the exchange agent for the
exchange offer. You should direct all
- executed letters of transmittal,
- questions,
- requests for assistance,
- requests for additional copies of this prospectus or of the letter of
transmittal, and
- requests for Notices of Guaranteed Delivery,
to the exchange agent at the following address:
THE BANK OF NEW YORK
BY OVERNIGHT COURIER OR
BY FACSIMILE: BY HAND: REGISTERED/CERTIFIED MAIL:
------------- ----------------------------- -----------------------------
(212) 298-1915 Attention: 101 Barclay Street, 7 East 101 Barclay Street, 7 East
Customer Service New York, New York 10286 New York, New York 10286
Attention: Corporate Trust Attention: Corporate Trust
Operations Reorganization Operations Reorganization
Unit Unit
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telephone or in person by our and our affiliates' officers and regular
employees.
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 will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses incurred in connection with these services.
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 New Notes will be recorded at the same carrying value as the Old Notes,
which is the accreted value, as reflected in our accounting records on the date
of exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes as a result of the exchange offer. The expenses of the exchange offer
will be deferred and charged to expense over the term of the New Notes.
27
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. However, holders who
instruct us to register New 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 a registered tendering holder will be responsible for the payment of any
applicable transfer tax on that transfer.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the exchange
offer will remain restricted securities. Accordingly, the Old Notes may be
resold only:
(1) to us upon redemption thereof or otherwise;
(2) so long as the outstanding securities are eligible for resale pursuant
to Rule 144A, to a person inside the United States who 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, which other exemption is 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.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the SEC set forth in no-action letters issued to third parties, we believe
that a holder or other person who receives New Notes, whether or not the person
is the holder (other than a person that is our affiliate within the meaning of
Rule 405 under the Securities Act) in exchange for Old 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 New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the exchange offer for the purpose of distributing or
participating in a distribution of the New Notes, the holder cannot rely on the
position of the staff of the SEC expressed in the 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 New Notes for its own
account in exchange for Old Notes, where the Old Notes were acquired by the
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 the New Notes.
28
THE TRANSACTIONS
TSI Holdings is a holding company with no material assets or operations
other than its ownership of the common stock of TSI, Inc. and was formed to
serve as issuer of the Old Notes.
In connection with, and as a condition to, the offering of the Old Notes,
we consummated the following transactions, which we refer to as the
"transactions."
PAYMENT OF DIVIDEND TO HOLDERS OF OUR COMMON STOCK
We made a payment of dividends to holders of our common stock in an
aggregate amount of $68.9 million.
REDEMPTION OF PREFERRED STOCK
We redeemed all of our issued and outstanding shares of preferred stock,
then held by BRS, Farallon Capital Partners, L.P. and certain of its affiliates,
Rosewood Capital, L.P. and certain of its affiliates and certain of our
directors in an aggregate amount of $50.6 million. See "Security Ownership and
Certain Beneficial Owners."
29
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the New Notes. In consideration for issuing the New Notes
contemplated in this prospectus, we will receive outstanding securities in like
principal amount, the form and terms of which are the same as the form and terms
of the New Notes, except as otherwise described in this prospectus. The old
Notes surrendered in exchange for New Notes will be retired and canceled.
Accordingly, no additional debt will result from the exchange. We have agreed to
bear the expense of the exchange offer.
The gross proceeds from the sale of the Old Notes were approximately
$124,807. We used the net proceeds, together with funds from borrowings under
our new credit facility, as follows (all amounts presented in thousands):
USES:
Redeem preferred stock...................................... $ 50,634
Shareholder dividend(1)..................................... 68,405
Employee bonus in lieu of dividend(2)....................... 1,090
Transaction fees and expenses............................... 4,316
General corporate purposes.................................. 362
--------
Total uses.................................................. $124,807
========
------------
(1) The total dividend amount is shown net of $526 of stock option exercise
proceeds received.
(2) Employees with vested stock options as of the dividend payment date, were
paid bonuses in amounts equivalent to the dividend they would have received
had they exercised and been a common shareholder.
30
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of December 31, 2003 on an actual basis and as adjusted to
reflect the transactions. This table should be read in conjunction with our
consolidated financial statements and the related notes to the consolidated
financial statements included elsewhere in this offering memorandum.
All amounts presented in thousands.
AS OF DECEMBER 31, 2003
------------------------
ACTUAL AS ADJUSTED
--------- ------------
Cash and cash equivalents................................... $ 40,802 $ 41,947(1)
======== =========
Debt:
Senior secured revolving credit facility.................. $ -- $ --(2)
Notes payable for acquired businesses..................... 4,358 4,358
Capitalized lease obligations............................. 2,519 2,519
Existing senior notes..................................... 255,000 255,000
Senior discount notes offered hereby, net of discount..... -- 124,807
-------- ---------
Total debt.................................................. 261,877 386,684
Series A redeemable preferred stock......................... 39,890 --
Total shareholders' deficit(3).............................. (34,294) (113,750)
-------- ---------
Total capitalization...................................... $267,473 $ 272,934
======== =========
------------
(1) The increase of as adjusted cash and cash equivalents reflects expected cash
outflows associated with $783 of accretion of our preferred stock for
periods subsequent to December 31, 2003 and $362 of cash maintained for
general business purposes. See "Use of Proceeds."
(2) Does not reflect $50,000 in revolving credit loans and letters of credit
available under our senior secured revolving credit facility.
(3) As of December 31, 2003 actual total shareholders' deficit includes $10,000
of Series B preferred stock.
31
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT CLUB AND MEMBERSHIP DATA)
Set forth below is TSI, Inc.'s selected historical consolidated financial,
other operating data and club and membership data as of the dates and for the
periods presented. The selected historical consolidated statement of operations
data for the years ended December 31, 2001, 2002, and 2003 and the selected
historical consolidated balance sheet data as of December 31, 2002 and 2003,
were derived from the audited Consolidated Financial Statements, which are
included herein. The selected historical consolidated statement of operations
data for the year ended December 31, 1999 and 2000 and the selected historical
consolidated balance sheet data as of December 31, 1999, 2000 and 2001 were
derived from our audited consolidated financial statements of the Company, which
are not included herein. 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 thereto appearing
elsewhere herein.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $158,184 $223,828 $281,633 $319,427 $342,541
Operating expenses:
Payroll and related............................... 63,838 90,801 112,766 129,105 130,585
Club operating.................................... 52,048 68,806 88,941 99,113 111,069
General and administrative........................ 10,797 14,626 18,785 21,368 21,995
Depreciation and amortization(1).................. 20,513 26,248 32,185 31,748 34,927
-------- -------- -------- -------- --------
Operating income.................................... 10,988 23,347 28,956 38,093 43,965
Loss on extinguishment of debt(2)................... -- -- -- -- 7,773
Interest expense, net of interest income............ 10,243 13,120 14,527 16,421 23,226
-------- -------- -------- -------- --------
Income from continuing operations before provision
for corporate income tax.......................... 745 10,227 14,429 21,672 12,966
Provision for corporate income tax.................. 622 5,031 6,853 9,709 5,537
-------- -------- -------- -------- --------
Income from continuing operations................... 123 5,196 7,576 11,963 7,429
Loss from discontinued operations of closed clubs(3)
(including loss on club closure of $996 in 2002),
net of income taxes............................... (74) (365) (530) (767) --
Cumulative effect of a change in accounting
principle, net of income tax
benefit of $612(4)................................ -- -- -- (689) --
-------- -------- -------- -------- --------
Net income 49 4,831 7,046 10,507 7,429
Accreted dividends on preferred stock............... (7,880) (9,016) (10,201) (11,543) (10,984)
-------- -------- -------- -------- --------
Net loss attributable to common stockholders........ $ (7,831) $ (4,185) $ (3,155) $ (1,036) $ (3,555)
======== ======== ======== ======== ========
OTHER DATA:
Non-cash rental lease expense, net of non-cash
income............................................ $ 3,061 $ 2,976 $ 4,224 $ 1,670 $ 1,650
Cash provided by (used in):
Operating activities.............................. 29,496 40,573 44,348 50,805 58,253
Investing activities.............................. (55,078) (70,048) (58,358) (40,182) (42,734)
Financing activities.............................. 33,553 5,715 16,103 (10,530) 19,732
CLUB AND MEMBERSHIP DATA:
New clubs opened(5)................................. 14 9 12 8 3
Clubs acquired(5)................................... 4 11 2 4 --
Closed, relocated or sold clubs..................... (1) (1) -- (2) (3)
Wholly-owned clubs operated at
end of period(5).................................. 82 103 117 127 127
Total clubs operated at end of period(6)............ 86 105 119 129 129
Members at end of period(7)......................... 203,000 278,000 317,000 342,000 342,000
Mature club revenue increase(8)..................... 16.0% 18.6% 12.3% 4.1% 1.6%
32
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Revenue per weighted average club
(in thousands)(9)................................. $ 2,130 $ 2,428 $ 2,619 $ 2,606 $ 2,691
Ratio of earnings to fixed charges(10).............. 1.0:1.0 1.4:1.0 1.5:1.0 1.7:1.0 1.3:1.0
Pro forma ratio of earnings to fixed charges(11).... 1.0:1.0
AS OF DECEMBER 31,
----------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital deficit(12)......................... $ (1,015) $(38,414) $(42,565) $(43,192) $ (9,087)
Total assets........................................ 215,678 256,085 296,005 314,250 362,199
Long-term debt, including current installments...... 132,202 144,498 163,979 160,943 261,877
Redeemable senior preferred stock................... 42,066 48,029 54,687 62,125 --
Redeemable Series A preferred stock(13)............. 23,216 26,580 30,432 34,841 39,890
Total stockholders' deficit(13)..................... $(28,813) $(30,491) $(32,797) $(31,740) $(34,294)
------------
(1) Effective January 1, 2002 we implemented Statement of Financial Accounting
Standards ("SFAS") No. 142 No. 142 ("SFAS 142"), Goodwill and Other
Intangible Assets. In connection with this implementation we no longer
amortize goodwill, but rather test it for impairment when circumstances
indicate it is necessary, and at a minimum annually. A reconciliation of
reported net income to net income adjusted for the impact of SFAS 142 is as
follows for the presented periods:
YEAR ENDED DECEMBER 31,
---------------------------
1999 2000 2001
------- ------- -------
Net income as reported...................................... $ 49 $ 4,831 $ 7,046
Goodwill amortization....................................... 2,845 3,545 4,436
Deferred tax benefit........................................ (1,195) (1,064) (1,344)
------- ------- -------
Net income as adjusted...................................... $ 1,699 $ 7,312 $10,138
======= ======= =======
(2) The $7.8 million loss on extinguishment of debt recorded in 2003 is a
result of the refinancing of our debt on April 16, 2003. In connection with
this refinancing, we wrote-off $3.7 million of deferred financing costs
related to extinguished debt, paid a $3.0 million call premium, and
incurred $1.0 million of additional interest on the 9 3/4% old Notes
representing interest incurred during the 30 day redemption notification
period.
(3) In the fourth quarter of 2002, we closed or sold two remote
underperforming, wholly-owned clubs. In connection with the closure of one
of the clubs, we recorded club closure costs of $996 related to the
write-off fixed assets. We have accounted for these two clubs as
discontinued operations and, accordingly, the results of their operations
have been classified as discontinued in the Consolidated Statement of
Operations and prior periods have been reclassified in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets To Be
Disposed Of.
Loss from operations of these discontinued clubs was as follows for the
periods presented:
YEAR ENDED DECEMBER 31,
-------------------------------
1999 2000 2001 2002
----- ----- ----- -------
Loss from operations of discontinued clubs, (including loss
of club closure of $996 in 2002).......................... $(125) $(597) $(894) $(1,318)
Benefit for corporate income tax............................ (51) (232) (364) (551)
----- ----- ----- -------
Loss from discontinued operations........................... $ (74) $(365) $(530) $ (767)
===== ===== ===== =======
(4) Effective January 1, 2002 we implemented SFAS 142. In connection with the
SFAS 142 transitional impairment test we recorded a $1.3 million write-off
of goodwill. A deferred tax benefit of $612 was recorded as a result of
this goodwill write-off, resulting in a net cumulative effect of change in
accounting principle of $689 in 2002. The write-off of goodwill related to
four, remote underperforming clubs. The impairment test was performed with
discounted estimated future cash flows as the criteria for determining fair
market value. The impairment loss recorded was measured by comparing the
carrying value to the fair value of goodwill.
(5) During 2000, we acquired two formerly partly-owned clubs and relocated one
club on expiration of lease.
(6) Includes wholly-owned or partly-owned and managed clubs.
(7) Represents members at wholly-owned or partly-owned clubs.
(8) We define mature clubs as those clubs operated by us for more than 24
months.
33
(9) Revenue per weighted average club is calculated as total revenue divided by
the product of the total numbers of clubs and their weighted average months
in operation as a percentage of the total year.
(10) For purposes of determining the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before provisions
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).
(11) Pro forma ratio reflects the issuance of the Old Notes and the use of
proceeds thereof as if they had occurred on the first day of the relevant
period.
(12) Working capital deficit is calculated as current assets less current
liabilities. We normally operate with a working capital deficit because we
receive dues or fee revenue either (i) during the month services are
rendered, or (ii) when paid-in-full in advance. As a result, we have no
material accounts receivable, and record a deferred revenue liability for
membership or ancillary services billed in advance. We also record deferred
revenue liability, because initiation fees are received at enrollment and
are deferred and recognized over the estimated average term of a
membership.
(13) We had 153,637 shares of Series A Redeemable Preferred Stock ("Series A")
outstanding at December 31, 1999, 2000, 2001, 2002 and 2003. We have
reclassified our 2001 financial statements to account for a redemption
feature included in the Series A stock, in accordance with the guidance in
EITF Topic No. D-98: Classification and Measurement of Redeemable
Securities ("EITF Topic No. D-98"). EITF Topic No. D-98 provided additional
guidance on the appropriate classification of redeemable preferred stock
upon the occurrence of an event that is not solely within the control of an
issuer. EITF Topic No. D-98 requires retroactive application in the first
fiscal quarter ending after December 15, 2001 by reclassifying the
financial statements of prior periods. The carrying value of the Series A
stock, which was previously presented as a component of stockholders'
deficit, has been reclassified as redeemable preferred stock outside of
stockholders' deficit. The reclassification of the 2001 financial
statements for the Series A stock had no effect on our net income, net loss
attributable to common stockholders', cash flow provided by operations or
total assets. The following sets forth the overall effect of the
reclassification on our stockholders' deficit:
AS OF DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Stockholders' deficit prior to reclassification............. $ (5,597) $ (3,911) $ (2,365)
Reclassification of Series A stock.......................... (23,216) (26,580) (30,432)
-------- -------- --------
Stockholders' deficit after the reclassification............ $(28,813) $(30,491) $(32,797)
======== ======== ========
The balance sheet data for all periods presented have been adjusted to
reflect the above reclassification.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus are forward-looking statements,
including, without limitation, statements regarding future financial results and
performance, potential sales revenue, legal contingencies and tax benefits.
These statements are subject to various risks and uncertainties, many of which
are outside of our control, including the level of market demand for our
services, competitive pressures, the ability to achieve reductions in operating
costs and to continue to integrate acquisitions, environmental matters, the
application of Federal and state tax laws and regulations, and other specific
factors discussed herein and in other Securities and Exchange Commission filings
by us. The information contained herein represents management's best judgement
as of the date hereof based on or as to information currently available;
however, we do not intend to update this except as required by law, information
to reflect development or information obtained after the date hereof and
disclaim any legal obligation to the contrary.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial and Other 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.
OVERVIEW
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 December 31,
2003, we operated 129 clubs that collectively served approximately 342,000
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.
Our target member is college-educated, typically between the ages of 21 and 50
and has an annual income of between $50,000 and $150,000.
Our goal is to develop the premier health club network in each of the major
metropolitan regions we enter. We believe that clustering clubs allows us to
achieve strategic operating advantages that enhance our ability to achieve this
goal. In entering new regions, we develop these clusters by initially opening or
acquiring clubs located in the more central urban markets of the region and then
branching out from these urban centers to suburbs and ancillary communities.
Capitalizing on this clustering of clubs, as of December 31, 2003, approximately
52% of our members participated in a membership plan that allows unlimited
access to all of our clubs for a higher membership fee.
We have executed this strategy successfully in the New York region through
the network of clubs we operate under our NYSC brand name. We are the largest
fitness club operator in Manhattan with 36 locations and operate a total of 86
clubs under the NYSC name within a defined radius of New York City. We operate
19 clubs in the Boston region, 15 clubs in the Washington D.C. region under our
BSC and WSC brand names respectively and have begun establishing a similar
cluster in the Philadelphia region with six clubs under is PSC brand name. In
addition we operate three clubs in Switzerland. Our goal is to increase our club
count by ten percent per year. In 2003, we slowed our club expansion plans and
maintained our club count at 129 while we recapitalized the company to position
it for future growth. While we maintained our club count at 129 in 2003 we plan
to open or acquire 12 clubs in 2004. 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.
Our operating and selling expenses are comprised of both fixed and variable
costs. The fixed costs 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 improve.
During the last several years, we have increased revenues, operating
income, net income, and cash flows provided by operating activities by expanding
our club base in New York, Boston, Washington, DC, and Philadelphia. As a result
of expanding our club base and the relatively fixed nature of our operating
costs, our operating income has increased from $11.0 million for the year ended
December 31, 1999 to $44.0 million for the year ended December 31, 2003. Net
income improved from $49,000 in 1999 to $7.4 million for the year ended December
31, 2003. Cash flows provided by operating activities increased from
35
$29.5 million in 1999 to $58.3 million for the year ended December 31, 2003. We
expect growth in revenues and operating income to continue as the 29 clubs
opened or acquired since the beginning of 2001 continue to mature. Based on our
historical experience, a new club tends to experience 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 and operating income of these 29 clubs will
increase as they mature. As a result of our expansion, however, operating income
margins may be negatively impacted in the near term, as further new clubs are
added.
HISTORICAL CLUB GROWTH
YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Clubs at beginning of period.......................... 69 86 105 119 129
Greenfield clubs(1)................................... 14 9 12 8 3
Acquired clubs........................................ 4 11 2 4 --
Sold, relocated or closed clubs....................... (1) (1) -- (2) (3)
-- --- --- --- ---
Clubs at end of period(2)............................. 86 105 119 129 129
== === === === ===
Number of partly owned clubs included at the end of
period(3)........................................... 4 2 2 2 2
---------------
(1) A "Greenfield club" is a new location constructed by us.
(2) We include in the club count wholly owned and partly owned clubs. In
addition, as of December 31, 2003 we managed two additional clubs in which
we did not have an equity stake.
(3) In March 2000, two clubs previously managed by us were purchased. Including
these two clubs, the total number of clubs opened or acquired in 2000 totals
22.
MATURE CLUB REVENUE
We define mature clubs as those clubs that were operated by us for the
entire period of the period presented and that same entire period of the
preceeding year. Under this definition, mature clubs for periods shown are those
clubs that were operated for more than 24 months. Our mature club revenue
increased 16.0%, 18.6%, 12.3%, 4.1%, and 1.6% for the years ended December 31,
1999, 2000, 2001, 2002 and 2003, respectively. We believe the decline in mature
club revenue growth has been driven primarily by general economic softness,
particularly in the New York metropolitan region. We have also seen increases in
competition throughout our markets and this has depressed revenue growth at
select mature clubs throughout our chain. In addition, we believe that the
decline in mature club revenue growth is also attributable to the increasing age
of our mature clubs.
36
Results of Operations
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------
2001 2002 2003
------ ------ ------
Revenues.................................................. 100.0% 100.0% 100.0%
Operating expenses:
Payroll and related..................................... 40.0 40.4 38.1
Club operating.......................................... 31.6 31.1 32.5
General and administrative.............................. 6.7 6.7 6.4
Depreciation and amortization........................... 11.4 9.9 10.2
----- ----- -----
Operating income........................................ 10.3 11.9 12.8
Loss on extinguishment of debt............................ -- -- 2.2
Interest expense.......................................... 5.3 5.1 6.8
Interest income........................................... (0.1) -- --
----- ----- -----
Income from continuing operations before provision for
corporate income taxes............................... 5.1 6.8 3.8
Provision for corporate income taxes...................... 2.4 3.1 1.6
----- ----- -----
Income from continuing operations......................... 2.7 3.7 2.2
Loss from discontinued operations of closed clubs, net of
income tax.............................................. (0.2) (0.2) --
Cumulative effect of a change in accounting principle, net
of income tax........................................... -- (0.2) --
----- ----- -----
Net income................................................ 2.5 3.3 2.2
Accreted dividends on preferred stock..................... (3.6) (3.6) (3.2)
----- ----- -----
Net loss attributable to common stockholders.............. (1.1)% (0.3)% (1.0)%
===== ===== =====
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Revenues. Revenues increased $23.1 million or 7.2%, to $342.5 million
during 2003 from $319.4 million in 2002. This increase resulted from the 12
clubs opened or acquired in 2002 (approximately $14.8 million), and the three
clubs opened in 2003 (approximately $3.1 million). In addition, revenues
increased during 2003 by approximately $4.9 million or 1.6% at our mature clubs
(clubs owned and operated for at least 24 months). In 2003 we received $2.8
million of insurance proceeds related to our business interruption insurance
settlement; a $1.8 million increase over the $1.0 million received in 2002.
These increases were offset by a $1.7 million decrease in revenue related to
three clubs we relocated in 2003.
Our mature club revenue increased 12.3%, 4.1% and 1.6% for the years ended
December 31, 2001, 2002 and 2003, respectively. We believe the decline in mature
club revenue growth had been driven primarily by the general economic climate,
particularly in the New York metropolitan region. We have also seen increases in
competition throughout our markets and this has depressed revenue growth at
select mature clubs throughout our chain. In addition, we believe that the
decline in mature club revenue growth is also attributable to the increasing age
of our mature clubs.
Operating Expenses. Operating expenses increased $17.2 million, or 6.1% to
$298.6 million in 2003, from $281.3 million in 2002. This increase was due to a
3.3% increase in the total months of club operations to 1,528 in 2003 from 1,479
in 2002. The increase is also attributable to increases in club operating costs,
particularly occupancy costs and utilities.
37
Payroll and related expenses increased by $1.5 million, or 1.1% to $130.6
million in 2003, from $129.1 million in 2002. This increase was partially offset
by a $1.0 million decrease in non-cash compensation expense which decreased from
$1.2 million in 2002 to $197,000 in 2003. The non-cash compensation expense
incurred during 2002 principally related to outstanding Series B stock options
and such options were exercised in the first quarter of 2003.
Club operating increased by $12.0 million, or 12.1% to $111.1 million in
2003, from $99.1 million in 2002. This increase is attributable to a 3.3%
increase in the total months of club operations to 1,528 in 2003 from 1,479 in
2002. The increase is also attributable to a $2.4 million or 20.6% increase in
utilities and a $7.6 million or 13.8% increase in occupancy costs. Occupancy
costs increased due to increases in real estate taxes as well as increases in
base rent associated with the opening of three flagship locations and several
club expansions.
General and administrative increased by $627,000, or 2.9% to $22.0 million
in 2003, from $21.4 million in 2002. This increase is principally attributable
to a $369,000 increase in liability and property insurance, as well as increases
in information technology maintenance and related costs.
Depreciation and amortization increased by $3.2 million or 10.0% to $34.9
million in 2003, from $31.7 million in 2002. This increase is principally due to
a full year of depreciation and amortization for fixed asset additions,
acquisitions or club openings in 2002. The increase is also attributable to
depreciation related to the three clubs opened in 2003 as well as depreciation
related to 2003 expansions and renovations.
Loss on Extinguishment of Debt. The $7.8 million loss on extinguishment of
debt recorded in 2003 is a result of the refinancing of our debt on April 16,
2003. In connection with this refinancing, we wrote-off $3.7 million of deferred
financing costs related to extinguished debt, paid a $3.0 million call premium,
and incurred $1.0 million of additional interest on the 9 3/4% old Notes
representing interest incurred during the 30 day redemption notification period.
Interest Expense. Interest expense increased $7.1 million to $23.7 million
in 2003 from $16.6 million in 2002. Interest expense increased $8.8 million due
to the refinancing of our Senior Notes as discussed in Financing Activities.
This increase was partially offset by decreases in interest on credit line and
subordinated credit line borrowings, which were completely repaid on April 16,
2003 in connection with the refinancing.
Interest Income. Interest income increased $306,000 to $444,000 in 2003
from $138,000 in 2002. This increase is due to increases in cash balances in
2003 compared to 2002.
Provision for Corporate Income Taxes. The provision for corporate income
taxes decreased $4.2 million from $9.7 million in 2002 to $5.5 million in 2003.
Our effective tax rate decreased to 42.7% in 2003 from 44.8% in 2002 principally
due to decreases in the effective New York State and New York City rates. With
the exception of deferred tax assets of $384,000 related to certain state net
operating loss carry-forwards, which have been reserved for, we expect future
taxable income to be sufficient to realize the $16.8 million of net deferred tax
assets.
Accreted Dividends on Preferred Stock. Accreted dividends on the Preferred
Stock decreased $559,000 to $11.0 million in 2003, from $11.5 million in 2002.
Accreted dividends on Series A preferred stock increased $640,000 due to the
compounding of accreted and unpaid dividends, and accreted dividends on the
Series B preferred stock increased $1.1 million due to the increase in shares
outstanding. These increases were offset by a $2.3 million decrease in
redeemable senior preferred stock dividends. The redeemable senior preferred
stock was redeemed in April 2003 and no dividends were accreted thereafter.
38
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues increased $37.8 million or 13.4%, to $319.4 million
during 2002 from $281.6 million in 2001. This increase resulted from the 14
clubs opened or acquired in 2001 (approximately $17.0 million), and the 12 clubs
opened or acquired in 2002 (approximately $9.1 million). In addition, revenues
increased during 2002 by approximately $11.1 million or 4.1% at our mature clubs
(clubs owned and operated for at least 24 months). The mature club revenue
increase is attributable to a 1.6% increase in membership, a 2.2% increase in
dues, and a 0.3% increase in ancillary revenues.
Our mature club revenue increased 18.6%, 12.3% and 4.1% for the years ended
December 31, 2000, 2001 and 2002, respectively. We believe the decline in mature
club revenue growth had been driven primarily by the general economic climate,
particularly in the New York metropolitan region, which has had an industry-wide
effect. In addition, we believe that the decline in mature club revenue growth
is also attributable to the increasing age of our mature clubs.
Operating Expenses. Operating expenses increased $28.6 million, or 11.3%
to $281.3 million in 2002, from $252.7 million in 2001. This increase was due to
a 13.9% increase in total months of club operations to 1,479 in 2002 from 1,298
in 2001. This increase was partially offset by a $437,000 decrease in
depreciation and amortization from 2001 to 2002. In accordance with SFAS 142 as
of January 1, 2002 goodwill is no longer being amortized.
Payroll and related expenses increased by $16.3 million, or 14.4% to $129.1
million in 2002, from $112.8 million in 2001. This increase was primarily
attributable to the acquisition or opening of 12 clubs in 2002 and a full year
of operating the 14 clubs opened or acquired in 2001. This increase was also
attributable to an increase in health and workers' compensation insurance, and
payroll associated with fee-for-service programs.
Club operating increased by $10.2 million, or 11.4% to $99.1 million in
2002, from $88.9 million in 2001. This increase is primarily attributable to the
acquisition or opening of 12 clubs in 2002 and the additional expenses
attributable to operating the 14 clubs opened or acquired in 2001.
General and administrative increased by $2.6 million, or 13.8% to $21.4
million in 2002, from $18.8 million in 2001. This increase is principally
attributable to a $1.3 million increase in liability and property insurance, and
increases attributable to expenses associated with our expansion, including the
enhancement of our management communication and information systems.
Depreciation and amortization decreased by $437,000, or 1.4% to $31.7
million in 2002, from $32.2 million in 2001. A $2.3 million and a $1.6 million
increase in depreciation and amortization expenses related to clubs opened or
acquired in 2001 and 2002, respectively, and was offset by a $4.3 million
decrease in goodwill amortization expense.
Interest Expense. Interest expense increased $1.6 million to $16.6 million
in 2002 from $14.9 million in 2001, primarily as a result of an increase in
subordinated credit borrowings associated with our club base expansion.
Interest Income. Interest income decreased $253,000 to $138,000 in 2002
from $391,000 in 2001. This decrease is due to lower interest rates earned on
cash balances in 2002 as compared to 2001.
Provision for Corporate Income Taxes. The provision for corporate income
taxes increased $2.8 million from $6.9 million in 2001 to $9.7 million in 2002.
Our effective tax rate decreased to 44.8% in 2002 from 47.5% in 2001. This
decrease is due to a decrease in goodwill amortization which was not deductible
for taxes. With the exception of deferred tax assets of $384,000 related to
certain state net operating loss carry-forwards, which have been reserved
39
for, we expect future taxable income to be sufficient to realize the $20.3
million of net deferred tax assets.
Discontinued Operations. In the fourth quarter of 2002, we sold or closed
two remote, underperforming, wholly-owned clubs. In connection with the closure
of one of the clubs we recorded club closure costs of $996 related to the
write-off of fixed assets. We have accounted for these two clubs as discontinued
operations and, accordingly, the results of their operations have been
classified as discontinued in the Consolidated Statement of Operations, and
prior periods have been reclassified in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of.
Revenue and pre-tax losses for these discontinued clubs were $1.7 million
and $894,000 in 2001, and $1.6 million and $322,000 in 2002, respectively.
Cumulative Effect of a Change in Accounting Principle. In connection with
the implementation of SFAS 142 we recorded a goodwill write-off of $1.3 million
in the first quarter of 2002. A deferred tax benefit of $612,000 was recorded in
connection with this goodwill write-off, resulting in a net cumulative effect of
a change in accounting principle of $689,000.
Accreted Dividends on Preferred Stock. Accreted dividends on the Preferred
Stock increased $1.3 million to $11.5 million in 2002, from $10.2 million in
2001. This increase is due to the compounding of accreted dividends.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. 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
year ended December 31, 2003 was $58.3 million compared to $50.8 million for the
year ended December 31, 2002. Cash flows from operations have improved with our
increase in operating income, and in addition, because of the favorable impact
of management's exercise of stock options in 2003, which provided us with a
current tax deduction of approximately $8.6 million.
Investing Activities. We invested $42.7 million and $40.2 million in
capital expenditures and asset acquisitions during the years ended December 31,
2003 and 2002, respectively, primarily as a result of our expansion efforts. Our
capital expenditures are net of landlord contributions of $617,000 and $3.5
million respectively for the years ended December 31, 2003 and 2002. We estimate
that for the year ended December 31, 2004, we will invest an additional $60.0
million in capital expenditures, which includes $7.2 million that management
intends to invest to expand and renovate certain existing clubs, $14.5 million
to maintain existing clubs and to maintain our management information systems,
and $2.0 million to further upgrade our management information system. The
remainder of our 2004 capital expenditures will be to build or acquire clubs.
This $60.0 million in expenditures will be funded by cash flow provided by
operations and available cash on hand.
Financing Activities. On April 16, 2003 we successfully completed a
refinancing of our debt. This refinancing included an offering of $255.0 million
of 9 5/8% Senior Notes ("Existing Notes") that will mature April 15, 2011, and
the entering into of a new $50.0 million senior secured revolving credit
facility (the "Senior Credit Facility") that will expire April 15, 2008. The
Existing Notes accrue interest at 9 5/8% per annum and interest is payable
semiannually on April 15, and October 15. In connection with this refinancing,
we wrote-off $3.7 million of deferred financing costs related to extinguished
debt, paid a call premium of $3.0 million and incurred $1.0 million of interest
on the 9 3/4% Notes representing the interest incurred during the
40
30 day redemption notification period. The uses of proceeds from the Note
offering were as follows:
($000'S)
--------
Redemption of existing 9 3/4% Senior Notes, principal and
interest.................................................. $126,049
Call premium on existing 9 3/4% Senior Notes................ 3,048
Redemption of senior preferred stock, at liquidation
value..................................................... 66,977
Repayment of line of credit principal borrowings and
interest.................................................. 4,013
Repayment of subordinated credit principal borrowings and
interest.................................................. 9,060
Underwriting fees and other closing costs................... 9,578
Available for general corporate purposes.................... 36,275
--------
Total use of funds.......................................... $255,000
========
We currently have a substantial amount of debt. As of December 31, 2003,
our total consolidated debt is $261.9 million. Our substantial debt could have
significant consequences, including:
- Making it more difficult to satisfy our obligations;
- Increasing our vulnerability to general adverse economic and industry
conditions;
- Limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions of new clubs and
other general corporate requirements;
- Requiring a substantial portion of our cash flow from operations for the
payment of interest on our debt and reducing our ability to use our cash
flow to fund working capital, capital expenditures, acquisitions of new
clubs and general corporate requirements; and
- Limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate.
These limitations and consequences may place us at a competitive
disadvantage to other less-leveraged competitors.
Net cash used in financing activities was $19.7 million for the year ended
December 31, 2003 compared to net cash provided by financing activities of $10.5
million for the same period in 2002 and compared to $16.1 million for the same
period in 2001.
As of December 31, 2003, TSI, Inc. had $255.0 million of Senior Notes
outstanding. The Senior Notes bear interest at a rate of 9 5/8% and mature in
2011. Under the provisions of the Senior Note Indenture, TSI, Inc. may not issue
additional Senior Notes without modification of the indenture with the
bondholders' consent. Our line of credit with our principal bank provides for
direct borrowings and letters of credit of up to $50.0 million. The line of
credit carries interest at our option based upon the Eurodollar borrowing rate
plus 4.0% or the bank's prime rate plus 3.0% as defined, and we are required to
pay a commitment fee of 0.75% per annum on the daily unutilized amount. As of
December 31, 2003, no borrowings were outstanding under this line. As of
December 31, 2003 outstanding letters of credit totaled $1.7 million. As of
December 31, 2003, we had approximately $48.3 million available under the line
of credit, which matures in April 2008, and has no scheduled amortization
requirements. As of December 31, 2003 we also had $40.8 million of cash on hand.
The line of credit contains restrictive covenants including a leverage
ratio and interest coverage ratio and dividend payment restrictions and is
collateralized by all the assets of the Company. As of December 31, 2003 our Net
Leverage Ratio, and Net Interest Coverage Ratio as defined by the terms of the
line of credit agreement are 3.3 and 3.2 to 1.0, respectively. Our ability to
incur additional debt is limited by the terms of the line of credit facility in
that the Net Leverage Ratio, as defined, cannot exceed 4.0 to 1.0 and the Net
Interest Coverage Ratio must
41
be greater than 2.25 to 1.0. Our common stock is not publicly traded and
therefore our ability to raise equity financing is not as readily available as
it is for companies that have publicly traded common stock.
We believe that we have or will be able to obtain or generate sufficient
funds to finance our current operating and growth plans through the end of 2007,
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 2007. There can be no assurance that such financing will be available, or
that it will be available on acceptable terms. The line of credit accrues
interest at variable rates based on market conditions, accordingly, future
increases in interest rates could have a negative impact on net income.
Notes payable were incurred upon the acquisition of various clubs and are
subject to the right of offset for possible post acquisition adjustments arising
out of operations of the acquired clubs. These notes bear interest at rates
between 5% and 9%, and are non-collateralized. The notes are due on various
dates through 2012.
CONTRACTUAL AND COMMERCIAL COMMITMENTS SUMMARY
The aggregate long-term debt, capital lease, operating lease, and
Redeemable Preferred Stock Obligations as of December 31, 2003 were as follows:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----------------------- -------- --------- --------- --------- --------
Long-Term Debt(1)................... $259,358 $ 1,191 $ 1,451 $ 849 $255,867
Capital Lease Obligations(2)........ 2,519 2,295 224 -- --
Operating Lease Obligations(3)...... 620,953 50,976 103,159 96,987 369,831
Redeemable Preferred Stock(4)....... 39,890 39,890 -- -- --
-------- ------- -------- ------- --------
Total Contractual Cash
Obligations....................... $922,720 $94,352 $104,834 $97,836 $625,698
======== ======= ======== ======= ========
---------------
Notes:
(1) The long-term debt contractual cash obligations include principal payment
requirements only. Interest on our 9 5/8% Senior Notes amounts to $24.5
million annually.
(2) Capital lease obligations represent principal and interest payments.
(3) Operating lease obligations include base rent only. Certain leases provide
for additional rent based on increases in real estate tax indexation,
utilities, and defined amounts based on the operating results of the lessee.
(4) The redeemable preferred stock was redeemed in February 2004 and therefore
has been included as due in less than one year.
LEGAL PROCEEDINGS
On February 13, 2003, an individual filed suit against us in the Supreme
Court, New York County, alleging that on January 14, 2003, he sustained an
injury at one of our club locations resulting in serious bodily injury. He filed
an amended complaint on September 17, 2003 seeking two billion dollars in
damages for personal injuries. His cause of action seeking punitive damages in
the amount of two hundred and fifty million dollars was dismissed on January 26,
2004. We have in force fifty one million dollars of insurance coverage to cover
claims of this nature. We intend to vigorously contest this lawsuit and
presently anticipate that these matters will be covered by insurance.
42
EFFECT ON RECENT CHANGES IN ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 requires a variable interest
entity, or VIE, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the VIE's activities or is entitled to receive
a majority of the entity's residual return or both. Interpretation No. 46 also
provides criteria for determining whether an entity is a VIE subject to
consolidation. Interpretation No. 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. In December 2003, a modification to Interpretation No. 46 was
issued (Interpretation No. 46R) which delayed the effective date until no later
than fiscal periods ending after March 31, 2004 and provided additional
technical clarifications to implementation issues. The Company does not
currently have any variable interest entities as defined in Interpretation No.
46R. The Company does not expect that the adoption of this statement will have a
material impact on the consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity (FAS
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. FAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. As of December 31, 2003 the
Company does not have financial instruments within the scope of this
pronouncement.
43
SEPTEMBER 11, 2001 EVENTS
The terrorist attacks of September 11, 2001 ("the September 11 events"),
resulted in a tremendous loss of life and property. Secondarily, those events
interrupted the operations at four of our clubs located in downtown Manhattan.
Three of the affected four clubs were back on operation by October 2001, while
the fourth club reopened in September 2002.
We carry business interruption insurance to mitigate certain lost revenue
and profits experienced with the September 11 events. In this regard in the
third quarter of 2001 a $175,000 insurance receivable was recorded representing
an estimate of costs incurred in September 2001. Such costs included rent,
payroll benefits, and other club operating costs incurred during period of
closure. In 2002, we collected this $175,000 receivable and received additional
on-account payments of $1.0 million. In 2003, we received $2.8 million from our
insurer and we entered into a final settlement agreement. These on-account and
final payments were classified with fees and other revenues when received.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 allocation and
fair value ascribed to assets acquired in connection with the acquisition of
clubs under the purchase method of accounting, the useful lives, recoverability
and impairment of fixed and intangible assets, deferred income tax valuation,
valuation of, and expense incurred in connection with stock options and
warrants, legal contingencies and the estimated membership life.
Our one-time member initiation fees and related direct expenses are
deferred, and recognized, on a straight-line basis, in operations over an
estimated membership life of 24 months. This estimated membership life has been
derived from actual membership retention experienced by us. Although the average
membership life approximated 24 months over each of the past several years, this
estimated life could increase or decrease in future periods. Consequently, the
amount of initiation fees and direct expenses deferred by us would increase or
decrease in similar proportion.
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 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. The costs related to
developing web applications, developing HTML web pages and installing developed
applications on the web servers are capitalized and classified as computer
software. Web site hosting fees and maintenance costs are expensed as incurred.
Long-lived assets, such as fixed assets, goodwill and intangible assets are
reviewed for impairment when events or circumstances indicate that the 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.
44
Actual cash flows realized could differ from those estimated and could result in
asset impairments in the future.
Effective January 1, 2002, we implemented SFAS 142. There were no changes
to the estimated useful lives of amortizable intangible assets due to the SFAS
142 implementation. In connection with the SFAS 142 transition impairment test
we recorded a $1.3 million write-off of goodwill. A deferred tax benefit of
$612,000 was recorded as a result of this goodwill write-off, resulting in a net
cumulative effect of change in accounting principle of $689,000, in the first
quarter of 2002. The write-off of goodwill related to four, remote
underperforming clubs. The impairment test was performed with discounted
estimated future cash flows as the criteria for determining fair market value.
Goodwill has been allocated to reporting units that closely reflect the regions
served by our four trade names; New York Sports Club, Boston Sports Club,
Washington Sports Club and Philadelphia Sports Club, with certain more remote
clubs that do not benefit from a regional cluster being considered single
reporting units. In 2003, the Company did not have to record a charge to
earnings for an impairment of goodwill as a result of its annual review
conducted during the first quarter.
As of December 31, 2003 our net deferred tax assets totaled $16.8 million.
These net assets represent cumulative net "temporary differences" that will
result in tax deductions in future years. The realizability of these assets
greatly depends on our ability to generate sufficient future taxable income. Our
pre-tax profit was $13.5 million, $20.4 million and $13.0 million, and current
tax liabilities were $11.0 million, $10.3 million and $2.1 million for the years
ended December 31, 2001, 2002 and 2003, respectively. Because there is currently
no evidence we will not continue to be profitable, the weight of available
evidence indicates we will be able to realize these net deferred tax assets. If
at some time in the future the weight of available evidence does not support the
realizability of a portion of, or the entire net deferred tax assets, the
write-down of this asset could have a significant impact on our financial
statements.
INFLATION
Although we cannot accurately anticipate the effect of inflation on our
operations, we believe that inflation has not had, and is not likely in the
foreseeable future to have, a material impact on our results of operations.
45
BUSINESS
OUR COMPANY
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 December 31,
2003, we owned and operated 127 fitness clubs and partly owned and operated two
fitness clubs. These 129 clubs collectively served approximately 342,000
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.
Our target member is college-educated, typically between the ages of 21 and 50
and earns an annual income between $50,000 and $150,000.
Our goal is to develop the premier health club network in each of the major
metropolitan regions we serve. We believe that clustering clubs allows us to
achieve strategic operating advantages that enhance our ability to achieve this
goal. When entering new regions, we develop clusters by initially opening or
acquiring clubs located in the more central urban markets of the region and then
branching out from these urban centers to suburbs and ancillary communities.
Capitalizing on this clustering of clubs, as of December 31, 2003, approximately
52% of our members participated in a membership plan that allows unlimited
access to all of our clubs for a higher membership fee.
We have executed this strategy successfully in the New York region through
the network of fitness clubs we operate under our New York Sports Club ("NYSC")
brand name. We are the largest fitness club operator in Manhattan with 36
locations and operate a total of 86 clubs under the NYSC name within a defined
radius of New York City. We operate 19 clubs in the Boston region and 15 clubs
in the Washington, DC region under our Boston Sports Club ("BSC") and Washington
Sports Club ("WSC") brand names, respectively and have begun establishing a
similar cluster in the Philadelphia region with six clubs under our Philadelphia
Sports Club ("PSC") brand name. In addition, we operate three clubs in
Switzerland. We employ localized brand names for our clubs to create an image
and atmosphere consistent with the local community and to foster recognition as
a regional network of quality fitness clubs rather than a national chain.
We sell month-to-month membership payment plans that are generally
cancelable by our members at any time with 30 days notice. Effective October,
2003 we also began to sell one and two year commit memberships at a discount to
the month-to-month non-commit membership plan. The one year commit membership is
typically the same monthly rate, which is paid monthly as the month-to-month
plan but with a discounted initiation fee, and the two year commit memberships
are typically at a 10% discount to the month-to-month plan also with a
discounted initiation fee. As of December 31, 2003, approximately 81% of our
members had a month-to-month non-commit membership plan. We believe members
prefer to have the choice to commit for a year or two at a discount to the
month-to-month plan or to have the flexibility of the month-to-month non-commit
plan.
We have experienced significant growth over the past several years through
a combination of (i) acquiring existing, privately owned, single and multi-club
businesses, and (ii) developing and opening "greenfield" club locations (a
greenfield club is a new location we have constructed). From January 1, 1999, to
December 31, 2003, we acquired 21 existing clubs, opened 46 greenfield clubs,
relocated five clubs, sold one club, and closed one club to increase our total
clubs under operation from 69 to 129. We currently plan to open twelve more
clubs prior to December 31, 2004. We have achieved revenue growth over the five
year period ended December 31, 2003 at a compound annual rate of approximately
21.3% from $158.2 million for the year ended December 31, 1999 to $342.5 million
for the year ended
46
December 31, 2003. This growth has been driven not only by the addition of
acquired and greenfield club locations, but also through mature club revenue
growth, which has ranged from 1.6% to 18.6% for the five year period ended
December 31, 2003 and averaged 10.5% over that period. Such growth was 1.6% for
the year ended December 31, 2003. Mature club, defined as those clubs that we
operated for more than 24 months, revenue growth has enabled us to increase
revenue per weighted average club over the five year period ended December 31,
2003. Revenue per weighted average club (as defined in Selected Financial Data)
has risen from $2.1 million for the year ended December 31, 1999 to $2.7 million
for the year ended December 31, 2003. Based on our historical experience, a new
club tends to achieve significant increases in revenues during its first three
years of operation as it matures. Because clubs experience little incremental
cost associated with such revenue increases, we realize a greater proportionate
increase in profitability. This operating leverage has allowed us to achieve
consistent increases in cash flows from operations over the five year period
ended December 31, 2003. Cash flows from operations improved from $29.5 million
in 1999 to $58.3 million for the year ended December 31, 2003. Net income
improved from $49,000 in 1999 to $7.4 million for the year ended December 31,
2003.
Over our 30-year history, we have developed and refined a model club format
that allows us to cost effectively construct and efficiently operate our fitness
clubs. Our urban model club ranges in size from approximately 15,000 to 25,000
square feet and averages approximately 20,000 square feet and our suburban clubs
vary in size from 15,000 square feet to 75,000 square feet, with one club being
200,000 square feet. Excluding this single large club, our average suburban club
is 25,000 square feet. Clubs typically have an open space to accommodate
cardiovascular and strength-training exercise, as well as special purpose rooms
to accommodate group fitness class instruction and other exercise programs as
well as massage. Locker rooms generally include a sauna and steam room. We seek
to 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. We strive to establish at least one
flagship club that has amenities such as swimming pools or racquet and
basketball courts in each of our key target areas.
We engage in detailed site analyses and selection process based upon
information provided by our customized development software to identify
potential target areas for additional clubs based upon population demographics,
psychographics, traffic and commuting patterns, availability of sites and
competitive market information. In addition to our existing 129 clubs under
operation and the seven sites for which we have entered into lease commitments,
we have identified approximately 70 target areas in which we may add clubs under
the brand names NYSC, BSC, WSC, or PSC. Once we begin to approach saturation of
these regions, we will explore expansion opportunities in other markets in the
United States sharing similar demographic characteristics to those in which we
currently operate.
We possess an experienced management team, four of the top five executives
of which have been working together at the Company since 1990. We believe that
we have 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. We believe that the presence of such
infrastructure will enable us over time to leverage certain fixed cost aspects
of corporate overhead to realize increased operating margins as we continue to
expand our club base. This operating leverage has already helped us to increase
operating income as a percent of revenue increased to 12.8% for the year ended
December 31, 2003 compared to 6.9% in 1999.
47
INDUSTRY OVERVIEW
Demographic trends have helped fuel the growth experienced by the fitness
industry over the past decade. The industry has benefited from the aging of the
"baby boomer" generation (ages 39 to 57) and the coming of age of their
offspring, the "echo boomers" (ages eight to 26). In 2001, Americans over the
age of fifty-five account for 6.9 million members, up nearly fourfold since
1993. Government-sponsored reports, such as the Surgeon General's Report on
Physical Activity & Health (1996) and the Call to Action to Prevent and Decrease
Overweight and Obesity (2002) have helped to increase the general awareness of
the benefits of physical exercise to these demographic segments over those of
prior generations. Membership penetration (defined as club members as a
percentage of the total U.S. population over the age of six) has increased
significantly from 7.4% in 1990 to 13.5% in 2001.
FITNESS CLUB REVENUES(1)
(IN $ BILLIONS)
[FITNESS CLUB REVENUES BAR GRAPHIC]
------------
(1) Industry revenues for 1991 and 1992 are not available.
U.S. FITNESS CLUBS MEMBERSHIP
(IN MILLIONS)
[FITNESS CLUB MEMBERSHIP BAR GRAPHIC]
Total U.S. fitness club industry revenues increased at a compound annual
growth rate of 8.1% from $6.5 billion in 1993 to $13.1 billion in 2002, while
the total number of clubs increased at a compound annual growth rate of 4.7%,
from 12,146 in 1991 to 20,207 in 2002. Growth in club memberships outpaced club
growth during this period, increasing at a compound annual growth rate of 5.1%
from 20.9 million in 1991 to 36.3 million in 2002.
Notwithstanding these longstanding growth trends, the fitness club industry
continues to be highly fragmented. Less than 10% of clubs in the United States
are owned and operated by companies that own more than 25 clubs, and the two
largest fitness club operators each generate less than 8% of total fitness club
revenues.
As a large operator with recognized brand names, leading regional market
shares and an established operating history, we believe we are well positioned
to benefit from these favorable industry dynamics.
We believe that the growth in fitness club memberships is attributable to
several factors. Americans are focused on achieving a healthier, more active and
less stressful lifestyle. Of the factors members consider very important in
their decision to join a fitness club, the most
48
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 areas. According to
published industry reports, convenience is an important factor in choosing a
fitness club.
We believe the industry can be segregated into three tiers based upon
price, service and quality: (i) an upper tier consisting of clubs with monthly
membership dues averaging in excess of $95.00 per month; (ii) a middle tier
consisting of clubs with monthly membership dues averaging between $45.00 and
$95.00 per month; and (iii) a lower tier consisting of clubs with monthly
membership dues averaging less than $45.00 per month. We compete in the middle
tier in terms of pricing and because of our wide array of programs and services
coupled with our commitment to customer service and our convenience to work and
home we are positioned toward the upper end of this tier. Based upon the quality
and service we provide to our members, we believe that we provide an attractive
value to our members at the monthly membership dues we charge.
MARKETING
Our marketing campaign, which has become a large driver of the brand, is
directed by our in-house media department which is headed by the Chief Executive
Officer and the newly appointed V.P. of Marketing. This team develops
advertising strategies to convey each of the our regionally branded networks as
the premier network of fitness clubs in that region. Our media team's goal is to
achieve broad awareness of our regional brand names primarily through radio,
television, newspaper, billboard, and direct mail advertising. We believe that
clustering clubs creates economies 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, pricing specials 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. Such incentive programs include a free month of membership,
personal training sessions, and sports equipment.
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 and regional retailers.
We maintain the following web site: www.mysportsclubs.com that provides
information about club locations, program offerings, exercise class schedules
and on-line promotions. Our web site provides our members a venue to give us
direct feedback on all of our services and offerings. We also use our web site
to promote career opportunities.
SALES
Sales of new memberships are generally handled at the club level. We employ
approximately 465 "in-club" membership consultants who are responsible for new
membership sales. Each club generally has two or three full-time and one
part-time membership consultants. These consultants report both to our area
sales managers, who in turn report to our Vice President Sales. Membership
consultants' compensation consists of a base salary plus commission. Sales
commissions range from $45 to $70 per new member enrolled. We provide additional
49
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: (i) the proximity of our clubs to concentrated commercial and
residential areas convenient to where target members live and work; (ii) for
non-commit membership plans, the lack of a long-term obligation on the part of
the enrollee; (iii) the price value relationship of a Town Sports membership;
and (iv) access to value-added services. 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 seven full-time corporate
sales managers whose 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 a streamlined membership structure to simplify the sales
process. In addition, our proprietary centralized computer software ensures
consistency of pricing and controls enrollment processing at the club level. We
generally offer three principal types of memberships:
The Passport Membership, priced from $45 to $92 per month, is our
higher priced membership and entitles members to use any Town Sports club
at any time. This membership is held by approximately 52% of our members.
In addition, we have introduced a Passport Premium membership for a select
club, that includes more member services, at a price greater than $100 per
month.
The Gold Membership, priced from $39 to $84 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 Town Sports club during
off-peak times. This membership is held by over 47% of our members.
The Off-peak Membership, priced from $39 to $75 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% of
our members.
We also offer corporate membership plans that vary in price depending
on the respective corporation's needs. The corporate membership plans are
typically at a discount to that of individual membership plans.
By clustering a group of clubs in a geographic area, the value of our
memberships is enhanced by our ability to offer Passport Memberships, which
allow our members to use any of our clubs at any time. 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 workplace. Our clustering
strategy also allows us to provide access to special facilities and programs
such as tennis, squash, basketball and racquetball courts, swimming pools and
programs targeted at children and other groups, through flagship locations
strategically located in key target areas, without offering such facilities or
programs 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 and monthly dues on an
ongoing basis. Monthly Electronic Funds Transfer "EFT" of individual membership
dues averaged approximately $70 per month for the year ended December 31, 2003.
During that same period, initiation fees averaged $74 for EFT members. We
collect 92.8% of all monthly membership dues through EFT and EFT revenue
constituted over 73% of consolidated revenue for the year ended December 31,
2003. Substantially all other membership dues are paid in advance. Based upon a
study of the membership base at our clubs open over 24 months, the average
length of our memberships is approximately 24 months. Our membership agreements
call for monthly dues
50
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, and working capital management. In addition, it
enables us to increase our dues in an efficient and consistent manner which we
typically do annually by between 1% and 3%, in line with cost of living
increases. During the first week of each month, we receive the EFT dues for that
month initiated by a third party EFT processor. Discrepancies and insufficient
funds incidents are researched and resolved by our in-house staff. For the year
ended December 31, 2003, we experienced an average of uncollected EFT dues of
1.3%.
Our total monthly EFT revenue has increased by $10.1 million or 88.6% from
$11.4 million in December, 1999 to $21.5 million in December, 2003. While we
strongly encourage monthly EFT memberships, approximately 7% of our members
(often corporate group members) purchase paid-in-full memberships for a one year
term.
ANCILLARY REVENUE
Over the past five years we have expanded the level of ancillary services
provided to our members. Ancillary revenue has increased by $28.7 million from
$17.3 million in 1999 to $46.0 million in 2003. Increases in personal training
revenue in particular have contributed to $18.9 million of the increase in
ancillary revenue from 1999 to 2003. In addition the Company has added Sports
Club for Kids and Group Exclusives (both additional fee for service programs) at
selected clubs. Ancillary revenue as a percentage of total revenue has increased
from 10.9% for the year ended December 31, 1999 to 13.4% for the year ended
December 31, 2003. Personal training revenue as a percentage of sales increased
from 7.7% of revenue in 1999 to 9.1% of revenue in 2003.
CLUB FORMAT AND LOCATIONS
Our clubs are typically located in well-established, higher-income
residential, commercial or mixed urban neighborhoods within major metropolitan
areas which are capable of supporting the development of a cluster of clubs. Our
clubs generally have relatively high "retail" visibility, and close proximity to
transportation. In the New York City, Boston and Washington, DC markets, we have
created clusters of clubs in urban areas and their commuter suburbs in
accordance with our operating strategy of offering our target members the
convenience of multiple locations close to where they live and work, reciprocal
use privileges and standardized facilities and services. We have begun
establishing a similar cluster in Philadelphia.
Approximately half of the clubs we operate are urban clubs while half are
suburban. Our urban clubs generally range in size from 15,000 to 25,000 square
feet and average approximately 20,000 square feet. Our suburban clubs vary in
size from 15,000 square feet to 75,000 square feet, with one club being 200,000
square feet. Excluding this single large club, the average suburban club is
25,000 square feet. Membership for each club generally ranges from 2,000 to
4,500 members at maturity. Although club members represent a cross-section of
the population in a given geographic market, our target member is college
educated, between the ages of 21 and 50 and has an annual income of between
$50,000 and $150,000.
Our facilities include state-of-the-art cardiovascular equipment, including
upright and recumbent bikes, steppers, treadmills, and elliptical motion
machines; strength equipment and free weights, including Cybex, Icarian,
Nautilus, Free Motion, and Hammer Strength equipment; group exercise and cycling
studio(s); the Sportsclub Network entertainment system; locker rooms, including
shower facilities, towel service, and other amenities such as, saunas and
steamrooms; babysitting, and a retail shop. Personal training services are
offered at all locations and massage is offered at most clubs, each at an
additional charge. At certain flagship
51
locations, additional facilities also are offered, including swimming pools,
racquet and basketball courts. Also, we have significantly expanded the
availability of fee-based programming at many of our clubs, including programs
targeted at children, members and non-member adult customers.
We have completed the launch of our Xpressline strength workout. Xpressline
is a trainer-supervised, eight-station total-body circuit workout designed to
accommodate all fitness levels. This service is a free service provided to our
members. We have also introduced FitMap, which is a visual tool that provides
our members with guidance on how to use our equipment through safe progressions
of difficulty.
We have over 5,000 Sportsclub Network personal entertainment units
installed in our clubs. The units are typically mounted on cardiovascular
equipment and are equipped with a color screen for television viewing, a compact
disk player and most models have audio cassette players. The Sportsclub Network
also broadcasts our own personalized music video channel that provides us with a
direct means of advertising products and services to our membership base.
CLUB SERVICES AND 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 group programs, 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
district managers, who liaise with senior operations management and other
corporate staff ensuring consistent service at all locations.
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. We
have implemented a comprehensive staff education curriculum which progresses
from basic knowledge and practical skills to advanced concepts and training
techniques. Our education program provides professional standards to ensure that
our trainers provide superior service and fitness expertise to our members.
There are four levels of professional competency for which different levels of
compensation are paid, with mandatory requirements trainers must meet in order
to achieve and maintain such status. We believe the qualifications of the
personal training staff helps ensure that members receive a consistent level of
quality service throughout our club base. We believe that our personal training
programs provide valuable guidance to our members and a significant source of
incremental revenue from value-added services. In addition, we believe that
members who participate in personal training programs have a longer membership
life.
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, pilates 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. All program instructors report to a centralized management
structure, headed by the Vice President of Programs and Services whose
department is responsible for overseeing auditions
52
and providing in-house training to keep instructors current in the latest
training techniques and program offerings. We also provide Group Exclusive
offerings to our members, which are for-fee based programs that have smaller
groups and provide more focused, and typically more advanced training classes.
Some examples of these offerings include: Pilates, boxing camps, and cycling.
Sports Clubs for Kids. During 2000, we began offering programs for
children under the Sports Club for Kids ("SCFK") brand. As of December 2003,
SCFK was operating in 15 locations throughout our NYSC, BSC, and PSC regions. In
addition to extending fitness offerings to a market not previously served by us,
we expect that SCFK programming will help position our suburban clubs as family
clubs, which should provide us with a competitive advantage. Depending upon the
facilities available at a location, Sports Clubs for Kids programming can
include traditional youth offerings such as day camps, sports camps, swim
lessons, hockey and soccer leagues, gymnastics, dance, martial arts and birthday
parties. It also can include innovative and proprietary programming such as
Kidspin Theater, a multi-media cycling experience, and non-competitive
"learn-to-play" sports programs. In selected locations we also offer laser tag.
Employee Compensation and Benefits. We provide performance-based
incentives to our management. Senior management compensation, for example, is
tied to our overall performance. Departmental directors, district managers and
general managers have bonuses tied to financial and member retention targets for
a particular club or group of clubs. We offer our employees various benefits
including; health, dental, disability, insurance, pre-tax healthcare and
dependent care accounts, and a 401(k) plan. We believe the availability of
employee benefits provides us with a strategic advantage in attracting and
retaining quality managers, 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.
PROPRIETARY CENTRALIZED INFORMATION SYSTEMS
We are utilizing a proprietary system developed internally to track and
analyze sales, leads, and membership statistics, 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 advertising to improve consumer response. This
system also assists 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.
INFORMATION SYSTEM DEVELOPMENTS
We recognize the value of enhancing and extending the uses of information
technology in virtually every area of our business. After developing an
information technology strategy to support the business strategy, we developed a
comprehensive multi-year plan to replace or upgrade key systems.
During 2001, we implemented a new time capture system that integrates with
our payroll processing system. This system integrates with the new club
management system to fully automate the various compensation plans for all
employees. In addition, during 2002, we implemented a new budgeting and
forecasting product that was expanded in 2003 for data warehousing capabilities
which will enable enhanced managerial and analytical reporting. We implemented
application and telephone systems to manage our internal customer service center
which supports information technology, facilities, equipment and Sportsclub
Network service call requests for all locations. Numerous infrastructure changes
were implemented to accommo-
53
date our growth, to provide network redundancy, efficiencies in operations, and
to improve management of all components of the technical architecture.
In 2003 we implemented a new fully integrated club management system. This
system incorporates contemporary browser-based technology and open architecture
to allow for scalability to support our projected growth and diversification of
services. This system provides enhanced or new functionality for member
services, contract management, electronic billing, point of sale, scheduling
resources, and reservations.
Our website will be expanded in 2004 to incorporate e-business
functionality such as sales of products, services and memberships. We have built
an intranet to provide the portal for the newly implemented browser-based
application. Development of intranet features to support corporate
communications, human resources programs, and training is ongoing.
In 2004, we will also implement an updated Disaster Recovery plan that will
include a designated "hot site", recovery procedures, data restoration testing,
and training of personnel.
STRATEGIC PLANNING
During 2001, the Company began a strategic planning process. That process,
spearheaded by the Chairman and the Chief Executive Officer, produced a new set
of Core Values, a revised Mission Statement and a set of five-year performance
targets. In 2002, more than 40 projects were completed in support of the Plan's
Strategic Initiatives and Objectives. Our Chairman and Chief Executive led the
strategy process, which produced significant changes in our approach to our
Brand, our Core Business Development process and our Intranet strategy.
The Strategic Plan was updated in 2003 with new Strategic Initiatives in
several areas. Senior Management continues to support the Strategic Planning
process and believes that accomplishing our strategic objectives will cause us
to attain the five-year performance targets outlined in the 2003 Plan.
INTELLECTUAL PROPERTY
We have registered, 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. We continue to register other trademarks and service marks
as they are created.
COMPETITION
The fitness club industry is highly competitive and continues to become
more competitive as the number of health clubs in the U.S. has increased from
12,146 in 1991 to 20,207 in 2002. We compete with other fitness clubs, physical
fitness and recreational facilities established by local governments and
hospitals and by 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. There
can be no assurance 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 we have, 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, and real estate availability thereby increasing costs
associated with expansion through both acquisitions, and greenfields.
54
We believe that our market leadership, experience and operating
efficiencies enable us to provide the consumer with a superior product in terms
of convenience, quality service 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 one or a series of acquisitions.
EMPLOYEES
At December 31, 2003, the Company had approximately 7,200 employees, of
which approximately 2,750 were employed full-time. Approximately 325 employees
were corporate personnel working in the Manhattan, Boston or 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
consider our relations with our employees to be good. We believe that we offer
employee benefits (including health, dental, disability insurance, pre-tax
healthcare and dependent care accounts, and a 401(k) plan) which 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 the 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 upon cancellation and we may
offset such amount against any refunds owed.
55
PROPERTIES
The following table provides information regarding our club locations:
DATE OPENED OR MANAGEMENT
LOCATION ADDRESS ASSUMED
-------------------------------------------------------------------------------------------
NEW YORK SPORTS CLUBS:
1. Manhattan 151 East 86th Street January, 1977
2. Manhattan 61 West 62nd Street July, 1983
3. Manhattan 614 Second Avenue July, 1986
4. Manhattan 151 Reade Street January, 1990
5. Manhattan 1601 Broadway September, 1991
6. Manhattan 50 West 34th Street August, 1992
7. Manhattan 349 East 76th Street April, 1994
8. Manhattan 248 West 80th Street May, 1994
9. Manhattan 502 Park Avenue February, 1995
10. Manhattan 117 Seventh Avenue South March, 1995
11. Manhattan 303 Park Avenue South December, 1995
12. Manhattan 30 Wall Street May, 1996
13. Manhattan 1635 Third Avenue October, 1996
14. Manhattan 575 Lexington Avenue November, 1996
15. Manhattan 278 Eighth Avenue December, 1996
16. Manhattan 200 Madison Avenue February, 1997
17. Manhattan 131 East 31st Street February, 1997
18. Manhattan 2162 Broadway November, 1997
19. Manhattan 633 Third Avenue April, 1998
20. Manhattan 1657 Broadway July, 1998
21. Manhattan 217 Broadway March, 1999
22. Manhattan 23 West 73rd Street April, 1999
23. Manhattan 34 West 14th Street July, 1999
24. Manhattan 503-511 Broadway July, 1999
25. Manhattan 1372 Broadway October, 1999
26. Manhattan 300 West 125th Street May, 2000
27. Manhattan 102 North End Avenue May, 2000
28. Manhattan 14 West 44th Street August, 2000
29. Manhattan 128 Eighth Avenue December, 2000
30. Manhattan 2521-23 Broadway August, 2001
31. Manhattan 3 Park Avenue August, 2001
32. Manhattan 19 Irving Place November, 2001
33. Manhattan 160 Water Street November, 2001
34. Manhattan 230 West 41st Street November, 2001
35. Manhattan 1221 Avenue of the Americas January, 2002
36. Manhattan 200 Park Avenue December, 2002
37. Brooklyn, NY 110 Boerum Place October, 1985
38. Brooklyn, NY 1736 Shore Parkway June, 1998
39. Brooklyn, NY 179 Remsen Street May, 2001
40. Brooklyn, NY 453 Fifth Avenue August, 2003
41. Queens, NY 69-33 Austin Street April, 1997
42. Queens, NY 153-67 A Cross Island Parkway June, 1998
43. Queens, NY 2856-2861 Steinway Street February, 2004
56
DATE OPENED OR MANAGEMENT
LOCATION ADDRESS ASSUMED
-------------------------------------------------------------------------------------------
44. Staten Island, NY 300 West Service Road June, 1998
45. Scarsdale, NY 696 White Plains Road October, 1995
46. Mamaroneck, NY 124 Palmer Avenue January, 1997
47. White Plains, NY 1 North Broadway September, 1997
48. Croton-on-Hudson, NY 420 South Riverside Drive January, 1998
49. Larchmont, NY 15 Madison Avenue December, 1998
50. Nanuet, NY 58 Demarest Mill Road May, 1998
51. Great Neck, NY 15 Barstow Road July, 1989
52. East Meadow, NY 625 Merrick Avenue January, 1999
53. Commack, NY 6136 Jericho Turnpike January, 1999
54. Oceanside, NY 2909 Lincoln Avenue May, 1999
55. Long Beach, NY 265 East Park Avenue July, 1999
56. Garden City, NY 833 Franklin Avenue May, 2000
57. Huntington, NY 350 New York Avenue February, 2001
58. Syosset, NY 49 Ira Road March, 2001
59. West Nyack, NY 3656 Palisades Center Drive February, 2002
60. Woodmere, NY 158 Irving Street March, 2002
61. Stamford, CT 6 Landmark Square December, 1997
62. Stamford, CT 16 Commerce Road January, 1998
63. Danbury, CT 38 Mill Plain Road January, 1998
64. Stamford, CT 1063 Hope Street November, 1998
65. Norwalk, CT 250 Westport Avenue March, 1999
66. Greenwich, CT 6 Liberty Way May, 1999
67. Westport, CT 427 Post Road, East January, 2002
68. Greenwich, CT 67 Mason Street February, 2004
69. East Brunswick, NJ 8 Cornwall Court January, 1990
70. Princeton, NJ 301 North Harrison Street May, 1997
71. Freehold, NJ 200 Daniels Way April, 1998
72. Matawan, NJ 163 Route 34 April, 1998
73. Old Bridge, NJ Gaub Road and Route 516 April, 1998
74. Marlboro, NJ 34 Route 9 North April, 1998
75. Fort Lee, NJ 1355 15th Street June, 1998
76. Ramsey, NJ 1100 Route 17 North June, 1998
77. Mahwah, NJ 7 Leighton Place June, 1998
78. Parsippany, NJ 2651 Route 10 August, 1998
79. Springfield, NJ 215 Morris Avenue August, 1998
80. Colonia, NJ 1250 Route 27 August, 1998
81. Franklin Park, NJ 3911 Route 27 August, 1998
82. Plainsboro, NJ 10 Schalks Crossing August, 1998
83. Somerset, NJ 120 Cedar Grove Lane August, 1998
84. Hoboken, NJ 221 Washington Street October, 1998
85. West Caldwell, NJ 913 Bloomfield Avenue April, 1999
86. Jersey City, NJ 147 Two Harborside Financial Center June, 2002
87. Newark, NJ 1 Gateway Center October, 2002
88. Ridgewood, NJ 129 S. Broad Street June, 2003
89. Westwood, NJ 35 Jefferson Avenue Opening 2004
90. Livingston, NJ 39 W. North Field Rd. Opening 2004
57
DATE OPENED OR MANAGEMENT
LOCATION ADDRESS ASSUMED
-------------------------------------------------------------------------------------------
91. Hoboken, NJ 1225 Willow Avenue Opening 2005
BOSTON SPORTS CLUBS:
92. Boston, MA 561 Boylston Street November, 1991
93. Allston, MA 15 Gorham Street July, 1997
94. Boston, MA 1 Bulfinch Place August, 1998
95. Natick, MA Sherwood Plaza, 124 Worcester Rd September, 1998
96. Weymouth, MA 553 Washington Street May, 1999
97. Boston, MA 201 Brookline Avenue June, 2000
98. Wellesley, MA 140 Great Plain Avenue July, 2000
99. Andover, MA 307 Lowell Street July, 2000
100. Lynnfield, MA 425 Walnut Street July, 2000
101. Lexington, MA 475 Bedford Avenue July, 2000
102. Franklin, MA 750 Union Street July, 2000
103. Framingham, MA 1657 Worcester Street July, 2000
104. Danvers, MA 50 Ferncroft Road July, 2000
105. Cambridge, MA 625 Massachusetts Avenue January, 2001
106. East Cambridge, MA 6 Museum Way January, 2001
107. Boston, MA 361 Newbury Street November, 2001
108. West Newton, MA 1359 Washington Street November, 2001
109. Boston, MA 350 Washington Street February, 2002
110. Waltham, MA 840 Winter Street November, 2002
WASHINGTON SPORTS CLUBS:
111. Washington, D.C. 214 D Street, S.E. January, 1980
112. Washington, D.C. 1835 Connecticut Avenue, N.W. January, 1990
113. Washington, D.C. 1990 M Street, N.W. February, 1993
114. Washington, D.C. 2251 Wisconsin Avenue, N.W. May, 1994
115. Washington, D.C. 1211 Connecticut Avenue, N.W. July, 2000
116. Washington, D.C. 1345 F Street, N.W. August, 2002
117. Washington, D.C. 5346 Wisconsin Ave., N.W. February, 2002
118. Washington, D.C. 1990 K Street, N.W. February, 2004
119. Washington, D.C. 7th & H Street, N.W. Opening 2004
120. Bethesda, MD 4903 Elm Street May, 1994
121. North Bethesda, MD 10400 Old Georgetown Road June, 1998
122. Germantown, MD 12623 Wisteria Drive July, 1998
123. Silver Spring, MD Wayne Ave Opening 2004
124. Alexandria, VA 3654 King Street June, 1999
125. Sterling, VA 21800 Town Center Plaza October, 1999
126. Fairfax, VA 11001 Lee Highway October, 1999
127. West Springfield, 8430 Old Keene Mill September, 2000
VA
128. Clarendon, VA 2700 Clarendon Boulevard November, 2001
PHILADELPHIA SPORTS CLUBS:
129. Philadelphia, PA 220 South 5th Street January, 1999
130. Philadelphia, PA 2000 Hamilton Street July, 1999
131. Chalfont, PA One Highpoint Drive January, 2000
132. Cherry Hill, NJ Route 70 and Kings Highway April, 2000
133. Philadelphia, PA 1735 Market Street October, 2000
134. Ardmore, PA 34 W. Lancaster Avenue March, 2002
58
DATE OPENED OR MANAGEMENT
LOCATION ADDRESS ASSUMED
-------------------------------------------------------------------------------------------
SWISS SPORTS CLUBS:
135. Basel, Switzerland St. Johanns-Vorstadt 41 August, 1987
136. Zurich, Switzerland Glarnischstrasse 35 August, 1987
137. Basel, Switzerland Basel FC Soccer Stadium August, 2001
---------------
We have also signed two leases for greenfield club development. These
locations are, however, part of development projects and are subject to
various conditions, including delivery of the space as specified in the lease.
We own the 151 East 86th Street location, which houses a fitness club and a
retail tenant that generated $614,000 of rental income for us during the year
ended December 31, 2003. Our fitness clubs occupy leased space pursuant to
long-term leases (generally 15 to 25 years, including options). In the next five
years (ending December 31, 2008), only one of our fitness club leases will
expire without any renewal option.
We lease approximately 40,000 square feet of office space in New York City,
and have smaller regional offices in Fairfax, VA, East Brunswick, NJ, Old
Bridge, NJ, Philadelphia, PA, Stamford, CT and Wakefield, MA, for administrative
and general corporate purposes. We also lease warehouse and commercial space in
Long Island City, New York, NY and Brooklyn, NY, for storage purposes and for
the operation of a centralized laundry facility for certain New York fitness
clubs.
As of December 31, 2003, 127 of the existing fitness clubs were wholly
owned by us and two were managed and partly owned (the "Partly Owned Clubs"). In
addition, we provide management services at two fitness clubs in which we have
no equity interest.
59
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and a brief account of the
business experience of each person who is a director or executive officer of
Town Sports.
NAME AGE POSITION
---- --- --------
Mark Smith............................. 44 Chairman and Director
Robert Giardina........................ 46 Chief Executive Officer, Office of the President
Alexander Alimanestianu................ 45 Chief Development Officer, Office of the
President
Richard Pyle........................... 45 Chief Financial Officer, Office of the President
Randy Stephen.......................... 46 Chief Operating Officer
Robert S. Herbst....................... 45 Vice President and General Counsel
Keith E. Alessi........................ 49 Director
Paul Arnold............................ 57 Director
Bruce Bruckmann........................ 50 Director
J. Rice Edmonds........................ 33 Director
Jason Fish............................. 46 Director
Mark Smith joined us in 1985 and has served as Chief Executive Officer from
1995 to 2001 and became Chairman in January 2002. Prior to these appointments,
he held the position of Executive Vice President of Development and
International Operations. Mr. Smith has also served as a director since
September 1995. He was appointed to the Board of the International Health,
Racquet and Sportsclub Association (the club industry trade association) in
2001. 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 joined us in 1981 and has served as President and Chief
Operating Officer from 1992 to 2001, and became Chief Executive Officer in
January 2002. 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 and Chief Development Officer in January 2002.
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 100 of our clubs.
Richard Pyle, a British chartered accountant, 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 and Chief Financial Officer in 1995, successively.
Before joining us, Mr. Pyle worked in public accounting (in the United States,
Bermuda, Spain and England) specializing in the hospitality industry, and as the
corporate controller for a British public company in the leisure industry.
Randy Stephen joined us in 2002 as Chief Operating Officer. Prior to
joining us and since 1987, Mr. Stephen held various positions with Circuit City
Stores, including Director of Human Resources and General Manager. In 1995, he
was appointed Circuit City Stores' Vice President, Corporate Operations,
focusing on marketing, promotions and business process re-engineering and in
1996 he became the Northeast Division President. Prior to 1987, Mr. Stephen
worked
60
with several premier retailers including Eastern Mountain Sports, Eddie Bauer,
Keeger & Sons and Britches of Georgetown.
Robert S. Herbst joined us in November 2003 as Vice President and General
Counsel. From 1984 through 1995, Mr. Herbst was an attorney in private practice
in New York City. He served as Assistant General Counsel of Coty Inc. from 1999
through 2003 and as Senior Corporate Counsel of Pfizer Inc. from 1995 through
1999. Mr. Herbst has a broad background in the fitness industry, having been a
competitive powerlifter and coach for more than 20 years.
Keith E. Alessi has served as a director of Town Sports since April 1997.
Mr. Alessi is an adjunct professor of Law at Washington and Lee University
School of Law. Mr. Alessi served as President, Chief Executive Officer and a
director of Telespectrum Worldwide, Inc. from March 1998 to April 2000. From May
1996 to March 1998, Mr. Alessi served as Chairman, President and Chief Executive
Officer of Jackson Hewitt, Inc.
Paul Arnold has served as a director of Town Sports since April 1997. Mr.
Arnold has served as Chairman and Chief Executive Officer of Cort Business
Services, Inc., a Berkshire Hathaway Company, since 2000. From 1992 to 2000, Mr.
Arnold served as President, Chief Executive Officer and Director of Cort
Business Services. Prior to 1992, Mr. Arnold held various positions over a 24
year period within Cort Furniture Rental, a division of Mohasco Industries. Mr.
Arnold is currently a Director of Relocation Central Corp. and Penhall
International, Inc.
Bruce Bruckmann has served as a director of Town Sports since December
1996. Since 1994, Mr. Bruckmann has served as Managing Director of BRS. From
1983 until 1994, Mr. Bruckmann served as an officer and subsequently a Managing
Director of Citicorp Venture Capital, Ltd. Mr. Bruckmann is currently a director
of Penhall International, Inc., Mohawk Industries, Inc., H&E Equipment Services
L.L.C. and Anvil Knitwear, Inc. and a director of several private companies.
J. Rice Edmonds has served as a director of Town Sports since July 2002.
Mr. Edmonds is a Principal of BRS. Prior to joining BRS in 1996, Mr. Edmonds
worked in the high yield finance group of Bankers Trust. Mr. Edmonds is
currently a director of H&E Equipment Services L.L.C. and several other private
companies.
Jason Fish has been a director of Town Sports since December 1996. Mr. Fish
is a co-founder and President of CapitalSource Inc., and a member of
CapitalSource's board of directors, a position he has held since September 2000.
Prior to founding CapitalSource, Mr. Fish was employed from 1990 to 2000 by
Farallon Capital Management, L.L.C., serving as a managing member from 1992 to
2000. Before joining Farallon, Mr. Fish worked at Lehman Brothers Inc., where he
was a Senior Vice President responsible for its financial institution investment
banking coverage on the West Coast.
61
EXECUTIVE COMPENSATION
The following summarizes, for the year indicated, the principal components
of compensation for our Chief Executive Officer and the other four highest
compensated executive officers (collectively, the "named executive officers").
The compensation set forth below fully reflects compensation for work performed
on our behalf.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
COMMON
STOCK
OTHER ANNUAL UNDERLYING
SALARY BONUS (1) COMPENSATION OPTIONS/SARS
NAME AND PRINCIPAL POSITION PERIOD ($) ($) ($) (#)
--------------------------- ------ ------- --------- ------------ ------------
Mark Smith.......................... 2003 434,594 511,133 -- 6,000
Chairman 2002 426,072 429,224 -- --
2001 413,662 364,597 -- --
Robert Giardina..................... 2003 412,179 406,227 -- 6,000
Chief Executive Officer, 2002 404,097 327,312 -- --
Office of the President 2001 392,327 276,678 -- --
Richard Pyle........................ 2003 306,270 251,746 -- 5,000
Chief Financial Officer, 2002 236,539 252,815 -- --
Office of the President 2001 215,035 216,258 -- --
Alexander Alimanestianu............. 2003 306,270 251,746 -- 5,000
Chief Development Officer, 2002 236,539 252,815
Office of the President 2001 215,035 216,258 -- --
Randy Stephen....................... 2003 225,000 95,755 -- 4,000
Chief Operating Officer,
Senior Vice President
Deborah Smith(2).................... 2002 178,098 171,690 -- --
Senior Vice President, 2001 172,911 145,839 -- --
Operations
---------------
(1) Includes annual bonus payments under our Annual Bonus Plan.
(2) Ms. Smith has resigned her position with the Company effective January 2003.
OPTION/SAR GRANTS DURING THE YEAR ENDED DECEMBER 31, 2003
In 2003 common stock options with an exercise price of $144.00 and a term
of ten years were granted to named executive officers as follows:
Mark Smith........................................... 6,000
Robert Giardina...................................... 6,000
Richard Pyle......................................... 5,000
Alexander Alimanestianu.............................. 5,000
Randy Stephen........................................ 4,000
62
AGGREGATED OPTION/SAR EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2003 AND 2003
YEAR-END OPTION/SAR VALUES
The following summarizes exercises of stock options (granted in prior
years) by the named executive officers during the year ended December 31, 2003
as well as the number and value of all unexercised options held by the named
executive officers as of December 31, 2003.
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)(1)
ACQUIRED ON VALUE VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXERCISE (#) REALIZED ($) REALIZED ($) ------------------------- -------------------------
NAME COMMON COMMON PREFERRED COMMON COMMON PREFERRED
---- ------------ ------------ ------------ ------------------------- ----------- -----------
Mark Smith........... -- -- $2,479,901 10,030/4,800 529,800/0 --
Robert Giardina...... -- -- 1,899,575 10,029/4,800 529,740/0 --
Richard Pyle......... -- -- 1,596,961 9,828/4,000 529,680/0 --
Alexander
Alimanestianu...... -- -- 1,575,547 9,828/4,000 529,680/0 --
Randy Stephen........ -- -- -- 800/3,200 -- --
Deborah Smith........ 540,653 5,750/0 338,400/0 --
---------------
(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 an independent
valuation.
TOWN SPORTS INTERNATIONAL, INC. STOCK OPTION PLAN
Our board of directors has adopted a stock option plan, which provides for
the grant to some of our key employees and/or directors of stock options. The
compensation committee of our board of directors administers the stock option
plan. The compensation committee has broad powers under the stock option plan,
including exclusive authority (except as otherwise provided in the stock option
plan) to determine:
(1) who will receive awards,
(2) the type, size and terms of awards,
(3) the time when awards will be granted, and
(4) vesting criteria, if any, of the awards.
Options awarded under the plan are exercisable into shares of our common
stock. The total number of shares of common stock as to which options may be
granted may not exceed 160,759 shares of common stock. Options may be granted to
any of our employees, directors or consultants.
If we undergo a reorganization, recapitalization, stock dividend or stock
split or other change in shares of our common stock, the compensation committee
may make adjustments to the plan in order to prevent dilution of outstanding
options. The compensation committee may also cause options awarded under the
plan to become immediately exercisable if we undergo specific types of changes
in the control of our Company.
COMPENSATION OF DIRECTORS
We reimburse directors for any out-of-pocket expenses incurred by them in
connection with services provided in such capacity.
63
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of our compensation committee are Bruce Bruckmann, Paul
Arnold and Mark Smith. Bruce Bruckmann and Paul Arnold are non-employee
directors.
MANAGEMENT EQUITY AGREEMENTS
We have entered into executive stock agreements with our named executive
officers. Pursuant to these executive stock agreements, our named executive
officers each have purchased our shares of common stock and/or shares of series
B preferred stock at a purchase price of $1.00 per share of common stock and
$35.00 per share of series B preferred stock.
OUR BENEFIT PLANS
We maintain a 401(k) defined contribution plan and are subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Plan provides for us to make discretionary contributions; however, we elected
not to make contributions for the year ended December 31, 2000. The Plan was
amended, effective January 1, 2001, to provide for an employer matching
contribution in an amount equal to 25% of the participant's contribution with a
limit of five hundred dollars per annum. In February 2003 and 2004, employer
matching contributions totaling $200,000 and $195,000, respectively, were made
for the Plan years ended December 31, 2002 and 2003.
64
SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS
The following table sets forth (as of December 31, 2003) certain
information with respect to the beneficial ownership of the common stock and
preferred stock by: (i) each person or entity who owns of record or beneficially
more than 5% or more of any class of our voting securities; (ii) each named
executive officer and director of TSI Holdings; and (iii) all directors and
named executive officers. TSI Holdings preferred stock will be redeemed with the
proceeds of this offering and the transactions. See "The Transactions."
COMMON
STOCK PERCENTAGE OF SERIES A SERIES B
BENEFICIALLY COMMON STOCK PREFERRED PREFERRED
NAME OWNED(1) OUTSTANDING(1) STOCK STOCK
---- ------------ -------------- ---------- ---------
BRS(2)
126 East 56th Street, 29th Floor
New York, New York 10022........................ 504,456 36.6%
104,330 --
Farallon Partners, L.L.C.(3)
One Maritime Plaza, Suite 1325
San Francisco, California 94111................. 270,091 19.6%
41,045 --
The Canterbury Entities
600 Fifth Avenue, 23rd Floor
New York, New York 10020........................ 139,437 10.1%
-- --
CapitalSource Holdings L.L.C
4445 Willard Avenue
Chevy Chase, Maryland 20815..................... 23,000 1.7%
-- --
Rosewood Capital L.P.
One Maritime Plaza, Suite 1330
San Francisco, California 94111................. 17,908 1.3%
-- 109,541
Executive Officers and Directors:
Mark Smith(4)................................... 74,955 5.6%
-- --
Robert Giardina(4).............................. 59,480 4.4%
-- --
Richard Pyle(4)................................. 51,410 3.8%
-- --
Alexander Alimanestianu(4)...................... 50,839 3.8%
-- --
Deborah Smith(4)................................ 15,908 1.3%
-- --
Bruce C. Bruckmann(5)........................... 517,642 37.5%
107,057 --
J. Rice Edmonds(6).............................. 504,456 36.6%
104,330 --
Jason Fish(7)................................... 23,000 1.7%
-- --
Paul Arnold..................................... * *
591 --
Keith Alessi.................................... * *
591 --
Executive Officers and Directors as a Group:
11 Persons(8)................................... 813,531 59.0%
108,240 --
---------------
* 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, 2004 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) 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. (collectively, the "Farallon Entities"), directly hold, in
aggregate, the shares listed above. As the general partner of each of the
Farallon Entities, Farallon Partners, L.L.C. ("FPLLC"), may, for purposes
of Rule 13d-3 under the Exchange Act, be deemed to own beneficially the
shares held by the Farallon Entities. FPLLC disclaims beneficial ownership
of such shares. All of the above-mentioned entities disclaim group
attribution.
65
(4) Includes options to acquire common stock, options exercisable within 60
days, pursuant to the option plan. Messrs. Smith, Giardina, Pyle, and
Alimanestianu each hold such options on 8,830, 8,829, 8,828, and 8,828
shares of common stock, respectively. The address for each of these named
executive officers is the same as the address of our principal executive
offices.
(5) 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.
(6) Includes shares held by BRS. Mr. Edmonds disclaims beneficial ownership of
such shares.
(7) Includes shares held by CapitalSource Holdings, L.L.C. Mr. Fish is a
co-founder and president of CapitalSource Inc. Mr. Fish disclaims
beneficial ownership of such shares.
(8) Includes (i) shares held by BRS, which may be deemed to be owned
beneficially by Messrs. Bruckmann and Edmonds, and (ii) shares held by
CapitalSource, which may be deemed to be owned beneficially by Mr. Fish.
Excluding the shares beneficially owned by BRS and CapitalSource, the
directors and named executive officers as a group beneficially own (i) 272,889
shares of common stock (which represents approximately 19.8% of the common stock
on a fully diluted basis), and (ii) 1,182 shares of series A preferred stock.
66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
In connection with our recapitalization in 1996, we, BRS, the Farallon
Entities, Canterbury Mezzanine Capital, L.P. ("CMC"), certain members of
management and other shareholders of Town Sports 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, the "Registration Rights
Agreement"). 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 (the "Registrable Securities") 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
In connection with our recapitalization, Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS Co."), an affiliate of BRS, and Town Sports entered into a
Professional Services Agreement, whereby BRS Co. agreed to provide us certain
advisory and consulting services. 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.
67
DESCRIPTION OF INDEBTEDNESS
SENIOR SECURED REVOLVING CREDIT FACILITY
Our senior secured revolving credit facility, with TSI, Inc., as borrower,
Deutsche Bank Trust Company Americas, as administrative agent, Deutsche Bank
Securities Inc., as joint lead arranger and BNP Paribas Securities Corp., as
joint lead arranger and syndication agent, is a five-year facility, providing
for borrowings of up to $50.0 million (containing a sublimit of $15.0 million
available for the issuance of letters of credit).
Permanent reductions to the commitments under the TSI, Inc. senior secured
revolving credit facility are required in an amount equal to (a) 100.0% of the
net cash proceeds of all asset sales and dispositions by TSI Holdings and TSI,
Inc. and its subsidiaries, subject to certain exceptions and reinvestment
rights, (b) 100.0% of the net cash proceeds of issuances of certain debt
obligations by TSI Holdings and TSI, Inc. and its subsidiaries, subject to
certain exceptions, and (c) 100.0% of certain insurance proceeds received by TSI
Holdings and TSI, Inc. and its subsidiaries, subject to certain exceptions and
reinvestment rights.
Voluntary prepayments and commitment reductions are permitted in whole or
in part, subject to minimum prepayment or reduction requirements, provided that
voluntary prepayments of eurodollar loans on a date other than the last day of
the relevant interest period are subject to the payment of customary breakage
costs, if any. Such voluntary prepayments and commitment reductions may be made
without premium or penalty.
All of our obligations under the senior secured revolving credit facility
are unconditionally guaranteed by each of TSI Holdings' and TSI, Inc.'s existing
and each subsequently acquired or organized domestic subsidiaries. The senior
secured revolving credit facility and the related guarantees are secured by the
capital stock of TSI, Inc. and by substantially all of the present and future
assets of TSI, Inc. and all present and future assets of each guarantor,
including but not limited to (i) a first-priority pledge of all of the
outstanding capital stock owned by TSI, Inc. and each guarantor (limited to 65%
of the voting stock of TSI, Inc.'s first tier foreign subsidiaries) and (ii)
perfected first-priority security interests in all of TSI, Inc.'s present and
future tangible and intangible assets and the present and future tangible and
intangible assets of each guarantor (in each case, other than certain equipment
assets subject to capitalized lease obligations). Guarantees from foreign
subsidiaries and security in respect thereof may be required in certain
circumstances.
Loans under the senior secured revolving credit facility, at our option,
bear interest at either the base rate or a floating rate equal to the reserve
adjusted London inter-bank offered rate ("LIBOR"), in each case plus a margin.
Overdue principal and, to the extent permitted by law, overdue interest does, in
each case bear interest at the greater of (x) the rate which is 2% in excess of
the rate otherwise applicable to base rate loans and (y) the rate which is 2% in
excess of the rate then borne by such loans. Interest on all loans under the
senior secured revolving credit facility is payable (x) in the case of base rate
loans, quarterly and (y) in the case of LIBOR loans, on the last day of the
interest period applicable thereto and every three months in the case of
interest periods in excess of three months and, in each case, at the time of
repayment of any such loans and at maturity. In addition to paying interest on
any outstanding principal amount under the senior secured revolving credit
facility, we are required to pay an unused revolving credit facility fee to the
senior lenders equal to 0.75% per annum on the unused daily balance of the
revolving credit commitment, commencing on the execution and delivery of the
senior secured revolving credit facility and payable quarterly in arrears, based
upon the actual number of days elapsed in a 360 day year. For each letter of
credit we issue, we will be required to pay (i) a per annum fee equal to the
margin over the LIBOR rate from time to time in effect, (ii) a fronting fee
equal to 1/4 of 1% on the aggregate outstanding stated amounts of such letters
of credit, plus (iii) customary administrative charges.
68
The credit agreement documentation contains certain customary
representations and warranties and contains customary covenants restricting TSI,
Inc.'s and in certain instances, TSI Holdings' ability to, among others (i)
declare dividends or redeem or repurchase capital stock, (ii) prepay, redeem or
purchase other debt, (iii) incur liens, (iv) make loans and investments, (v)
incur additional indebtedness, (vi) amend or otherwise alter debt and other
material agreements, (vii) make capital expenditures, (viii) engage in mergers,
acquisitions and asset sales, (ix) transact with affiliates, and (x) alter the
business we conduct. TSI, Inc. is also required to comply with specified
financial covenants and affirmative covenants.
Events of default under the credit agreement documentation include, but are
not limited to, (i) TSI, Inc.'s failure to pay principal or interest when due,
(ii) TSI, Inc.'s material breach of any representations or warranty, (iii)
covenant defaults, (iv) events of bankruptcy, (v) cross default to certain other
debt, (vi) unsatisfied final judgments over a certain threshold, and (vii) a
change of control. Certain of these events of default may apply to TSI Holdings.
TSI, Inc. is obligated to pay the senior lenders certain syndication and
administration fees, reimburse certain expenses and provide certain indemnities
to the senior lenders, the administrative agent and the arranger, in each case
which are customary for credit facilities of this type.
9 5/8% SENIOR NOTES DUE 2011
TSI, Inc. issued $255 million principal amount of 9 5/8% Senior Notes due
2011 pursuant to an indenture dated as of April 16, 2003 by and among TSI, Inc.,
the guarantors party thereto and The Bank of New York. Interest is payable
semiannually on April 15 and October 15. The 9 5/8% Senior Notes are redeemable
at any time on or after April 15, 2007 at the redemption prices set forth in the
9 5/8% Senior Notes plus accrued and unpaid interest to the date of redemption.
If a change of control of TSI, Inc. occurs, it is required, subject to certain
conditions, to give holders of the 9 5/8% Senior Notes the opportunity to sell
the notes to us at 101% of their face amount plus accrued and unpaid interest.
69
DESCRIPTION OF NOTES
GENERAL
The New Notes will be issued under an indenture (the "Indenture"), dated as
of February 4, 2004, between us and The Bank of New York, as Trustee. The
following summary 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 (the "TIA"), and to all of the provisions of
the Indenture (a copy of the form of which may be obtained from us), 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 most of the capitalized terms used in the following summary are
set forth below under "-- Certain Definitions."
The Notes will be our unsecured obligations, ranking equal in right of
payment to all of our unsubordinated debt.
We will issue the Notes in fully registered form only, without coupons, in
denominations of $1,000 principal amount at maturity 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 Old Notes that remain outstanding after the
completion of the Exchange Offer, together with the New 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 will be unlimited in aggregate principal amount, with $213.0
million aggregate principal amount at maturity to be issued in this offering and
will mature on February 1, 2014. Additional Notes may be issued from time to
time subject to the limitations set forth under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness."
No cash interest will accrue on the Notes prior to February 1, 2009,
although for U.S. federal income tax purposes a significant amount of original
issue discount, taxable as ordinary income, will be recognized by a holder as
such discount accretes. See "Material United States Federal Tax Consequences"
for a discussion regarding the taxation of such original issue discount. Cash
interest will accrue on the Notes at 11% per annum from February 1, 2009, or
from the most recent date to which interest has been paid, and will be payable
semiannually on February 1 and August 1 of each year, commencing August 1, 2009,
to the holders of record at the close of business on January 15 and July 15
immediately preceding the applicable interest payment date.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
HOLDING COMPANY STRUCTURE
The Company is a holding company and does not have any material assets or
operations other than ownership of TSI. All of its operations are conducted
through its Subsidiaries. Claims of creditors of such Subsidiaries, including
trade creditors, and claims of preferred stockholders (if any) of such
Subsidiaries generally will have priority with respect to the assets and
earnings of such Subsidiaries over the claims of the Company's creditors,
including holders of the Notes. The Notes, therefore, will be structurally
subordinated to creditors (including trade creditors)
70
and preferred stockholders (if any) of our Subsidiaries including TSI. As of
December 31, 2003, on a pro forma basis after giving effect to this offering and
the use of proceeds, the Company would have had Indebtedness of approximately
$386.7 million outstanding, and our Subsidiaries would have had Indebtedness and
other liabilities of approximately $261.9 million outstanding including, in both
instances, no borrowings outstanding under the senior credit facility. Although
the Indenture limits the incurrence of Indebtedness and the issuance of
preferred stock of our Restricted Subsidiaries, such limitation is subject to a
number of significant qualifications. Moreover, the Indenture does not impose
any limitation on the incurrence by such Restricted Subsidiaries of liabilities
that are not considered Indebtedness under the Indenture. See "Risk Factors".
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after February
1, 2009, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount at maturity
thereof) if redeemed during the twelve-month period commencing on February 1 of
the year set forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption:
YEAR PERCENTAGE
---- ----------
2009........................................................ 105.500%
2010........................................................ 103.667%
2011........................................................ 101.833%
2012 and thereafter......................................... 100.000%
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to February 1, 2007, the Company may, at its option, use the
net cash proceeds of one or more Equity Offerings (as defined below) to redeem
up to 35% of the Notes issued under the Indenture, in each case at a redemption
price equal to 111% of the Accreted Value thereof at the redemption date;
provided that:
(1) at least 65% of the aggregate principal amount at maturity of
Notes issued under the Indenture remains outstanding immediately after any
such redemption; and
(2) the Company shall make such redemption not more than 120 days
after the consummation of any such Equity Offering.
As used in the preceding paragraph, "Equity Offering" means a public or
private offering of Qualified Capital Stock of the Company (other than to a
Subsidiary of the Company) that generates gross proceeds to the Company of at
least $15.0 million.
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 at maturity of $1,000 or less
shall be redeemed in part; and
(2) that if a partial redemption is made with the proceeds of an
Equity Offering, selection of the Notes or portions thereof for redemption
shall be made by the Trustee only
71
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 at
maturity 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 Accreted Value will cease to accrete and interest will cease to
accrue, in each case to the extent applicable, on Notes or portions thereof
called for redemption as long as the Company has deposited with the Paying Agent
funds in satisfaction of the applicable redemption price pursuant to the
Indenture.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company 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 Accreted Value thereof plus accrued and
unpaid interest to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company 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.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company 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. The Credit Agreement contains, and any
future other agreements relating to other indebtedness to which we become, or
one of our Subsidiaries becomes, a party may contain restrictions or
prohibitions on the Company's ability to repurchase Notes or may provide that an
occurrence of a Change of Control constitutes an event of default under, or
otherwise requires payments of amounts borrowed under, those agreements. If a
Change of Control occurs at a time when the Company is prohibited from
repurchasing the Notes, we could seek the consent of our then existing lenders
or the lenders of TSI to the repurchase of the Notes or could attempt to
refinance the indebtedness containing such prohibitions. If the Company does not
obtain such consent or repay the indebtedness, it would remain prohibited from
repurchasing the Notes. In that case, failure to repurchase tendered Notes would
constitute an Event of Default under the Indenture and may constitute a default
under the terms of other indebtedness that we may enter into from time to time.
In the event the Company is required to purchase outstanding Notes pursuant to a
Change of Control Offer, the Company expects that it would seek third
72
party financing to the extent it does not have available funds to meet our
purchase obligations. However, there can be no assurance that the Company would
be able to obtain such financing.
Neither the Board of Directors of the Company 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 the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company 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
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements that 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.
The Company 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 provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company 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. The Company will not,
and will not permit any of its 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, (i) the Company 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,
the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.00
to 1.00 and (ii) any of TSI and its Restricted Subsidiaries 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, TSI's Consolidated Fixed Charge Coverage Ratio is greater
than 2.00 to 1.00.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in the Qualified Capital Stock of the
Company) on or in respect of shares of the Company's Capital Stock to
holders of such Capital Stock,
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock,
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(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) any scheduled or mandatory repayment or
(c) any scheduled sinking fund payment, any Indebtedness of the
Company 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) the Company is 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 April 16, 2003 (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 the
Board of Directors of the Company (or if prior to the Issue Date, by the
Board of Directors of TSI)) shall exceed the sum of, without duplication:
(a) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss) of the Company earned subsequent to the end of the fiscal quarter
immediately prior to April 16, 2003 (determined as if the Company owned
TSI for all periods prior to the Issue Date) and on or prior to the end
of the most recently ended fiscal quarter for which internal financial
statements are available as of the date the Restricted Payment occurs
(treating such period as a single accounting period), plus
(b) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from
the issuance and sale subsequent to April 16, 2003 and on or prior to
the date the Restricted Payment occurs of Qualified Capital Stock of the
Company (or if prior to the Issue Date, Qualified Capital Stock of TSI),
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 the Company from a holder of the Company's
Capital Stock subsequent to April 16, 2003 (or if prior to the Issue
Date, received by TSI from a holder of TSI's Capital Stock) and on or
prior to the date the Restricted Payment occurs, plus
(d) without duplication, 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 the
Company or any Restricted Subsidiary or the receipt of proceeds by the
Company 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 April 16, 2003 and
(y) the consolidated net Investments on the date of
Revocation made by the Company or any of its Restricted Subsidiaries in
any Subsidiary of the Company that has been designated an Unrestricted
Subsidiary after April 16, 2003 upon its
74
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 or the mailing of such
irrevocable redemption notice if the dividend or redemption payment, as the
case may be, would have been permitted on the date of declaration or the
date of mailing of such notice;
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Company,
either
(a) solely in exchange for shares of Qualified Capital Stock of
the Company or
(b) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company;
(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either
(a) solely in exchange for shares of Qualified Capital Stock of
the Company, or
(b) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the
Company) of
(x) shares of Qualified Capital Stock of the Company or
(y) Refinancing Indebtedness;
(4) if no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Capital Stock of the Company or
options or warrants to purchase Capital Stock of the Company, stock
appreciation rights or any similar equity interest in the Company from
consultants, directors, officers and employees of the Company or any of its
Subsidiaries or their authorized representatives upon the death,
disability, retirement or termination of employment of such consultants,
directors, officers or employees in an aggregate amount not to exceed
$750,000 in any calendar year plus the amount of any proceeds received
under key-man life insurance policies that are used to make such payments;
(5) if no Default shall have occurred and be continuing, the
purchase, redemption, defeasance or other acquisition or retirement of
Indebtedness of the Company that is subordinate or junior in right of
payment to the Notes in connection with an asset sale net proceeds amount
offer or change of control offer after complying with the covenants set
forth under "-- Limitation on Asset Sales" and "-- Change of Control";
(6) if no Default or Event of Default shall have occurred and be
continuing, Restricted Payments in an aggregate amount not to exceed $10.0
million; and
(7) any payments made in furtherance of the Transactions with the net
proceeds received by the Company from the sale of the Notes on the Issue
Date.
In determining the aggregate amount of Restricted Payments made subsequent to
April 16, 2003 in accordance with clause (3) of the second preceding paragraph,
amounts expended pursuant to clauses (1) , (2)(b), (3)(b)(x), (4) and (6) of the
immediately preceding paragraph shall be included in such calculation.
75
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case
may be, receives 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 the Board of Directors of the Company);
(2) at least 75% of the consideration received by the Company or its
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in
the form of cash or Cash Equivalents and shall be received at the time of
such disposition; provided, however, that the amount of:
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or the notes thereto) of the
Company 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 the Company or such
Restricted Subsidiary is released and
(b) any notes, securities or other obligations received by the
Company or by any such Restricted Subsidiary from such transferee that
are immediately converted by the Company 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;
(3) upon the consummation of an Asset Sale, the Company shall 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 pay (i) Indebtedness under the Credit Agreement (and, in the
case of any such Indebtedness under any revolving credit facility,
effect a corresponding permanent reduction in the availability under
such revolving credit facility) or other Indebtedness ranking pari passu
with the Notes; provided, however, that if the Company repays such other
pari passu Indebtedness it must make an equal and ratable offer to all
holders of Notes as provided in the following paragraph, or (ii) in the
case of an Asset Sale by a Restricted Subsidiary, Indebtedness of such
Restricted Subsidiary,
(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 the Company
and its 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 the
Board of Directors of the Company or of such Restricted Subsidiary 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 that
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 Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on
a date not less than 45 nor more than 60 days following the applicable Net
Proceeds Offer Trigger Date, the maximum Accreted Value of Notes and principal
amount of other Indebtedness of the Company that ranks pari passu in right of
payment with the Notes (to the extent required by the
76
instrument governing such other Indebtedness), that may be purchased out of the
Net Proceeds Offer Amount; provided, however, notwithstanding the foregoing, in
the case of an Asset Sale by a Restricted Subsidiary of the Company, the Company
shall not be required to make a Net Proceeds Offer to the extent such Restricted
Subsidiary is not permitted pursuant to its outstanding Indebtedness to make a
Restricted Payment to the Company. Any Notes and other Indebtedness to be
purchased pursuant to a Net Proceeds Offer shall be purchased pro rata based on
the aggregate principal amount of Notes and such other Indebtedness outstanding
and all Notes shall be purchased at an offer price in cash in an amount equal to
100% of the Accreted Value thereof, plus accrued and unpaid interest to the date
of purchase.
The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $10.0 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 $10.0 million, shall be
applied as required pursuant to the preceding paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its 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 the
properties and assets of the Company and its 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 such properties and assets of the Company
or its 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, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent:
(1) at least 75% 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
the Company or any of its 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 shall 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
principal amount at maturity 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.
The Company shall 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, the Company shall 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.
77
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
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
its Capital Stock;
(2) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary,
in each case except for such encumbrances or restrictions existing under or by
reason of:
(a) applicable law;
(b) the Indenture, the Notes, the Existing TSI Indenture as in
effect on the Issue Date and the Existing TSI Notes and the guarantees
thereof;
(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 (other than the Credit
Agreement) to the extent and in the manner such agreements are in effect
on the Issue Date;
(f) the Credit Agreement or an agreement governing any other
Indebtedness of the Company or any Restricted Subsidiary permitted to be
incurred under the Indenture; provided that either (y) with respect to
any agreement governing such other Indebtedness, the provisions relating
to such encumbrance or restriction are no less favorable to the Company
in any material respect than the provisions contained in the Credit
Agreement as in effect on the Issue Date or (z) any encumbrance or
restriction contained in such other Indebtedness does not prohibit
(except upon a default or event of default thereunder) the payment of
dividends or the making of loans or advances in an amount sufficient, as
determined by our Board of Directors in its reasonable and good faith
judgment (including the use of reasonable projections of future
operating performance), to make scheduled payments of cash interest on
the Notes;
(g) restrictions on the transfer of assets subject to any Lien
permitted under the Indenture imposed by the holder of such Lien;
(h) restrictions imposed by any agreement to sell assets or Capital
Stock permitted under the Indenture to any Person pending the closing of
such sale;
(i) customary provisions in joint venture agreements and other
similar agreements in each case relating solely to the respective joint
venture or similar entity or to the equity interest therein;
(j) customary provisions imposed by agreements governing
Indebtedness of a Foreign Restricted Subsidiary permitted to be incurred
under the Indenture to the extent that such encumbrance or restriction
relates solely to the respective Foreign Restricted Subsidiary; and
(k) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (b) and
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(d) through (g) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such Indebtedness
are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company 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)
and (d) through (g) above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit
any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to
own any Preferred Stock of any Restricted Subsidiary.
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any of its Restricted Subsidiaries, 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 Indebtedness of the Company
(other than Indebtedness represented by any guarantees (including through the
pledge of intercompany notes or otherwise) of Indebtedness under the Credit
Agreement and the Existing TSI Notes), unless, in any such case (a) such
Restricted Subsidiary executes and delivers a supplemental indenture to the
Indenture, providing a Guarantee and (b) if any 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
subordinated Indebtedness shall be subordinated to the Guarantee substantially
to the same extent as such Indebtedness is subordinated to the Notes. This
covenant shall not apply to guarantees by Restricted Subsidiaries of
Indebtedness of Restricted Subsidiaries.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Notes shall 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: (i) 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 (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided 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.
Limitation on Liens. The Company will not, directly or indirectly, create,
incur, assume or permit or suffer to exist any Liens upon any property or assets
of the Company (excluding property, assets and Capital Stock of Restricted
Subsidiaries to secure Indebtedness of 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 Subordinated Indebtedness, 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
(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) (x) Liens securing Indebtedness permitted by clauses (2) and
(15) of the definition of Permitted Indebtedness and (y) Liens securing
Indebtedness permitted by the covenant described under "-- Limitation on
Additional Indebtedness" (other than Indebtedness permitted by clauses
(2) and (15) of the definition of Permitted Indebtedness); provided that
such Indebtedness and all other Indebtedness secured by
79
Liens permitted by this clause (y) shall, at the time such Indebtedness
is incurred and after giving effect to such incurrence, not exceed an
aggregate principal amount equal to the difference between (i) 1.25
times Consolidated EBITDA of the Company for the most recently ended
four fiscal quarters for which internal financial statements are
available and (ii) the amount of Indebtedness then outstanding under
clauses (2) and (15) of the definition of Permitted Indebtedness;
(c) Liens securing the Notes;
(d) Liens of the Company on assets of any Restricted Subsidiary of
the Company;
(e) Liens securing Refinancing Indebtedness that is incurred to
Refinance any Indebtedness that has been secured by a Lien permitted
under the Indenture and that 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, in each case
in any material respect, than the Liens in respect of the
Indebtedness being Refinanced; and
(y) do not extend to or cover any property or assets of the
Company not securing the Indebtedness so Refinanced,
(f) Liens in favor of the Company; and
(g) Permitted Liens.
Merger, Consolidation and Sale of Assets. The Company 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 the
Company's assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries) whether as an entirety or substantially as an entirety
to any Person unless:
(1) either:
(a) the Company will be the surviving or continuing corporation or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition of properties and assets of the Company and of its
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 the part of the Company 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), the Company
or such Surviving Entity, as the case may be, shall be able to incur at
least $1.00 of additional Indebtedness (other than Permitted
80
Indebtedness) pursuant to clause (i) of 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 shall have occurred or be continuing; and
(4) the Company or the Surviving Entity shall 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
the properties and assets of the Company, will be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company 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) The Company will not, and will not permit any of its 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 an Affiliate of the Company 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 $2.5 million
will be approved by the Board of Directors of the Company or 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 the Company 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 $10.0 million, the Company or such
Restricted Subsidiary, as the case may be, will, prior to the consummation
thereof, obtain an opinion from an Independent Financial Advisor stating that
such transaction or series of related transactions are fair to the Company or to
the relevant Restricted Subsidiary, as the case may be, from a financial point
of view.
81
(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 the
Company's Board of Directors or senior management,
(b) transactions exclusively between or among the Company and any
of its Restricted Subsidiaries or exclusively between or among such
Restricted Subsidiaries; provided such transactions are not otherwise
prohibited by the Indenture,
(c) Restricted Payments and Permitted Investments permitted by the
Indenture and
(d) management or advisory fees to BRS Group or its affiliates in
accordance with the terms of the Management Agreement as in effect on
the Issue Date or as the same may be modified or amended; provided,
however, that such modification or amendment cannot provide for the
annual payment of such fees in an amount in excess of 1.5% of
Consolidated EBITDA for the immediately preceding fiscal year.
Reports to Holders. Whether or not required by the rules and regulations
of the Commission, so long as any Notes are outstanding, the Company will
furnish the holders of Notes, with a copy to the Trustee:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial condition and results of operations of the Unrestricted
Subsidiaries of the Company, if any) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants; and
(2) the information that would be required to be included in all
current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports, in each case
within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Notes remain outstanding, it will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
that 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
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(2) the Company 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) the fair market value of the Capital Stock of such Subsidiary
owned by the Company and its Restricted Subsidiaries on such date and
(b) the aggregate amount of other Investments of the Company and
its Restricted Subsidiaries in such Subsidiary on such date; and
(3) the Company 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, the Company shall 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 the
Company shall not, and shall 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); or
(2) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary.
The Indenture further provides that the Company 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 Board Resolutions of
the Company certifying compliance with the foregoing provisions.
Payments for Consent. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder of Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid
and is paid to all Holders of the Notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) the failure to pay interest on any Note when the same becomes due
and payable and the default continues for a period of 30 days;
(2) the failure to pay the principal of any Note, 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) on the date
specified for such payment in the applicable offer to purchase;
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(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 the Company receives 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 stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary, or the
acceleration of the final stated maturity of any such Indebtedness (which
acceleration is not rescinded, annulled or otherwise cured within 20 days
of receipt by the Company or such Restricted Subsidiary of notice of any
such acceleration) 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 (in each case with respect to which the 20-day period described
above has passed), aggregates $5.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess of $5.0
million (to the extent not covered by insurance) shall have been rendered
against the Company or any of its Significant Subsidiaries and such
judgments remain undischarged, unpaid or unstayed for a period of 60 days
after such judgment or judgments become final and nonappealable; or
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(6) above relating to the Company) shall occur and be continuing, the Trustee or
the Holders of at least 25% in principal amount at maturity of outstanding Notes
may declare the Accreted Value of and accrued and unpaid interest, if any, on
all the Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration", and the same shall become immediately due and payable. If an
Event of Default specified in clause (6) above relating to the Company occurs
and is continuing, then all unpaid Accreted Value of, and premium, if any, and
accrued and unpaid interest, if any, 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 at maturity 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 the Company has 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 an opinion of
counsel stating that such Event of Default has been cured or waived.
84
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount at maturity 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 at maturity 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, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors (if any) discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Company shall 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) the Company's 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, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes. In the event Covenant Defeasance
occurs, certain 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.
85
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) the Company 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, 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, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that
(a) the Company has 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, the Company shall 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 (other than a Default or an Event of
Default resulting from the borrowing of funds to be applied to such deposit
and the grant of any Lien securing such borrowings);
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the Indenture (other
than a Default or an Event of Default resulting from the borrowing of funds
to be applied to such deposit and the grant of any Lien securing such
borrowings) or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(7) the Company shall 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) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, assuming no intervening bankruptcy of the
Company between the date of deposit and the 91st day following the date of
deposit and that no Holder is an insider of the Company, after the 91st day
following the date of 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
86
(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 the name, and at the expense, of the Company.
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 (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 the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the
Trustee for cancellation, or
(b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable or will be due and payable
within one year and the Company has 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 the Company directing the Trustee to apply such funds
to the payment thereof at maturity or redemption, as the case may be;
(2) the Company has paid all other sums payable by the Company under
the Indenture; and
(3) the Company has 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, the Company 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 at
87
maturity 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 or Accreted Value 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 at
maturity of Notes to waive Defaults or Events of Default;
(6) after the Company's obligation to purchase Notes arises under the
Indenture, amend, change or modify in any material respect the obligation
of the Company to make and consummate a Change of Control Offer in the
event of a Change of Control or make and consummate a Net 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 that adversely
affects the Holders; provided, that ranking shall not be affected by the
existence or lack thereof of a security interest or by priority with
respect to a security interest.
GOVERNING LAW
The Indenture provides that it, 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 person 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 a creditor of the Company or of a
Subsidiary of the Company, 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.
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"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Notes:
(1) if the Specified Date occurs on one of the following dates (each,
a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
August 1, 2004....................................... $ 617.63
February 1, 2005..................................... $ 651.60
August 1, 2005....................................... $ 687.44
February 1, 2006..................................... $ 725.25
August 1, 2006....................................... $ 765.13
February 1, 2007..................................... $ 807.22
August 1, 2007....................................... $ 851.61
February 1, 2008..................................... $ 898.45
August 1, 2008....................................... $ 947.87
February 1, 2009..................................... $1,000.00
(2) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (A) the original issue price
of a Note and (B) an amount equal to the product of (x) the Accreted Value
for the first Semi-Annual Accrual Date less such original issue price
multiplied by (y) a fraction, the numerator of which is the number of days
from the Issue Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the Issue Date to the first Semi-Annual Accrual Date, using a 360-day
year of twelve 30-day months;
(3) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (A) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(B) an amount equal to the product of (x) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (y) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(4) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"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 the Company or any of its 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.
89
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means
(1) an Investment by the Company 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 the Company or any Restricted
Subsidiary; or
(2) the acquisition by the Company or 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 comprise 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.
"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 the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of:
(1) any Capital Stock of any Restricted Subsidiary; or
(2) any other property or assets of the Company or 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 the
Company or its Restricted Subsidiaries receive aggregate consideration of
less than $2.5 million,
(b) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company 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 the
Company or any Restricted Subsidiary of assets or property to the Company
or one or more Restricted Subsidiaries and
(e) any Restricted Payment permitted by the "Limitation on Restricted
Payments" covenant or any Permitted Investment.
"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, Sherrill & Co., Inc. and its
Affiliates.
"Business Day" means a day other than a Saturday, Sunday or other day on
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
90
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, membership 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
highest ratings obtainable from either S&P or 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
$250.0 million;
(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 that 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 the assets
of the Company 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), other than to a Permitted Holder;
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the 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 the issued and outstanding Capital Stock of the Company;
91
(4) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority
of the Board of Directors of the Company 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; or
(5) the failure at any time by the Company to beneficially own (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act) directly or
indirectly , 100% of the Common Stock of TSI.
"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 such Person and its 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
(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 such Person and its Restricted Subsidiaries in
accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means with respect to any
Person, the ratio of Consolidated EBITDA of such Person 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 of
such Person 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 such Person or
any of its 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
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(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 such Person or one of its 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 that 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 such Person or any of its 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 such Person or any such Restricted Subsidiary
of such Person 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 that 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.
"Consolidated Fixed Charges" means, with respect to any Person 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 Preferred
Stock of such Person (other than dividends paid or to be paid in such
period in Qualified Capital Stock) paid or required to be paid during
such period, 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 income tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
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
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(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its 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 (without regard to the
$2.5 million limitation set forth in the definition thereof) or abandonment
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 the Company 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 (other than restrictions permitted by the "Limitations
on Dividend and Other Payment Restrictions Affecting Subsidiaries"
covenant);
(5) the net income of any Person, other than the Company or a
Restricted Subsidiary, except to the extent of cash dividends or
distributions paid to the Company 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 to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any net
income of the successor corporation prior to such consolidation, merger or
transfer of assets.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person (including, without limitation, charges related to the impairment of
intangibles) and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person 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 Agreement" means the Credit Agreement dated as of April 16, 2003 by
and among TSI, the lenders from time to time party thereto in their capacities
as lenders thereunder and Deutsche Bank Trust Company Americas, as agent,
together with the related documents thereto (including, without limitation, any
guarantee agreements and security documents), 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 the Company
or Subsidiaries of the Company or TSI 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.
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"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company 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.
"Domestic Restricted Subsidiary" means a Restricted Subsidiary incorporated
or otherwise organized or existing under the laws of the United States or any
state thereof.
"Equity Offering" has the meaning set forth under
"-- Redemption -- Optional Redemption Upon Equity Offerings."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Existing TSI Indenture" means the indenture dated as of April 16, 2003
among TSI, the guarantors named therein and The Bank of New York, as trustee, as
amended or modified from time to time.
"Existing TSI Notes" means the 9 5/8% Senior Notes due 2011 of TSI issued
under the Existing TSI Indenture.
"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 the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company.
"Farallon" means Farallon Partners, L.L.C. and its Affiliates.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary that is not a
Domestic Restricted Subsidiary.
"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 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 April 16, 2003. 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 (i) the deduction or amortization of any premiums, fees and
expenses incurred in connection with any financings or any other permitted
incurrence of Indebtedness and (ii) depreciation, amortization or other expenses
recorded as a
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result of the application of purchase accounting in accordance with Accounting
Principles Board Opinion Nos. 16 and 17 and FASB Nos. 141 and 142.
"Guarantee" means each guarantee of the Company's obligations under the
Indenture and the Notes by the Guarantors.
"Guarantor" means: each of the Company's Restricted Subsidiaries that in
the future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor; provided that
any Person constituting a Guarantor as described above shall cease to constitute
a Guarantor when its respective Guarantee is released in accordance with the
terms of the Indenture.
"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);
(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 that 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 the Board of Directors of the Company. 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 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.
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"Independent Financial Advisor" means a firm:
(1) that does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the
Company; and
(2) that, in the judgment of the Board of Directors of the Company, is
otherwise independent and qualified to perform the task for which it is to
be engaged.
"Initial Purchaser" means Deutsche Bank Securities Inc.
"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 other Person. "Investment" shall exclude extensions of trade credit by
the Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes 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 a Subsidiary of the Company, the Company 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 February 4, 2004.
"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).
"Moody's" means Moody's Investors Service, Inc.
"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
the Company or any of its 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 secured by the assets sold in
the relevant Asset Sale or other Indebtedness that is required to be repaid
in connection with such Asset Sale; and
97
(4) appropriate amounts to be provided by the Company 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 the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, 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.
"Permitted Holder" means any of BRS Group, Farallon and their respective
Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under (i) the Notes issued under the Indenture in an
aggregate principal amount not to exceed $213.0 million and any Guarantees
thereof and (ii) the Existing TSI Notes and the guarantees thereof
(including any guarantees thereof by the Company);
(2) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $50.0
million incurred under this clause (2), less the amount of all required
principal payments actually made by the Company in respect of the loans
thereunder that were incurred under this clause (2) in accordance with the
provisions set forth under "-- Certain Covenants -- Limitation on Asset
Sales" (which, in the case of revolving loans, are accompanied by a
corresponding permanent commitment reduction);
(3) other Indebtedness (including Capitalized Lease Obligations) of
the Company and its Restricted Subsidiaries outstanding on the Issue Date;
(4) Purchase Money Indebtedness and Capitalized Lease Obligations of
the Company and its Restricted Subsidiaries in an aggregate amount for all
Indebtedness incurred pursuant to this clause (4) not to exceed $20.0
million outstanding at any one time;
(5) Interest Swap Obligations covering Indebtedness of the Company or
any of its Restricted Subsidiaries; provided, however, that such Interest
Swap Obligations are entered into to protect the Company and its 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, at the time of
incurrence thereof, 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 the Company and its
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 the Company or to
another Restricted Subsidiary for so long as such Indebtedness is held by
the Company, a Restricted Subsidiary or the holders of a Lien permitted
under the Indenture, in each case subject to no Lien held by a Person other
than the Company, a Restricted Subsidiary or the holders of a Lien
permitted under the Indenture; provided, that if as of any date any Person
other than the Company, a Restricted Subsidiary or the holders of a Lien
permitted under the Indenture 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 pursuant to this subclause (7);
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(8) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary or the holders of a
Lien permitted under the Indenture, in each case subject to no Lien other
than a Lien permitted under the Indenture; provided that:
(a) any Indebtedness of the Company to any Restricted Subsidiary
that is not a Guarantor is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and
the Notes and
(b) if as of any date any Person other than a Restricted Subsidiary
or the holders of a Lien permitted under the Indenture 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 the Company under this clause
(8);
(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 four Business Days of incurrence;
(10) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or 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;
(12) Indebtedness represented by guarantees by the Company or its
Restricted Subsidiaries of Indebtedness otherwise permitted to be incurred
under the Indenture; provided that, in the case of a guarantee by a
Restricted Subsidiary, such Restricted Subsidiary complies with the
covenant described under "Certain Covenants -- Limitation on Issuances of
Guarantees by Restricted Subsidiaries" to the extent applicable;
(13) Indebtedness of the Company or any of its Restricted Subsidiaries
in respect of bid, payment and performance bonds, bankers' acceptances,
workers' compensation claims, surety or appeal bonds, payment obligations
in connection with self-insurance or similar obligations, and bank
overdrafts (and letters of credit in respect thereof) in the ordinary
course of business;
(14) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets; and
(15) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10.0 million
at any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement).
For purposes of determining any particular amount of Indebtedness under
"Limitation on Incurrence of Additional Indebtedness" covenant, guarantees,
Liens or letter of credit obligations supporting Indebtedness otherwise included
in the determination of such particular amount shall not be included. For
purposes of determining compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness
described in clauses (1) through (15) above or is permitted to be incurred
pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of such
covenant, the Company shall, in its sole discretion, classify (or later
reclassify) such item of Indebtedness in any manner that complies with such
covenant. Accrual of interest, accretion or amortization of original issue
discount, the
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payment of interest on any Indebtedness in the form of additional Indebtedness
with the same terms, the payment of dividends on Disqualified Capital Stock in
the form of additional shares of the same class of Disqualified Capital Stock
and change in the amount outstanding due solely to the result of fluctuations in
the exchange rates of currencies will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Capital Stock for purposes of the
"Limitations on Incurrence of Additional Indebtedness" covenant.
"Permitted Investments" means:
(1) Investments by the Company or 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 the Company or
a Restricted Subsidiary;
(2) Investments in the Company by any Restricted Subsidiary; provided
that any Indebtedness incurred by the Company evidencing such Investment by
a Restricted Subsidiary that is not a Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to directors, employees and officers of the
Company and its Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of $5.0 million at any one
time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of the 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 $10.0 million 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 or in good
faith settlement of delinquent obligations of such trade creditors or
members;
(8) Investments represented by guarantees that are otherwise permitted
under the Indenture;
(9) Investments the payment for which is Qualified Capital Stock of
the Company;
(10) Investments made by the Company or its 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," and
(11) the acquisition by the Company of obligations of one or more
officers, directors or employees of the Company or any of its Subsidiaries
in connection with such officers', directors' or employees' acquisition of
shares of capital stock of the Company so long as no cash is paid by the
Company or any of its Subsidiaries to such officers, directors or employees
in connection with the acquisition of any such obligations.
"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 the Company or its Restricted Subsidiaries shall have set aside on
its books such reserves as may be required pursuant to GAAP;
100
(2) statutory and contractual 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 the business of the Company
or of any of its 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 asset
which is not leased property subject to such Capitalized Lease Obligation;
(7) purchase money Liens to finance property or assets of the 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 property or
assets of the 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 the
Company or any of its Restricted Subsidiaries, including rights of offset
and setoff;
(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;
(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 the Company
or a Restricted Subsidiary and were not granted in connection with, or
in anticipation of, the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary and
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(b) such Liens do not extend to or cover any property or assets of
the Company or of any of its Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by us or a Restricted Subsidiary;
(14) Liens on assets of a Restricted Subsidiary that is not a
Guarantor to secure Indebtedness and other obligations of such Restricted
Subsidiary that are otherwise permitted under the Indenture;
(15) leases, subleases, licenses and sublicenses granted to others
that do not materially interfere with the ordinary course of business of
the Company and its Restricted Subsidiaries;
(16) banker's Liens, rights of setoff and similar Liens with respect
to cash and Cash Equivalents on deposit in one or more bank accounts in the
ordinary course of business;
(17) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(18) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods; and
(19) additional Liens not to exceed $10.0 million at any one time.
"Person" means an individual, partnership, corporation, limited liability
company, 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 the Company or its
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.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"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 the Company 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), (12), (13), (14) or (15) 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 the Company or any Restricted Subsidiary in connection
with such Refinancing); or
(2) create Indebtedness with
102
(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 solely
of the Company, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company, 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.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of February 4, 2004 among the Company and the Initial Purchaser.
"Replacement Assets" means assets of a kind used or usable in the business
of the Company and its Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
of the Company delivered to the Trustee, as an Unrestricted Subsidiary 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 the 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."
"S&P" means Standard and Poor's Ratings Service.
"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 the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company 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.
"Subordinated Indebtedness" means Indebtedness of the Company that is by
its express terms subordinated or junior in right of payment to the Notes.
"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."
"Transactions" means the manner in which the proceeds received by the
Company from the sale of the Notes on the Issue Date will be used, including the
payment of dividends to the Company's shareholders and the repurchase of TSI's
preferred stock.
103
"TSI" means Town Sports International, Inc.
"Unrestricted Subsidiary" means any Subsidiary of the 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 the 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 the Company or another Wholly Owned Restricted Subsidiary.
104
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion (including the opinion of counsel described below)
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and administrative
rulings and practice. There can be no assurance that the Internal Revenue
Service (the "IRS") will not take a contrary view, and no ruling from the IRS
has been or will be sought. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conditions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to holders. Certain holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. We recommend that each holder consult such holder's own tax
advisor as to the particular tax consequences of exchanging such holder's Old
Notes for New Notes, including the applicability and effect of any state, local
or foreign tax laws.
LEGAL MATTERS
Certain legal matters in connection with the offering of the Notes will be
passed upon for us by Kirkland & Ellis LLP, New York, New York.
EXPERTS
The financial statements of Town Sports International, Inc. as of December
31, 2003 and 2002 and for each of the three years in the period ended December
31, 2003 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.
AVAILABLE INFORMATION
TSI, Inc. is subject to the periodic reporting and other informational
requirements of the Exchange Act, as amended. Under the terms of the indenture,
we agree that, whether or not required by the rules and regulations of the SEC,
so long as any Notes are outstanding, we will furnish to the trustee and the
holders of Notes (i) all quarterly and annual financial information that would
be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, if
we were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes our
financial condition and results of operations and our consolidated subsidiaries
and, with respect to the annual information only, a report thereon by our
certified independent accountants and (ii) all current reports that would be
required to be filed with the SEC on Form 8-K if we were required to file such
reports. In addition, whether or not required by the rules and regulations of
the SEC, we will file a copy of all such information and reports with the SEC
for public availability (unless the SEC will not accept such a filing) and make
such information available to securities analysts and prospective investors upon
request. Information filed with the SEC may be read and copied by the public at
the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. In addition, we have agreed that, for so long as any Notes remain
outstanding, we will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
105
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Annual Financial Statements:
Report of Independent Auditors............................ F-2
Consolidated balance sheets at December 31, 2002 and
2003................................................... F-3
Consolidated statements of operations for the years ended
December 31, 2001, 2002 and 2003....................... F-4
Consolidated statements of stockholders' deficit for the
years ended December 31, 2001, 2002 and 2003........... F-5
Consolidated statements of cash flows for the years ended
December 31, 2001, 2002 and 2003....................... F-6
Notes to consolidated financial statements................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
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' deficit and cash
flows present fairly, in all material respects, the financial position of TOWN
SPORTS INTERNATIONAL, INC. and SUBSIDIARIES (the "Company") at December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in Notes 2m and 4 to the financial statements, the Company
changed its method of accounting for goodwill and other intangibles effective
January 1, 2002.
/s/ PRICEWATERHOUSECOOPERS LLP
February 17, 2004, except as to Note 18,
which is dated March 17, 2004.
F-2
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 2002 AND 2003
2002 2003
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 5,551 $ 40,802
Accounts receivable (less allowance for doubtful accounts
of $120 and $822 in 2002 and 2003, respectively)........ 1,333 1,469
Inventory................................................. 1,132 750
Prepaid corporate income taxes............................ 3,012 4,062
Prepaid expenses and other current assets................. 4,430 5,322
-------- --------
TOTAL CURRENT ASSETS.................................... 15,458 52,405
Fixed assets, net........................................... 210,823 223,599
Goodwill.................................................... 45,531 45,864
Intangible assets, net...................................... 1,675 630
Deferred tax assets, net.................................... 20,254 16,771
Deferred membership costs................................... 14,408 13,038
Other assets................................................ 6,101 9,892
-------- --------
TOTAL ASSETS............................................ $314,250 $362,199
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt and capital lease
obligations............................................. $ 5,178 $ 3,486
Accounts payable.......................................... 5,328 5,379
Accrued expenses.......................................... 21,634 26,006
Deferred revenue.......................................... 26,510 26,621
-------- --------
TOTAL CURRENT LIABILITIES............................... 58,650 61,492
Long-term debt and capital lease obligations................ 155,765 258,391
Deferred lease liabilities.................................. 23,644 25,856
Deferred revenue............................................ 3,435 3,002
Other liabilities........................................... 7,530 7,862
-------- --------
TOTAL LIABILITIES....................................... 249,024 356,603
-------- --------
Commitments and contingencies (Note 15)
Redeemable preferred stock
Redeemable senior preferred stock, $1.00 par value;
liquidation value $64,512; authorized 100,000 shares;
40,000 and 0 shares issued and outstanding at December
31, 2002 and December 31, 2003, respectively............ 62,125 --
Series A redeemable preferred stock, $1.00 par value; at
liquidation value; authorized 200,000 shares; 153,637
shares issued and outstanding at December 31, 2002 and
2003.................................................... 34,841 39,890
-------- --------
96,966 39,890
-------- --------
Stockholders' deficit
Series B preferred stock, $1.00 par value; at liquidation
value; 3,822 and 109,540 shares issued and outstanding
at December 31, 2002 and 2003, respectively............. 303 9,961
Class A voting common stock, $.001 par value; issued and
outstanding 1,176,043 shares at December 31, 2002 and
2003, respectively...................................... 1 1
Paid-in capital........................................... (32,149) (45,627)
Unearned compensation..................................... (278) (172)
Accumulated other comprehensive income (currency
translation adjustment)................................. 293 596
Retained earnings......................................... 90 947
-------- --------
TOTAL STOCKHOLDERS' DEFICIT............................. (31,740) (34,294)
-------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT.................................. $314,250 $362,199
======== ========
See notes to consolidated financial statements.
F-3
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
2001 2002 2003
-------- -------- --------
Revenues
Club operations...................................... $278,200 $314,995 $336,140
Fees and other....................................... 3,433 4,432 6,401
-------- -------- --------
281,633 319,427 342,541
-------- -------- --------
Operating expenses
Payroll and related.................................. 112,766 129,105 130,585
Club operating....................................... 88,941 99,113 111,069
General and administrative........................... 18,785 21,368 21,995
Depreciation and amortization........................ 32,185 31,748 34,927
-------- -------- --------
252,677 281,334 298,576
-------- -------- --------
OPERATING INCOME.................................. 28,956 38,093 43,965
Loss on extinguishment of debt......................... -- -- 7,773
Interest expense....................................... 14,918 16,559 23,670
Interest income........................................ (391) (138) (444)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR CORPORATE INCOME TAXES...................... 14,429 21,672 12,966
Provision for corporate income taxes................... 6,853 9,709 5,537
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS................. 7,576 11,963 7,429
Loss on discontinued operations (including loss on club
closure of $996 in 2002), net of income tax benefits
of $364 and $551 for 2001 and 2002, respectively..... (530) (767) --
Cumulative effect of a change in accounting principle,
net of income tax benefit of $612.................... -- (689) --
-------- -------- --------
NET INCOME........................................ 7,046 10,507 7,429
Accreted dividends on preferred stock.................. (10,201) (11,543) (10,984)
-------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS...... $ (3,155) $ (1,036) $ (3,555)
======== ======== ========
See notes to consolidated financial statements.
F-4
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
PREFERRED STOCK COMMON STOCK
SERIES B CLASS A FOREIGN ACCUMULATED
($1.00 PAR) ($.001 PAR) CURRENCY (DEFICIT)/
---------------- ------------------ PAID-IN UNEARNED TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT EARNINGS
------- ------ --------- ------ -------- ------------ ----------- -----------
BALANCE AT JANUARY 1, 2001......... 3,822 $ 232 1,005,698 $1 $(13,117) $(156) $ 12 $(17,463)
Common stock issued in connection
with subordinated credit
facility.......................... 23,000
Compensation expenses incurred in
connection with Series B Preferred
stock options..................... 993
Amortization of unearned
compensation...................... 156
Accretion of Series B preferred
stock dividend ($8.63 per
share)............................ 33 (33)
Accretion of Series A redeemable
preferred stock dividend ($25.07
per share)........................ (3,852)
Accretion of redeemable senior
preferred stock dividend ($157.90
per share plus accretion of
liquidation value)................ (6,658)
Deferred compensation recorded in
connection with the issuance of
stock options..................... 422 (422)
Other comprehensive income, net of
taxes:
Net income........................ 7,046
Foreign currency translation
adjustment...................... 9
Total comprehensive income......
------- ------ --------- -- -------- ----- ---- --------
BALANCE AT DECEMBER 31, 2001....... 3,822 265 1,028,698 1 (22,245) (422) 21 (10,417)
Common stock issued in connection
with warrant exercises............ 147,345 1
Vesting of restricted common stock
issued in connection with
subordinated credit facility...... 917
Compensation expense incurred in
connection with Series B Preferred
stock options..................... 1,137
Amortization of unearned
compensation...................... 70
Accretion of Series B preferred
stock dividend ($10.20 per
share)............................ 38 (38)
Accretion of Series A redeemable
preferred stock dividend ($28.71
per share)........................ (4,409)
Accretion of redeemable senior
preferred stock dividend ($177.40
per share plus accretion to
liquidation value)................ (7,438)
Forfeiture of unvested options..... (74) 74
Other comprehensive income, net of
taxes:
Net income........................ 10,507
Foreign currency translation
adjustment...................... 272
Total comprehensive income......
------- ------ --------- -- -------- ----- ---- --------
BALANCE AT DECEMBER 31, 2002....... 3,822 303 1,176,043 1 (32,149) (278) 293 90
Series B preferred stock issued in
connection with the exercise of
stock options..................... 106,267 8,618 (8,618)
Repurchase of stock................ (549) (43) (540)
Compensation expense incurred in
connection with Series B Preferred
stock options..................... 177
Amortization of unearned
compensation...................... 21
Accretion of Series B preferred
stock dividend ($9.84 per
share)............................ 1,083 (305) (778)
Accretion of Series A redeemable
preferred stock dividend ($32.86
per share)........................ (1,219) (3,830)
Accretion of redeemable senior
preferred stock dividend ($121.30
per share plus accretion to
liquidation value)................ (2,888) (1,964)
Forfeiture of unvested options..... (85) 85
Other comprehensive income, net of
taxes:
Net income........................ 7,429
Foreign currency translation
adjustment...................... 303
Total comprehensive income......
------- ------ --------- -- -------- ----- ---- --------
BALANCE AT DECEMBER 31, 2003....... 109,540 $9,961 1,176,043 $1 $(45,627) $(172) $596 $ 947
======= ====== ========= == ======== ===== ==== ========
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
BALANCE AT JANUARY 1, 2001......... $(30,491)
Common stock issued in connection
with subordinated credit
facility..........................
Compensation expenses incurred in
connection with Series B Preferred
stock options..................... 993
Amortization of unearned
compensation...................... 156
Accretion of Series B preferred
stock dividend ($8.63 per
share)............................ --
Accretion of Series A redeemable
preferred stock dividend ($25.07
per share)........................ (3,852)
Accretion of redeemable senior
preferred stock dividend ($157.90
per share plus accretion of
liquidation value)................ (6,658)
Deferred compensation recorded in
connection with the issuance of
stock options..................... --
Other comprehensive income, net of
taxes:
Net income........................ 7,046
Foreign currency translation
adjustment...................... 9
--------
Total comprehensive income...... 7,055
--------
BALANCE AT DECEMBER 31, 2001....... (32,797)
Common stock issued in connection
with warrant exercises............ 1
Vesting of restricted common stock
issued in connection with
subordinated credit facility...... 917
Compensation expense incurred in
connection with Series B Preferred
stock options..................... 1,137
Amortization of unearned
compensation...................... 70
Accretion of Series B preferred
stock dividend ($10.20 per
share)............................ --
Accretion of Series A redeemable
preferred stock dividend ($28.71
per share)........................ (4,409)
Accretion of redeemable senior
preferred stock dividend ($177.40
per share plus accretion to
liquidation value)................ (7,438)
Forfeiture of unvested options..... --
Other comprehensive income, net of
taxes:
Net income........................ 10,507
Foreign currency translation
adjustment...................... 272
--------
Total comprehensive income...... 10,779
--------
BALANCE AT DECEMBER 31, 2002....... (31,740)
Series B preferred stock issued in
connection with the exercise of
stock options..................... --
Repurchase of stock................ (583)
Compensation expense incurred in
connection with Series B Preferred
stock options..................... 177
Amortization of unearned
compensation...................... 21
Accretion of Series B preferred
stock dividend ($9.84 per
share)............................ --
Accretion of Series A redeemable
preferred stock dividend ($32.86
per share)........................ (5,049)
Accretion of redeemable senior
preferred stock dividend ($121.30
per share plus accretion to
liquidation value)................ (4,852)
Forfeiture of unvested options..... --
Other comprehensive income, net of
taxes:
Net income........................ 7,429
Foreign currency translation
adjustment...................... 303
--------
Total comprehensive income...... 7,732
--------
BALANCE AT DECEMBER 31, 2003....... $(34,294)
========
See notes to consolidated financial statements.
F-5
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
2001 2002 2003
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 7,046 $ 10,507 $ 7,429
-------- -------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................ 32,667 32,025 34,927
Amortization of debt issuance costs...................... 1,882 1,928 1,627
Noncash rental expense, net of noncash rental income..... 4,224 1,670 1,650
Compensation expense incurred in connection with stock
options................................................ 1,149 1,207 198
Net change in certain working capital components......... 3,475 2,413 (227)
Decrease (increase) in deferred tax asset................ (4,526) (1,162) 3,483
Decrease (increase) in deferred membership costs......... (1,162) 340 1,370
Loss on extinguishment of debt........................... -- -- 7,773
Goodwill impairment write-off............................ -- 1,301 --
Club closure costs....................................... -- 996 --
Other.................................................... (407) (420) 23
-------- -------- ---------
Total adjustments...................................... 37,302 40,298 50,824
-------- -------- ---------
Net cash provided by operating activities.............. 44,348 50,805 58,253
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of effect of acquired
businesses............................................... (57,811) (41,393) (43,397)
Proceeds from sale of equipment............................ -- -- 176
Acquisition of businesses, net of cash acquired............ (1,272) (2,322) (130)
Landlord contributions..................................... 725 3,533 617
-------- -------- ---------
Net cash used in investing activities.................. (58,358) (40,182) (42,734)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from 9 5/8% Senior Note Offering.................. -- -- 255,000
Repayment of 9 3/4% Senior Notes........................... -- -- (125,000)
Premium paid on extinguishment of debt and other costs..... -- -- (4,064)
Redemption of redeemable senior preferred stock............ -- -- (66,977)
Transaction costs related to 9 5/8% Senior Notes........... -- -- (9,578)
Net line of credit (repayments) borrowings................. 13,745 (8,245) (14,500)
Net subordinated credit (repayments) borrowings............ 5,762 2,810 (9,000)
Repurchase of Series B preferred stock..................... -- -- (583)
Repayments of other borrowings............................. (3,404) (5,095) (5,566)
-------- -------- ---------
Net cash provided by (used in) financing activities.... 16,103 (10,530) 19,732
-------- -------- ---------
Net increase in cash and cash equivalents.............. 2,093 93 35,251
CASH AND CASH EQUIVALENTS
Beginning of period........................................ 3,365 5,458 5,551
-------- -------- ---------
End of period.............................................. $ 5,458 $ 5,551 $ 40,802
======== ======== =========
SUMMARY OF THE CHANGE IN CERTAIN WORKING CAPITAL
COMPONENTS,NET OF EFFECTS OF ACQUIRED BUSINESSES
Increase in accounts receivable............................ $ (304) $ (443) $ (136)
Decrease (increase) in inventory........................... (433) 194 382
Increase in prepaid expenses and other current assets...... (514) (527) (137)
Increase in accounts payable and accrued expenses.......... 1,745 3,751 1,036
(Increase) decrease in prepaid corporate income taxes...... 1,828 (3,012) (1,050)
(Decrease) increase in deferred revenue.................... 1,153 2,450 (322)
-------- -------- ---------
Net change in certain working capital components....... $ 3,475 $ 2,413 $ (227)
======== ======== =========
See notes to consolidated financial statements.
F-6
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2002 AND 2003
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
1. NATURE OF BUSINESS
Town Sports International, Inc. and Subsidiaries (the "Company") owns and
operates 127 fitness clubs ("clubs") and partly owns and operates two additional
clubs as of December 31, 2003. The Company operates in a single segment. The
Company operates 86 clubs in the New York metropolitan market, 19 clubs in the
Boston market, 15 clubs in the Washington, D.C. market, six in the Philadelphia
market and three clubs in Switzerland. 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, acts of
terrorism and economic down turns. The Company's Swiss operations are immaterial
to the Company's consolidated financial position, results of operations, and
cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Town Sports International, Inc. ("TSI") and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain reclassifications were made to the reported amounts at December 31,
2001 and 2002 to conform to the presentation at December 31, 2003.
b. REVENUE RECOGNITION
The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. The Company's members have the option to join on a
month-to-month basis or to commit to a one or two year membership.
Month-to-month members can 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
life of twenty four (24) months. The amount of costs deferred do not exceed the
related deferred revenue for the periods presented. Dues that are received in
advance are recognized on a pro-rata basis over the periods in which services
are to be provided. Revenues from ancillary services are recognized as services
are performed. 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.
In connection with advance receipts of fees or dues, the Company is
required to maintain surety bonds totaling $3,342 pursuant to various state
consumer protection laws.
c. INVENTORY
Inventory consists of athletic equipment, supplies, headsets for the club
entertainment system and clothing for sale to members. Inventories are valued at
the lower of cost or market by the first-in, first-out method.
F-7
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d. 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 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. The costs related to
developing web applications, developing HTML web pages and installing developed
applications on the web servers are capitalized and classified as computer
software. Web site hosting fees and maintenance costs are expensed as incurred.
e. ADVERTISING AND CLUB PREOPENING COSTS
Advertising costs and club preopening costs are charged to operations
during the period in which they are incurred except for production costs related
to television and radio advertisements, which are expensed when the related
commercials are first aired. Total advertising costs incurred by the Company
during the years ended December 31, 2001, 2002 and 2003 totaled $9,327, $8,888
and $9,783, respectively, and are included in club operations.
f. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 allocation and
fair value ascribed to assets acquired in connection with the acquisition of
clubs under the purchase method of accounting, the useful lives, recoverability
and impairment of fixed and intangible assets, deferred income tax valuation,
valuation of and expense incurred in connection with stock options and warrants,
legal contingencies and the estimated membership life.
g. 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 basis of assets and liabilities ("temporary differences") at enacted tax
rates in effect for the years in which the temporary differences are expected to
reverse. A valuation allowance is recorded to reduce deferred tax assets to the
amount that is more likely than not to be realized.
F-8
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
h. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
2001 2002 2003
------- ------- -------
Cash paid
Interest (net of amounts capitalized)............ $13,887 $15,035 $24,004
Income taxes..................................... 10,087 13,187 3,104
Noncash investing and financing activities
Acquisition of fixed assets included in accounts
payable and accrued expenses.................. 7,538 3,901 7,287
Acquisition of equipment and software financed by
lessors....................................... 2,853 2,575 --
See Notes 6, 9, 10 and 11 for additional noncash
investing and financing activities
i. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments which have
original 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. The Company owns and operates a captive
insurance company in the State of New York. Under the insurance laws of the
State of New York, this captive insurance company is required to maintain a cash
balance of at least $250. At December 31, 2003, $252 of cash related to this
wholly owned subsidiary was included within cash and cash equivalents.
j. 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.
k. FOREIGN CURRENCY
At December 31, 2003, the Company owns three Swiss clubs, which use the
local currency as their functional currency. Assets and liabilities are
translated into U.S. dollars at year-end exchange rates, while income and
expense items are translated into U.S. dollars at the average exchange rate for
the period. For all periods presented foreign exchange transaction gains and
losses were not material. Adjustments resulting from the translation of foreign
functional currency financial statements into U.S. dollars are included in the
currency translation adjustment in stockholders' deficit. The difference between
the Company's net income and comprehensive income is the effect of foreign
exchange translation adjustments, which was immaterial for 2001, and was $272
and $303 for 2002 and 2003, respectively.
l. INVESTMENTS IN AFFILIATED COMPANIES
The Company has investments in Capitol Hill Squash Club Associates
("CHSCA") and Kalorama Sports Management Associates ("KSMA") (collectively
referred to as the "Affiliates"). The Company has a limited partnership interest
in CHSCA, which provides the Company with approximately 20% of the CHSCA
profits, as defined. The Company has a co-general partnership and limited
partnership interests in KSMA, which entitles it to receive approximately 45% of
the KSMA profits, as defined. The Affiliates have operations, which are
F-9
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
similar, and related to, those of the Company. The Company accounts for these
Affiliates in 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.
m. INTANGIBLE ASSETS, GOODWILL AND DEBT ISSUANCE COSTS
Intangible assets consist of membership lists, a beneficial lease and
covenants-not-to-compete. These assets are stated at cost and are being
amortized by the straight-line method over their estimated lives. Membership
lists are amortized over 24 months and covenants-not-to-compete are amortized
over the contractual life, generally five years. The beneficial lease is being
amortized over the remaining life of the underlying club lease.
In accordance with the Statement on Financial Accounting Standards ("SFAS")
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, goodwill has not
been amortized subsequent to December 31, 2001. For the year ended December 31,
2001, goodwill was amortized by the straight-line method over the remaining
lives of the underlying club leases, five to fifteen years. See Note 4 for
further discussion on Goodwill and Intangible Assets.
Debt issuance costs are classified within other assets and are being
amortized as additional interest expense over the life of the underlying debt,
five to eight years, using the interest method. Amortization of debt issue costs
was $1,882, $1,928 and $1,627 for December 31, 2001, 2002 and 2003,
respectively.
n. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as fixed assets and intangible assets 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.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets," which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets, expands the scope of discontinued operation to include a
component of an entity and eliminates the exemption to consolidation when
control over a subsidiary is likely to be temporary. In 2002, the Company
discontinued operations at two wholly-owned clubs. As a result of the adoption
of SFAS No. 144 the Company has accounted for these two clubs as discontinued
operations. See Note 17 for further discussion on Discontinued Operations.
o. 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.
p. 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
F-10
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. The
fair value of warrants granted to nonemployees for financing were recorded as
deferred financing costs and amortized into interest expense using the interest
method. See Note 10 for further discussion on stock options and warrants.
The following table illustrates the effect on net loss attributed to common
stockholders if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board issued Statement No. 123, ("SFAS 123")
Accounting for Stock-Based Compensation, to stock-based employee compensation.
2001 2002 2003
------- ------- -------
Net loss attributed to common stockholders, as
reported......................................... $(3,155) $(1,036) $(3,555)
Add
Stock-based employee compensation expense
included in reported net loss attributed to
common stockholders, net of related tax
effects....................................... 84 38 12
Deduct
Total stock-based employee compensation expense
determined under fair value based method for
all stock option awards, net of related tax
effects....................................... (229) (142) (167)
------- ------- -------
Pro forma net loss attributed to common
stockholders..................................... $(3,300) $(1,140) $(3,710)
======= ======= =======
Since option grants vest over several years and additional grants are
expected in the future, the pro forma results noted above are not likely to be
representative of the effects on future years of the application of the fair
value based method.
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 and the following assumptions:
WEIGHTED
RISK-FREE AVERAGE EXPECTED FAIR VALUE
INTEREST EXPECTED EXPECTED DIVIDEND AT DATE
CLASS A COMMON RATE LIFE VOLATILITY YIELD OF GRANT
-------------- --------- -------- ---------- -------- ----------
1999 Grants.................... 5.7% 5 years 60% -- $ 30.10
2000 Grants.................... 6.6 5 69 -- 47.11
2001 Grants.................... 4.6 5 72 -- 111.89
2003 Grants.................... 3.8 6 55 -- 14.50
q. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity (FAS
150), which establishes
F-11
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. FAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. As of December 31, 2003 the Company does not have
financial instruments within the scope of this pronouncement.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 requires a variable interest
entity, or VIE, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the VIE's activities or is entitled to receive
a majority of the entity's residual return or both. Interpretation No. 46 also
provides criteria for determining whether an entity is a VIE subject to
consolidation. Interpretation No. 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. In December 2003, a modification to Interpretation No. 46 was
issued (Interpretation No. 46R) which delayed the effective date until no later
than fiscal periods ending after March 31, 2004 and provided additional
technical clarifications to implementation issues. The Company does not
currently have any variable interest entities as defined in Interpretation No.
46R. The Company does not expect that the adoption of this statement will have a
material impact on the consolidated financial statements.
r. SERIES A REDEEMABLE PREFERRED STOCK
As described in Note 9, the Company has issued 153,637 shares of Series A
Redeemable Preferred Stock ("Series A"). The Company has reclassified its 2001
financial statements to account for a redemption feature included in the Series
A stock in accordance with the guidance in EITF Topic No. D-98: Classification
and Measurement of Redeemable Securities ("EITF Topic No. D-98"). EITF Topic No.
D-98 provided additional guidance on the appropriate classification of
redeemable preferred stock upon the occurrence of an event that is not solely
within the control of an issuer. EITF Topic No. D-98 requires retroactive
application in the first fiscal quarter ending after December 15, 2001 by
reclassifying the financial statements of prior periods. The carrying value of
the Series A stock, which was previously presented as a component of
stockholders' deficit, has been reclassified as redeemable preferred stock
outside of stockholders' deficit. The reclassification of the 2001 financial
statements for the Series A stock had no effect on the Company's net income, net
loss attributable to common stockholders cash flows from operations, or total
assets. The following sets forth the overall effect of the reclassification on
the Company's stockholders' deficit at December 31, 2001:
Stockholders' deficit prior to reclassification............. $ (2,365)
Reclassification of Series A stock.......................... (30,432)
--------
Stockholders' deficit after the reclassification............ $(32,797)
========
F-12
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FIXED ASSETS
Fixed assets as of December 31, 2002 and 2003, are shown at cost, less
accumulated depreciation and amortization, and are summarized below:
2002 2003
-------- --------
Leasehold improvements..................................... $211,480 $234,560
Club equipment............................................. 50,937 58,376
Furniture, fixtures and computer equipment................. 33,779 34,703
Computer software.......................................... 4,503 7,838
Building and improvements.................................. 4,995 4,995
Land....................................................... 986 986
Construction in progress................................... 8,631 13,836
-------- --------
315,311 355,294
Less: Accumulated depreciation and amortization.......... 104,488 131,695
-------- --------
$210,823 $223,599
======== ========
Depreciation and leasehold amortization expense for the years ended
December 31, 2001, 2002 and 2003, was $25,780, $30,645 and $33,987,
respectively.
4. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002 we implemented SFAS 142. There were no changes to
the estimated useful lives of amortizable intangible assets due to the SFAS 142
implementation. In connection with the SFAS 142 transitional impairment test the
Company recorded a $1,301 write-off of goodwill. A deferred tax benefit of $612
was recorded as a result of this goodwill write-off, resulting in a net
cumulative effect of change in accounting principle of $689, in the first
quarter of 2002. The write-off of goodwill related to four, remote
underperforming clubs. The impairment test was performed with discounted
estimated future cash flows as the criteria for determining fair market value.
Goodwill has been allocated to reporting units that closely reflect the regions
served by our four trade names; New York Sports Club, Boston Sports Club,
Washington Sports Club and Philadelphia Sports Club, with certain more remote
clubs that do not benefit from a regional cluster being considered single
reporting units.
A reconciliation of reported net income for the year ended December 31,
2001 to net income adjusted for the impact of SFAS 142 over that same period is
as follows:
2001
-------
Net income as reported...................................... $ 7,046
Goodwill amortization....................................... 4,436
Deferred tax benefit........................................ (1,344)
-------
Net income as adjusted.................................... $10,138
=======
In addition, the Company is required to conduct an annual review of
goodwill for potential impairment. Goodwill impairment testing requires a
comparison between the carrying value and fair value of reportable goodwill. If
the carrying value exceeds the fair value, goodwill is considered impaired. The
amount of the impairment loss is measured as the difference between the carrying
value and the implied fair value of goodwill, which is determined using
discounted
F-13
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash flows. In 2003, the Company did not have to record a charge to earnings for
an impairment of goodwill as a result of its annual review conducted during the
first quarter.
The change in the carrying amount of goodwill from December 31, 2002
through December 31, 2003 is as follows:
BALANCE AT DECEMBER 31, 2002................................ $45,531
Changes due to
Currency.................................................. 203
Acquisitions.............................................. 130
-------
BALANCE AT DECEMBER 31, 2003................................ $45,864
=======
A summary of our acquired amortizable intangible assets as of December 31,
2002 and 2003 is as follows:
DECEMBER 31, 2002
-------------------------------------
GROSS
CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION INTANGIBLES
-------- ------------ -----------
ACQUIRED INTANGIBLE ASSETS
Membership lists................................ $11,054 $ (9,605) $1,449
Covenants-not-to-compete........................ 876 (711) 165
Beneficial lease................................ 223 (162) 61
------- -------- ------
$12,153 $(10,478) $1,675
======= ======== ======
DECEMBER 31, 2003
-------------------------------------
GROSS
CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION INTANGIBLES
-------- ------------ -----------
ACQUIRED INTANGIBLE ASSETS
Membership lists................................ $10,205 $ (9,630) $575
Covenants-not-to-compete........................ 876 (871) 5
Beneficial lease................................ 223 (173) 50
------- -------- ----
$11,304 $(10,674) $630
======= ======== ====
The amortization expense of the above acquired intangible assets for each
of the five years ending December 31, 2008 will be as follows:
AMORTIZATION
EXPENSE
------------
YEAR ENDING DECEMBER 31,
2004........................................................ $591
2005........................................................ 11
2006........................................................ 11
2007........................................................ 11
2008........................................................ 6
----
$630
====
F-14
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense of intangible assets for the years ended December 31,
2001, 2002 and 2003, was $6,403, $1,103 and $940, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------
2002 2003
------- -------
Accrued payroll............................................. $ 7,817 $ 6,086
Accrued interest............................................ 2,731 5,157
Accrued construction in progress and equipment.............. 2,650 5,300
Accrued occupancy costs..................................... 3,514 4,002
Accrued other............................................... 4,922 5,461
------- -------
$21,634 $26,006
======= =======
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
DECEMBER 31,
-------------------
2002 2003
-------- --------
Senior Notes 9 5/8%........................................ $ -- $255,000
Series B 9 3/4% Senior Notes, due 2004..................... 125,000 --
Line of credit borrowings.................................. 14,500 --
Subordinated credit borrowings............................. 9,000 --
Notes payable for acquired businesses...................... 6,230 4,358
Capital lease obligations.................................. 6,213 2,519
-------- --------
160,943 261,877
Less: Current portion due within one year.................. 5,178 3,486
-------- --------
Long-term portion........................................ $155,765 $258,391
======== ========
The aggregate long-term debt and capital lease obligations maturing during
the next five years and thereafter is as follows:
AMOUNT DUE
----------
YEAR ENDING DECEMBER 31,
2004........................................................ $ 3,486
2005........................................................ 1,056
2006........................................................ 619
2007........................................................ 632
2008........................................................ 217
Thereafter.................................................. 255,867
--------
$261,877
========
In October 1997, the Company issued $85,000 of Series B 9 3/4% Senior Notes
due October 2004. The net proceeds from the Senior Notes totaled approximately
$81,700. The
F-15
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction fees of approximately $3,300, were accounted for as deferred
financing costs. In June 1999, the Company issued $40,000 of Senior Notes at a
price of 98.75%, providing the Company with $39,500 of proceeds before expenses
relating to the issuance. The Senior Notes bear interest at an annual rate of
9 3/4%, payable semi-annually. The Senior Notes are redeemable at the option of
the Company on or after October 15, 2001. For redemption prior to October 15,
2004, the Company would be required to pay a premium as defined. The $85,000 and
$40,000 issuances are collectively referred to as the "Senior Notes." The Senior
Notes were redeemed on April 16, 2003. See the April 16, 2003 Refinancing
Transactions discussed below.
Prior to the April 16, 2003 refinancing transactions, the Company had a
$25,000 line of credit with its principal bank for direct borrowings and letters
of credit. The line of credit carried 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 was required to pay a commitment commission of
0.375% per annum based upon the daily unutilized amount. There were $10,500 of
Eurodollar and $4,000 of prime rate based borrowings outstanding against this
line as of December 31, 2002. The interest rates charged on the Eurodollar
borrowings and prime rate based borrowings outstanding at December 31, 2002 were
4.0% and 6.25%, respectively. In connection with the April 16, 2003 refinancing
transactions, this line of credit was terminated.
In November 2000, the Company entered into a Subordinated Credit Agreement
(the "Subordinated Agreement") with an affiliate of a stockholder of the
Company. This Subordinated Agreement provided for up to $20,000 of principal
borrowings and would have expired December 31, 2004. Interest on principal
borrowings accrued at 12.75% per annum; 9.75% of which was payable on a monthly
basis and the remaining 3% was accruable and payable, at the option of the
Company, through maturity. The Company was charged a fee of 0.083% per month
based on the portion of the facility not utilized. There were $9,000 of
Subordinated credit borrowings outstanding as of December 31, 2002. In
connection with the April 16, 2003 refinancing transactions, this Subordinated
Credit Agreement was terminated.
April 16, 2003 Refinancing Transaction
On April 16, 2003 the Company successfully completed a refinancing of its
debt. This refinancing included an offering of $255,000 of 9 5/8% Senior Notes
("Notes") that will mature April 15, 2011, and the entering into of a new
$50,000 senior secured revolving credit facility (the "Senior Credit Facility")
that will expire April 15, 2008. The transaction fees of approximately $9,600
have been accounted for as deferred financing costs. The Notes accrue interest
at 9 5/8% per annum and interest is payable semiannually on April 15 and October
15. In connection with this refinancing, the Company wrote-off $3,709 of
deferred financing costs related to extinguished debt, paid a call premium of
$3,048 and incurred $1,016 of interest on the 9 3/4% Notes representing the
interest incurred during the 30 day redemption notification period.
The Senior Credit Facility contains various covenants including limits on
capital expenditures, the maintenance of a consolidated interest coverage ratio
of not less than 2.25:1.00 during 2003, and a maximum permitted total leverage
ratio of 4.00:1.00 during 2003. Loans under the Senior Credit Facility will, at
our option, bear interest at either the bank's prime rate plus 3.0% or the
Eurodollar rate plus 4.0%, as defined. There were no borrowings outstanding at
December 31, 2003 and outstanding letters of credit issued totaled $1,749. The
Company is
F-16
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to pay a commitment fee of 0.75% per annum on the daily unutilized
amount. The unutilized portion of the Senior Credit Facility as of December 31,
2003 was $48,251.
Notes payable were incurred upon the acquisition of various 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 rates of between 5% and 9%, and are non-collateralized. The notes are
due on various dates through 2012.
The carrying value of long-term debt, other than the Senior Notes and the
Notes, approximates fair market value as of December 31, 2002 and 2003 as the
debt is generally short-term in nature. Based on quoted market prices, the
Senior Notes have a fair value of approximately $125,000 at December 31, 2002
and the Notes have a fair value of approximately $272,850 at December 31, 2003.
The Company's interest expense and capitalized interest related to funds
borrowed to finance club facilities under construction for the years ended
December 31, 2001, 2002 and 2003 are as follows:
YEARS ENDED DECEMBER 31,
---------------------------
2001 2002 2003
------- ------- -------
Interest costs expensed............................ $14,918 $16,559 $23,670
Interest costs capitalized......................... 907 354 322
------- ------- -------
$15,825 $16,913 $23,992
======= ======= =======
The Company leases equipment under noncancelable capital leases. The
initial lease terms range from three to five years, after which the Company has
the right to purchase the equipment at amounts defined by the agreements.
As of December 31, 2003, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
------------------------ -------------
2004........................................................ $2,337
2005........................................................ 224
------
2,561
Less: Amounts representing interest....................... 42
------
PRESENT VALUE OF MINIMUM CAPITAL LEASE PAYMENTS........ $2,519
======
The cost of leased equipment included in club equipment was approximately
$12,658 and $12,097 at December 31, 2002 and 2003, respectively; and the related
accumulated depreciation was $5,686 and $7,544, respectively.
7. RELATED PARTY TRANSACTIONS
The Company entered into a professional service agreement with Bruckmann,
Rosser, Sherrill & Co., Inc. ("BRS"), a stockholder of the Company for strategic
and financial advisory services on December 10, 1996. Fees for such services,
which are included in General and administrative expenses, are $250 per annum,
and are payable while BRS owns 20% or more of the outstanding Common stock of
the Company. No amounts were due BRS at December 31, 2002 and 2003.
F-17
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's Subordinated Agreement discussed in Note 6 was entered into
with an affiliate of a stockholder of the Company in 2000. This agreement was
terminated in connection with the April 16, 2003 Refinancing Transaction.
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. Under the provisions of
certain of these leases, the Company is required to maintain irrevocable letters
of credit, which total $1,749 as of December 31, 2003.
The leases expire at various times through December 31, 2027, and certain
leases may be extended at the Company's option.
Future minimum rental payments under noncancelable operating leases are as
follows:
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
------------------------ -------------
2004........................................................ $ 50,976
2005........................................................ 51,659
2006........................................................ 51,500
2007........................................................ 49,511
2008........................................................ 47,476
Aggregate thereafter........................................ 369,831
--------
$620,953
========
Rent expense, including the effect of deferred lease liabilities, for the
years ended December 31, 2001, 2002 and 2003 was $42,341, $52,085 and $59,273,
respectively. Such amounts include additional rent of $7,119, $8,368 and
$10,342, respectively.
The Company, as landlord, leases space to third party tenants under
noncancelable operating leases and licenses. 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 August 31, 2014. Future
minimum rentals receivable under noncancelable leases are as follows:
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
------------------------ -------------
2004........................................................ $ 2,167
2005........................................................ 2,392
2006........................................................ 2,196
2007........................................................ 1,985
2008........................................................ 1,278
Aggregate thereafter........................................ 5,723
-------
$15,741
=======
F-18
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental income, including noncash rental income, for the years ended
December 31, 2001, 2002 and 2003 was $1,879, $2,132 and $2,434, respectively.
Such amounts include additional rental charges above the base rent of $982,
$1,046 and $679, respectively.
9. REDEEMABLE PREFERRED STOCK
Redeemable Senior Preferred Stock
During November 1998, the Company issued 40,000 shares of mandatorily
redeemable Senior stock ("Senior") and 143,261 warrants. During 2002 71,630 of
these warrants were exercised and in January 2004 the remaining 71,631 warrants
were exercised (see Note 18 Subsequent Events). The Senior stock had no voting
rights except as required by law. The warrants had 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)
was being accreted to its liquidation value using the interest method. The
Senior stock was redeemable in November 2008. The Company, at its option, could
redeem the Senior stock at any time without premium.
The Senior stock had a liquidation value of $1,000 per share plus
cumulative unpaid dividends of $26,977 as of April 16, 2003. The Senior stock
holders were entitled to a cumulative 12% annual dividend, based on the share
price of $1,000. On April 16, 2003, in connection with the refinancing
transaction discussed in Note 6, all of the Senior stock was redeemed at a
liquidation value of $66,977. During 2003, the Company recorded $4,852 of
accretion, which was comprised of stock dividend accretion of $2,465 and the
remaining warrant accretion to liquidation value of $2,387.
Series A Redeemable Preferred Stock
During fiscal years 1997 and 1998, the Company issued 152,455 and 1,182
shares, respectively, of Series A redeemable preferred stock. As of December 31,
2002 and 2003, 153,637 shares of Series A stock were outstanding. Series A stock
has liquidation preferences over Common Stock in the event of a liquidation,
dissolution or winding up of the Company. Series A stock has 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 $24,526 as of December 31, 2003. Series A stockholders are entitled
to a cumulative 14% annual dividend based upon the per share price of $100. The
Company may, at its sole discretion, pay any dividends by cash or by the
issuance of additional Series A shares. The Company may at any time redeem all
or any portion of the Series A stock at a price equal to the liquidation value
plus cumulative unpaid dividends.
F-19
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of transactions related to Series A stock is as follows:
CARRYING
SHARES VALUE
------- --------
Proceeds received in connection with the issuance of Series
A stock................................................... 153,637 $15,364
Accretion of Series A stock dividends....................... -- 11,216
------- -------
January 1, 2001 Series A stock.............................. 153,637 26,580
Accretion to Series A stock dividends....................... -- 3,852
------- -------
December 31, 2001 Series A stock............................ 153,637 30,432
Accretion to Series A stock dividends....................... -- 4,409
------- -------
December 31, 2002 Series A stock............................ 153,637 34,841
Accretion to Series A stock dividends....................... -- 5,049
------- -------
December 31, 2003 Series A stock............................ 153,637 $39,890
======= =======
In the event of a change in control as defined, each holder of Series A
stock then outstanding may require the Corporation, and the Corporation shall be
obligated, to redeem all or any portion of the Series A stock owned by such
holder.
In February 2004, the Company redeemed all of the Series A stock at a
liquidation value of $40,516. See Note 18, Subsequent Events.
10. STOCKHOLDERS' DEFICIT
A. CAPITALIZATION
The Company's certificate of incorporation, as amended, 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"); and 200,000 shares of Series B Preferred Stock ("Series B") par
value $1.00 per share. This also includes the redeemable preferred stock
discussed in Note 9, 100,000 shares Senior stock, par value $1.00 per share and
200,000 shares of Series A stock, 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.
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.
Series B Preferred Stock
During December 1996, the Company issued 3,857 shares of Series B preferred
stock, 3,822 shares of which were outstanding as of December 31, 2002. During
2003, the Company issued an additional 106,267 shares and repurchased 549 shares
of previously issued Series B
F-20
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock which were retired. The executives sold all of the Series B
stock issued in connection with the 106,267 shares to an affiliate of a
stockholder of the Company. Series B stock has liquidation preferences over
Common Stock in the event of a liquidation, dissolution or winding up of the
Company. Series B stock has no voting rights except as required by law, and rank
"pari passu." Upon consummation of an IPO, at the option of the holder, each
Series B stock is convertible into Class A Common Stock at prices, at which the
Class A Common Stock is sold in such IPO. The Company may at any time redeem all
or any portion of the Series B stock at a price equal to the liquidation value
plus cumulative unpaid dividends. Series B stock has a liquidation value of $35
per share plus cumulative unpaid dividends of $6,127 as of December 31, 2003.
Series B stockholders are entitled to a cumulative 14% annual dividend based
upon the per share price of $35. The Company may, at its sole discretion, pay
any dividends by cash or by the issuance of additional Series B shares.
In the event of a change in control, as defined, each holder of Series B
stock then outstanding may require the Corporation, and the Corporation shall be
obligated, to redeem all or any portion of the Series B stock owned by such
holder. The Series B preferred stockholders do not control a majority of the
votes of the board of directors through direct representation or other rights.
In February 2004, the Company redeemed all of the Series B stock at a
liquidation value of $10,118. See Note 18, Subsequent Events.
B. STOCK OPTIONS
Class A Common Stock Options
During the year ended May 31, 1997, the Company adopted the Town Sports
International Inc. Common Stock Option Plan (the "Plan"). The provisions of the
Plan, as amended and restated, provide for the Company's Board of Directors to
grant to executives and key employees options to acquire 162,754 shares of Class
A stock.
Grants vest in full at various dates between December 2007 and 2012. The
vesting of these grants will be accelerated in the event that certain defined
events occur including the achievement of annual equity values or the sale of
the Company. The term of each of these grants is ten or eleven years.
In accordance with APB No. 25, Accounting for Stock Issued to Employees,
the Company recorded unearned compensation in connection with the 1998 Grants
and the 2001 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 years ended December 31, 2001, 2002 and 2003, amortization of
unearned compensation totaled $156, $70 and $21, respectively.
As of December 31, 2003, there were 30,227 shares reserved for future
option awards.
As of December 31, 2001, 2002 and 2003, a total of 76,474, 75,819 and
80,294 Class A Common stock options were exercisable, respectively.
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. Series B Options were fully
F-21
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vested on the date of grant and expire on December 31, 2021. The terms of the
Series B Options also contained provisions whereby the exercise price would be
reduced, or in certain cases, the option holder would receive cash in accordance
with a formula as defined. The aggregate value of, either a reduction in
exercise price, or the distribution of cash is deemed compensatory and,
accordingly, is recorded as a compensation expense. For the years ended December
31, 2001, 2002 and 2003 compensation expense recognized in connection with
Series B Options totaled $993, $1,137 and $177, respectively. All Series B
Preferred stock options were exercisable upon grant. There are no shares of
Series B Preferred Stock reserved for future option grants.
In January 2003, an executive officer of the Company exercised 9,530 Series
B Options, and in turn these newly issues shares were repurchased by the Company
for $540 and were retired. In February 2003, several executives of the Company
exercised and converted the remaining 148,775 Series B Options in to 106,267
shares of Series B preferred stock. The difference between the 148,775 options
exercised and the 106,267 shares issued is due to the remittance of these shares
to the Company to cover the purchase price of the stock. The remitted shares
were subsequently retired by the Company.
The following table summarizes the stock option activity for the years
ended December 31, 2001, 2002 and 2003:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CLASS A EXERCISE SERIES B EXERCISE
COMMON PRICE PREFERRED PRICE
------- -------- --------- --------
Balance at January 1, 2001........... 92,682 $ 23.88 158,306 $10.00
Granted.............................. 7,400 $100.00(i) --
Exercised............................ (788) $ 32.53 --
Forfeited............................ (512) $ 25.76 --
------- ---------
Balance at December 31, 2001......... 98,782 $ 29.32 158,306 $10.00
Exercised............................ (3,100) $ 22.93 --
Forfeited............................ (2,200) $ 84.57 --
------- ---------
Balance at December 31, 2002......... 93,482 $ 28.23 158,306 $10.00
Granted.............................. 46,400 $144.00(ii) --
Exercised............................ (1,740) $ 36.14 (158,306) $10.00
Forfeited............................ (7,610) $ 24.48 --
------- ---------
Balance at December 31, 2003......... 130,532 $ 69.49 --
======= =========
---------------
(i) Option exercise price of these options was less than the estimated fair
value on the grant date.
(ii) Option exercise price was greater than market price on the grant date.
F-22
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock option information as of December 31,
2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- --------- ----------- ---------
Class A Common
1997 Grants......... 45,586 36 months $ 1.00 45,586 $ 1.00
1998 Grants......... 7,800 52 months $ 17.50 7,800 $ 17.50
1999 Grants......... 9,700 60 months $ 53.00 7,760 $ 53.00
2000 Grants......... 16,446 72 months $ 75.00 9,868 $ 75.00
2001 Grants......... 4,600 101 months $100.00 -- $100.00
2003 Grants......... 46,400 108 months $144.00 9,280 $144.00
----------- -----------
Total Grants.......... 130,532 80,294
=========== ===========
11. ASSET ACQUISITIONS
During the period from January 1, 2001 through December 31, 2002, the
Company completed the acquisition of six fitness clubs. There were no club
acquisitions during the year ended December 31, 2003. None of the individual
acquisitions were material to the financial position, results of operations or
cash flows of the Company. The table below summarizes the aggregate purchase
price and the purchase price allocation to assets acquired:
YEARS ENDED
DECEMBER 31,
---------------
2001 2002
------ ------
Number of clubs acquired.................................... 2 4
====== ======
Purchase prices payable in cash at closing.................. $1,272 $2,322
Issuance and assumption of notes payable.................... 250 4,725
------ ------
TOTAL PURCHASE PRICES.................................. $1,522 $7,047
====== ======
Allocation of purchase prices
Goodwill.................................................. $1,316 $4,479
Fixed assets.............................................. 235 1,955
Membership lists.......................................... 181 1,432
Other net liabilities acquired............................ (172) (108)
Deferred revenue.......................................... (38) (711)
------ ------
TOTAL ALLOCATION OF PURCHASE PRICES.................... $1,522 $7,047
====== ======
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 and
goodwill. The results of operations of the clubs have been included in the
Company's consolidated financial statements from the respective dates of
acquisition. Certain acquisitions have continuing consideration based on future
earnings, which
F-23
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will be capitalized as part of the purchase price when incurred. The impact of
these acquisitions on the consolidated financial statements of the Company was
not material.
12. REVENUE FROM CLUB OPERATIONS
Revenues from club operations for the years ended December 31, 2001, 2002
and 2003 are summarized below:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2002 2003
-------- -------- --------
Membership dues................................ $227,073 $257,917 $273,608
Initiation fees................................ 13,287 14,361 13,891
Other club revenues............................ 37,840 42,717 48,641
-------- -------- --------
$278,200 $314,995 $336,140
======== ======== ========
13. CORPORATE INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
2001, 2002 and 2003 consisted of the following:
YEAR ENDED DECEMBER 31, 2001
-----------------------------
STATE AND
FEDERAL LOCAL TOTAL
------- --------- -------
Current............................................ $ 7,964 $ 3,415 $11,379
Deferred........................................... (3,357) (1,169) (4,526)
------- ------- -------
$ 4,607 $ 2,246 $ 6,853
======= ======= =======
YEAR ENDED DECEMBER 31, 2002
-----------------------------
STATE AND
FEDERAL LOCAL TOTAL
------- --------- -------
Current............................................ $ 6,483 $ 4,388 $10,871
Deferred........................................... (536) (626) (1,162)
------- ------- -------
$ 5,947 $ 3,762 $ 9,709
======= ======= =======
YEAR ENDED DECEMBER 31, 2003
-----------------------------
STATE AND
FEDERAL LOCAL TOTAL
------- --------- -------
Current............................................ $ 463 $ 1,591 $ 2,054
Deferred........................................... 3,017 466 3,483
------- ------- -------
$ 3,480 $ 2,057 $ 5,537
======= ======= =======
F-24
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset as of, December 31, 2002 and
2003 are summarized below:
DECEMBER 31,
-----------------
2002 2003
------- -------
Deferred tax assets
Deferred lease liabilities................................ $ 9,821 $ 9,998
Deferred revenue.......................................... 5,954 5,156
Fixed assets and intangible assets........................ 5,032 4,054
Compensation expense incurred in connection with stock
options................................................ 4,855 1,489
State net operating loss carry-forwards................... 1,151 1,431
Other..................................................... (1) 517
------- -------
26,812 22,645
------- -------
Deferred tax liabilities
Deferred costs............................................ (6,174) (5,490)
------- -------
(6,174) (5,490)
------- -------
NET DEFERRED TAX ASSETS, PRIOR TO VALUATION
ALLOWANCE............................................ 20,638 17,155
Valuation allowance......................................... (384) (384)
------- -------
NET DEFERRED TAX ASSETS................................ $20,254 $16,771
======= =======
As of December 31, 2003, the Company has state net operating loss ("NOL")
carry-forwards of approximately $15,970. Such amounts expire between December
31, 2004 and December 31, 2021. The Company's $384 valuation allowance has been
maintained principally for NOL carryforwards, which are subject to limitations
principally due to acquisitions.
Foreign income and the effect of foreign income taxes was immaterial.
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate were as follows for the years ended December 31,
2003, 2002 and 2001:
YEARS ENDED DECEMBER 31,
-------------------------
2001 2002 2003
----- ----- -----
Federal statutory tax rate................................. 35% 35% 35%
State and local income taxes, net of federal tax benefit
and change of valuation allowance........................ 8 9 8
Change in state effective income tax rate.................. 1 -- --
Non-deductible goodwill and other permanent differences.... 3 1 --
-- -- --
47% 45% 43%
== == ==
14. SEPTEMBER 11, 2001 EVENTS
The terrorist attacks of September 11, 2001 ("the September 11 events"),
resulted in a tremendous loss of life and property. Secondarily, those events
interrupted the operations at four clubs located in downtown Manhattan. Three of
the affected four clubs were back in operation by October 2001, while the fourth
club reopened in September 2002.
F-25
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company carries business interruption insurance to mitigate certain
lost revenue and profits experienced with the September 11 events. In this
regard in the third quarter of 2001 a $175 insurance receivable was recorded
representing an estimate of costs incurred in September 2001. Such costs
included rent, payroll benefits, and other club operating costs incurred during
period of closure. In 2002, we collected this $175 receivable and received
additional on-account payments of $1,025. In 2003 the Company received $2,800
from its insurer and the Company entered into a final settlement agreement.
These on-account and final payments were classified with fees and other revenue
when received.
15. CONTINGENCIES
On February 13, 2003, an individual filed suit against the Company in the
Supreme Court, New York County, alleging that on January 14, 2003, he sustained
an injury at one of our club locations resulting in serious bodily injury. He
filed an amended complaint on September 17, 2003 seeking two billion dollars in
damages for personal injuries. His cause of action seeking punitive damages, in
the amount of two hundred and fifty million dollars, was dismissed on January
26, 2004. The Company has in force fifty-one million dollars of insurance
coverage to cover claims of this nature. The Company intends to vigorously
contest this lawsuit and presently anticipates that these matters will be
covered by insurance.
The Company is a party to various 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.
16. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) defined contribution 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. The Plan
was amended, effective January 1, 2001, to provide for an employer matching
contribution in an amount equal to 25% of the participant's contribution with a
limit of five hundred dollars per individual, per annum. Employer matching
contributions totaling $200 and $195 were made in February 2003 and 2004,
respectively, for the Plan years ended December 31, 2002 and 2003, respectively.
17. DISCONTINUED OPERATIONS
In the fourth quarter of 2002, the Company closed or sold two remote
underperforming, wholly-owned clubs. In connection with the closure of one of
the clubs the Company recorded club closure costs of $996 related to the
write-off of fixed assets. The Company has accounted for these two clubs as
discontinued operations and, accordingly, the results of their operations have
been classified as discontinued in the consolidated statement of operations and
prior periods have been reclassified in accordance with SFAS No. 144.
Revenues and pre-tax losses for these discontinued clubs were $1,659 and
$894 in 2001 and $1,606 and $322 in 2002, respectively.
18. SUBSEQUENT EVENTS
On January 26, 2004 warrants to purchase 71,631 shares of Class A common
stock were exercised.
On February 4, 2004 the Company and affiliates and Town Sports
International Holdings ("TSI Holdings"), a newly formed company, entered into a
Restructuring Agreement. In
F-26
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with this Restructuring, the holders of the Company's Series A
Preferred Stock, Series B Preferred Stock and Class A Common stock contributed
their shares of the Company to TSI Holdings for an equal amount of newly issued
shares of the same form in TSI Holdings. Immediately following this exchange TSI
Holdings contributed to the Company the certificates representing all of the
Company shares contributed in the aforementioned exchange and in return the
Company issued 1,000 shares of common stock to TSI Holdings, and cancelled on
its books and records the certificate representing Company shares contributed to
it by TSI Holdings.
On February 4, 2004 TSI Holdings, successfully completed an offering of
11.0% Senior Discount Notes ("the Discount Notes") that will mature in February
2014. TSI Holdings received a total of $124,807 in connection with this
issuance. Fees and expenses related to this transaction totaled approximately
$4,375. No cash interest is required to be paid prior to February 2009. The
accreted value of each Discount Note will increase from the date of issuance
until February 1, 2009, at a rate of 11.0% per annum compounded semi-annually
such that on February 1, 2009 the accreted value will equal $213,000, the
principal value due at maturity. Subsequent to February 1, 2009 cash interest on
the Discount Notes will accrue and be payable semi-annually in arrears February
1 and August 1 of each year, commencing August 1, 2009. The Discount Notes are
structurally subordinated and effectively rank junior to all indebtedness of the
Company.
On February 6, 2004 all of TSI Holdings' outstanding Series A stock and
Series B stock were redeemed for a total of $50,634.
On March 12, 2004 65,296 vested common stock options of TSI Holdings were
exercised.
On March 15, 2004 the Board of Directors of TSI Holdings approved a common
stock dividend of $52.50 per share to all shareholders of record on March 15,
2004. This dividend was paid on March 17, 2004.
19. GUARANTORS
The Company and all of its domestic subsidiaries have unconditionally
guaranteed the $255,000 9 5/8% Senior Notes discussed in Note 6. However, the
Company's foreign subsidiaries have not provided guarantees for these Notes.
Each guarantor is a wholly owned subsidiary of the Company and the
guarantees are full and unconditional and joint and severable. The following
schedules set forth condensed consolidating financial information as required by
Rule 3-10f of Securities and Exchange Commission Regulation S-X at December 31,
2002 and 2003 and for each of the three years ending December 31, 2003. The
financial information illustrates the composition of the combined guarantors.
F-27
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(ALL FIGURES IN THOUSANDS OF DOLLARS)
DECEMBER 31, 2002
NON-
SUBSIDIARY GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents........... $ 1,575 $ 3,635 $ 341 $ -- $ 5,551
Accounts receivable, net............ 1,840 1,173 99 (1,779) 1,333
Inventory........................... -- 1,106 26 -- 1,132
Prepaid corporate income taxes...... 3,012 -- -- -- 3,012
Intercompany receivable (payable)... (18,996) 20,469 (1,473) -- --
Prepaid expenses and other current
assets............................ 5,837 2,093 -- (3,500) 4,430
-------- -------- ------- --------- --------
Total current assets.............. (6,732) 28,476 (1,007) (5,279) 15,458
Investment in subsidiaries............ 206,413 -- -- (206,413) --
Fixed assets, net..................... 11,273 198,050 1,500 -- 210,823
Goodwill, net......................... -- 44,927 604 -- 45,531
Intangible assets, net................ -- 1,569 106 -- 1,675
Deferred tax assets, net.............. 20,866 (490) (122) -- 20,254
Deferred membership costs............. -- 14,408 -- -- 14,408
Other assets.......................... 5,038 1,063 -- -- 6,101
-------- -------- ------- --------- --------
Total assets...................... $236,858 $288,003 $ 1,081 $(211,692) $314,250
======== ======== ======= ========= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt
and capital lease obligations..... $ 5,178 $ -- $ -- $ -- $ 5,178
Accounts payable.................... 214 5,114 -- -- 5,328
Accrued expenses.................... 9,470 13,398 545 (1,779) 21,634
Deferred revenue.................... -- 26,510 -- -- 26,510
-------- -------- ------- --------- --------
Total current liabilities......... 14,862 45,022 545 (1,779) 58,650
Long-term debt and capital lease
obligations......................... 155,765 3,500 -- (3,500) 155,765
Deferred lease liabilities............ 625 23,019 -- -- 23,644
Deferred revenue...................... 7 3,345 83 -- 3,435
Other liabilities..................... 373 7,157 -- -- 7,530
-------- -------- ------- --------- --------
Total liabilities................. 171,632 82,043 628 (5,279) 249,024
-------- -------- ------- --------- --------
Redeemable preferred stock
Redeemable senior preferred stock... 62,125 -- -- -- 62,125
Series A preferred stock............ 34,841 -- -- -- 34,841
-------- -------- ------- --------- --------
96,966 -- -- -- 96,966
-------- -------- ------- --------- --------
Stockholders' deficit
Series B preferred stock............ 303 -- -- -- 303
Common stockholders' deficit........ (32,336) 205,960 160 (206,120) (32,336)
Accumulated other comprehensive
income............................ 293 -- 293 (293) 293
-------- -------- ------- --------- --------
Total stockholders' deficit....... (31,740) 205,960 453 (206,413) (31,740)
-------- -------- ------- --------- --------
Total liabilities, redeemable
preferred stock and
stockholders' deficit........... $236,858 $288,003 $ 1,081 $(211,692) $314,250
======== ======== ======= ========= ========
F-28
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
(ALL FIGURES IN THOUSANDS OF DOLLARS)
DECEMBER 31, 2003
NON-
SUBSIDIARY GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents........ $ 420 $ 39,006 $1,376 $ -- $ 40,802
Accounts receivable, net......... 2,230 1,235 133 (2,129) 1,469
Inventory........................ 0 720 30 -- 750
Prepaid corporate income taxes... 4,062 -- -- -- 4,062
Intercompany receivable
(payable)...................... 7,068 (5,451) (1,617) -- --
Prepaid expenses and other
current assets................. 6,493 2,329 -- (3,500) 5,322
-------- -------- ------ --------- --------
Total current assets........... 20,273 37,839 (78) (5,629) 52,405
Investment in subsidiaries......... 238,166 -- -- (238,166) --
Fixed assets, net.................. 11,671 210,477 1,451 -- 223,599
Goodwill, net...................... -- 45,058 806 -- 45,864
Intangible assets, net............. -- 630 -- -- 630
Deferred tax assets, net........... 17,399 (491) (137) -- 16,771
Deferred membership costs.......... -- 13,038 -- -- 13,038
Other assets....................... 9,005 887 -- -- 9,892
-------- -------- ------ --------- --------
Total assets................... $296,514 $307,438 $2,042 $(243,795) $362,199
======== ======== ====== ========= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt
and capital lease
obligations.................... $ 3,486 $ -- $ -- $ -- 3,486
Accounts payable................. 220 5,159 -- -- 5,379
Accrued expenses................. 11,416 16,091 628 (2,129) 26,006
Deferred revenue................. -- 26,621 -- -- 26,621
-------- -------- ------ --------- --------
Total current liabilities...... 15,122 47,871 628 (2,129) 61,492
Long-term debt and capital lease
obligations...................... 274,947 (13,056) -- (3,500) 258,391
Deferred lease liabilities......... 563 25,293 -- -- 25,856
Deferred revenue................... (64) 2,973 93 -- 3,002
Other liabilities.................. 351 7,511 -- -- 7,862
-------- -------- ------ --------- --------
Total liabilities.............. 290,919 70,592 721 (5,629) 356,603
-------- -------- ------ --------- --------
Redeemable preferred stock
Series A preferred stock......... 39,890 -- -- -- 39,890
-------- -------- ------ --------- --------
39,890 -- -- -- 39,890
-------- -------- ------ --------- --------
Stockholders' deficit
Series B preferred stock......... 9,961 -- -- -- 9,961
Common stockholders' deficit..... (44,851) 236,845 725 (237,570) (44,851)
Accumulated other comprehensive
income......................... 596 -- 596 (596) 596
-------- -------- ------ --------- --------
Total stockholders' deficit.... (34,294) 236,845 1,321 (238,166) (34,294)
-------- -------- ------ --------- --------
Total liabilities, redeemable
preferred stock and
stockholders' deficit........ $296,515 $307,437 $2,042 $(243,795) $362,199
======== ======== ====== ========= ========
F-29
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(ALL FIGURES IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31, 2001
NON-
SUBSIDIARY GUARANTORS
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
REVENUES
Club operations........... $ 113 $275,482 $2,605 $ -- $278,200
Fees and other............ 1,272 6,012 -- (3,851) 3,433
-------- -------- ------ -------- --------
1,385 281,494 2,605 (3,851) 281,633
-------- -------- ------ -------- --------
OPERATING EXPENSES
Payroll and related....... 20,083 91,537 1,146 -- 112,766
Club operating............ 447 91,089 705 (3,300) 88,941
General and
administrative......... 390 18,658 288 (551) 18,785
Depreciation and
amortization........... 2,636 29,021 528 -- 32,185
-------- -------- ------ -------- --------
23,556 230,305 2,667 (3,851) 252,677
-------- -------- ------ -------- --------
Operating income.......... (22,171) 51,189 (62) -- 28,956
Interest expense............ 14,904 352 12 (350) 14,918
Interest income............. (722) (19) -- 350 (391)
-------- -------- ------ -------- --------
Income from continuing
operations before
provision for corporate
income taxes........... (36,353) 50,856 (74) -- 14,429
Provision for corporate
income taxes.............. (17,268) 24,108 13 -- 6,853
-------- -------- ------ -------- --------
Income from continuing
operations before
equity earnings........ (19,085) 26,748 (87) -- 7,576
Equity earnings from
subsidiaries.............. 26,131 -- -- (26,131) --
Loss on discontinued
operations, net of income
tax benefit of $551....... -- (530) -- -- (530)
-------- -------- ------ -------- --------
Net income................ $ 7,046 $ 26,218 $ (87) $(26,131) $ 7,046
======== ======== ====== ======== ========
F-30
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(ALL FIGURES IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31, 2002
NON-
SUBSIDIARY GUARANTORS
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
REVENUES
Club operations........... $ 241 $310,926 $3,828 $ -- $314,995
Fees and other............ 2,187 6,290 -- (4,045) 4,432
-------- -------- ------ -------- --------
2,428 317,216 3,828 (4,045) 319,427
-------- -------- ------ -------- --------
OPERATING EXPENSES
Payroll and related....... 22,184 105,390 1,531 -- 129,105
Club operating............ 564 101,088 945 (3,484) 99,113
General and
administrative......... 437 21,149 343 (561) 21,368
Depreciation and
amortization........... 2,857 28,509 382 -- 31,748
-------- -------- ------ -------- --------
26,042 256,136 3,201 (4,045) 281,334
-------- -------- ------ -------- --------
Operating income.......... (23,614) 61,080 627 -- 38,093
Interest expense............ 16,548 351 10 (350) 16,559
Interest income............. (488) -- (444) 350 (138)
-------- -------- ------ -------- --------
Income from continuing
operations before
provision for corporate
income taxes........... (39,674) 60,729 617 -- 21,672
Provision for corporate
income taxes.............. (17,766) 27,296 179 -- 9,709
-------- -------- ------ -------- --------
Income from continuing
operations before
equity earnings........ (21,908) 33,433 438 -- 11,963
Equity earnings from
subsidiaries.............. 33,104 -- -- (33,104) --
Loss on discontinued
operations, net of income
tax benefit of $551....... -- (767) -- -- (767)
Cumulative effect of a
change in accounting
principle, net of income
tax benefit of $812....... (689) (689) -- 689 (689)
-------- -------- ------ -------- --------
Net income................ $ 10,507 $ 31,977 $ 438 $(32,415) $ 10,507
======== ======== ====== ======== ========
F-31
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(ALL FIGURES IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31, 2003
NON-
SUBSIDIARY GUARANTORS
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
REVENUES
Club operations........... $ 427 $331,102 $4,611 $ -- $336,140
Fees and other............ 3,990 6,586 -- (4,175) 6,401
-------- -------- ------ -------- --------
4,417 337,688 4,611 (4,175) 342,541
-------- -------- ------ -------- --------
OPERATING EXPENSES
Payroll and related....... 21,439 107,364 1,782 -- 130,585
Club operating............ 772 112,800 1,112 (3,615) 111,069
General and
administrative......... (123) 22,291 387 (560) 21,995
Depreciation and
amortization........... 3,890 30,661 376 -- 34,927
-------- -------- ------ -------- --------
25,978 273,116 3,657 (4,175) 298,576
-------- -------- ------ -------- --------
Operating income.......... (21,561) 64,572 954 -- 43,965
Loss on extinguishment of
debt...................... 7,773 -- -- -- 7,773
Interest expense............ 23,891 130 (1) (350) 23,670
Interest income............. (794) -- -- 350 (444)
-------- -------- ------ -------- --------
Income from continuing
operations before
provision for corporate
income taxes........... (52,431) 64,442 955 -- 12,966
Provision for corporate
income taxes.............. (24,100) 29,401 236 -- 5,537
-------- -------- ------ -------- --------
Income from continuing
operations before
equity earnings........ (28,331) 35,041 719 -- 7,429
Equity earnings from
subsidiaries.............. 35,760 -- -- (35,760) --
-------- -------- ------ -------- --------
Net income................ $ 7,429 $ 35,041 $ 719 $(35,760) $ 7,429
======== ======== ====== ======== ========
F-32
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(ALL FIGURES IN THOUSANDS OF DOLLARS)
NON-
SUBSIDIARY GUARANTORS
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 7,046 $ 26,218 $ (87) $(26,131) $ 7,046
-------- -------- ----- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization........... 2,636 29,503 528 32,667
Compensation expense in connection with
stock options......................... 1,149 -- -- 1,149
Noncash rental expenses, net of noncash
rental income......................... 56 4,168 -- -- 4,224
Amortization of debt issuance costs..... 1,882 -- -- -- 1,882
Changes in operating assets and
liabilities........................... (6,317) 4,005 99 -- (2,213)
Other................................... (26,775) 229 8 26,131 (407)
-------- -------- ----- -------- --------
Total adjustments..................... (27,369) 37,905 635 26,131 37,302
-------- -------- ----- -------- --------
Net cash provided by operating
activities.......................... (20,323) 64,123 548 -- 44,348
-------- -------- ----- -------- --------
NET CASH USED IN INVESTING ACTIVITIES..... (3,893) (53,751) (714) -- (58,358)
-------- -------- ----- -------- --------
NET CASH USED IN FINANCING ACTIVITIES..... 24,349 (8,491) 245 -- 16,103
-------- -------- ----- -------- --------
Net decrease in cash and cash
equivalents......................... 133 1,881 79 -- 2,093
CASH AND CASH EQUIVALENTS
Beginning of period....................... 57 3,311 (3) -- 3,365
-------- -------- ----- -------- --------
End of period............................. $ 190 $ 5,192 $ 76 $ -- $ 5,458
======== ======== ===== ======== ========
F-33
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(ALL FIGURES IN THOUSANDS OF DOLLARS)
NON-
SUBSIDIARY GUARANTORS
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 10,507 $ 31,977 $ 438 $(32,415) $ 10,507
-------- -------- ------ -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization........... 2,857 28,786 382 -- 32,025
Goodwill impairment write-off and club
closure costs......................... -- 2,297 -- -- 2,297
Compensation expense in connection with
stock options......................... 1,207 -- -- -- 1,207
Noncash rental expenses, net of noncash
rental income......................... (78) 1,748 -- -- 1,670
Amortization of debt issuance costs..... 1,928 -- -- -- 1,928
Changes in operating assets and
liabilities........................... (3,483) 4,768 306 -- 1,591
Other................................... (32,061) (742) (32) 32,415 (420)
-------- -------- ------ -------- --------
Total adjustments..................... (29,630) 36,857 656 32,415 40,298
-------- -------- ------ -------- --------
Net cash provided by operating
activities.......................... (19,123) 68,834 1,094 -- 50,805
-------- -------- ------ -------- --------
NET CASH USED IN INVESTING ACTIVITIES..... (3,128) (36,805) (249) -- (40,182)
-------- -------- ------ -------- --------
NET CASH USED IN FINANCING ACTIVITIES..... 23,636 (33,586) (580) -- (10,530)
-------- -------- ------ -------- --------
Net change in cash and cash
equivalents......................... 1,385 (1,557) 265 -- 93
CASH AND CASH EQUIVALENTS
Beginning of period....................... 190 5,192 76 -- 5,458
-------- -------- ------ -------- --------
End of period............................. $ 1,575 $ 3,635 $ 341 $ -- $ 5,551
======== ======== ====== ======== ========
F-34
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
(ALL FIGURES IN THOUSANDS OF DOLLARS)
NON-
SUBSIDIARY GUARANTORS
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 7,429 $ 35,041 $ 719 $(35,760) $ 7,429
-------- -------- ------ -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization........... 3,890 30,661 376 -- 34,927
Compensation expense in connection with
stock options......................... 198 -- -- -- 198
Noncash rental expenses, net of noncash
rental income......................... (84) 1,734 -- -- 1,650
Loss on extinguishment of debt.......... 7,773 -- -- -- 7,773
Amortization of debt issuance costs..... 1,627 -- -- -- 1,627
Changes in operating assets and
liabilities........................... 4,011 549 66 -- 4,626
Other................................... (36,277) 485 55 35,760 23
-------- -------- ------ -------- --------
Total adjustments..................... (18,862) 33,429 497 35,760 50,824
-------- -------- ------ -------- --------
Net cash provided by operating
activities.......................... (11,433) 68,470 1,216 -- 58,253
-------- -------- ------ -------- --------
Net cash used in investing activities..... (4,288) (38,120) (326) -- (42,734)
-------- -------- ------ -------- --------
Net cash used in financing activities..... 14,566 5,021 145 -- 19,732
-------- -------- ------ -------- --------
Net change in cash and cash
equivalents......................... (1,155) 35,371 1,035 -- 35,251
CASH AND CASH EQUIVALENTS
Beginning of period....................... 1,575 3,635 341 -- 5,551
-------- -------- ------ -------- --------
End of period............................. $ 420 $ 39,006 $1,376 $ -- $ 40,802
======== ======== ====== ======== ========
F-35
$213,000,000
TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
EXCHANGE OFFER FOR
11% SENIOR DISCOUNT NOTES DUE 2014
---------------------
PROSPECTUS
, 2004
---------------------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained in
this prospectus. You may not rely on unauthorized information or
representations.
This prospectus does not offer to sell or ask for offers to buy any of the
securities in any jurisdiction where it is unlawful, where the person making the
offer is not qualified to do so, or to any person who can not legally be offered
the securities.
The information in this prospectus is current only as of the date on its
cover, and may change after that date. For any time after the cover date of this
prospectus, we do not represent that our affairs are the same as described or
that the information in this prospectus is correct, nor do we imply those things
by delivering this prospectus or selling securities to you.
Until , 2004, all dealers that effect transactions in these
securities, whether or not participating in the exchange offer may be required
to deliver a prospectus. This is in addition to the dealers' obligations to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Town Sports International Holdings, Inc. is a corporation organized
under the laws of the State of Delaware. Article V of Town Sports
International Holdings, Inc.'s By-Laws provides that:
Section 1. Nature of Indemnity. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or a person of whom
he is the legal representative, is or was a director or officer, of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than said law permitted the corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 hereof, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the board of directors of the corporation. The
right to indemnification conferred in this Article V shall be a contract right
and, subject to Sections 2 and 5 hereof, shall include the right to be paid by
the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition. The corporation may, by action of its board of
directors, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the corporation under Section 1 of
this Article V or advance of expenses under Section 5 of this Article V shall be
made promptly, and in any event within 30 days, upon the written request of the
director or officer. If a determination by the corporation that the director or
officer is entitled to indemnification pursuant to this Article V is required,
and the corporation fails to respond within sixty days to a written request for
indemnity, the corporation shall be deemed to have approved the request. If the
corporation denies a written request for indemnification or advancing of
expenses, in whole or in part, or if payment in full pursuant to such request is
not made within 30 days, the right to indemnification or advances as granted by
this Article V shall be enforceable by the director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be indemnified by the corporation. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to the
corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the corporation to indemnify the claimant for the amount claimed, but the burden
of such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
II-1
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the corporation (including its board of directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
Section 3. Nonexclusivity of Article V. The rights to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article V shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the corporation's certificate of incorporation, by-law, agreement,
vote of stockholders or disinterested directors or otherwise.
Section 4. Insurance. The corporation may purchase and maintain insurance
on its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the corporation or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the corporation would have the power to indemnify such
person against such liability under this Article V.
Section 5. Expenses. Expenses incurred by any person described in Section
1 of this Article V in defending a proceeding shall be paid by the corporation
in advance of such proceeding's final disposition unless otherwise determined by
the board of directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
corporation. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors deems
appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article V and who are or were employees or agents
of the corporation, or who are or were serving at the request of the corporation
as employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be
deemed to be a contract right between the corporation and each director or
officer who serves in any such capacity at any time while this Article V and the
relevant provisions of the General Corporation Law of the State of Delaware or
other applicable law are in effect, and any repeal or modification of this
Article V or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article V
with respect to the resulting or surviving corporation as he or she would have
with respect to such constituent corporation if its separate existence had
continued.
II-2
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
See Exhibit Index.
(b) Financial Statement Schedules.
All schedules have been omitted because they are not applicable or because
the required information is shown in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(2) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(3) 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 in the registration statement;
(4) 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;
(5) 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 that time shall be deemed to be the initial bona
fide offering thereof;
(6) 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;
(7) Insofar 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 registrants have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act 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.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 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.
(9) 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.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on March , 2004.
TOWN SPORTS INTERNATIONAL HOLDINGS,
INC.
By: /s/ RICHARD PYLE
------------------------------------
Richard Pyle
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitute and appoint Richard Pyle his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities (including his or her capacity as a director and/or officer of Town
Sports International Holdings, Inc.), 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
each said attorney-in-fact and agents 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 each 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 March , 2004.
SIGNATURE CAPACITY
--------- --------
/s/ MARK SMITH Chairman of the Board of Directors and
----------------------------------------------------- Director
Mark Smith
/s/ ROBERT GIARDINA Chief Executive Officer
----------------------------------------------------- (Principal Executive Officer)
Robert Giardina
/s/ RICHARD PYLE Chief Financial Officer
----------------------------------------------------- (Principal Financial and Accounting Officer)
Richard Pyle
/s/ KEITH ALESSI Director
-----------------------------------------------------
Keith Alessi
/s/ BRUCE BRUCKMAN Director
-----------------------------------------------------
Bruce Bruckman
/s/ J. RICE EDMONDS Director
-----------------------------------------------------
J. Rice Edmonds
/s/ JASON FISH Director
-----------------------------------------------------
Jason Fish
/s/ PAUL ARNOLD Director
-----------------------------------------------------
Paul Arnold
II-4
EXHIBIT INDEX
1.1 Purchase Agreement dated as of January 28, 2004 by and among Town Sports
International Holdings, Inc. and Deutsche Bank Securities Inc.
3.1 Certificate of Incorporation of Town Sports International Holdings, Inc.
3.2 Amended Certificate of Incorporation of Town Sports International
Holdings, Inc.
3.3 By-laws of Town Sports International Holdings, Inc.
4.1 Indenture dated as of February 4, 2004 by and among Town Sports
International Holdings, Inc. and The Bank of New York.
4.2 Form of Note (included in Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of February 4, 2004, by and
between Town Sports International Holdings, Inc. and Deutsche Bank
Securities Inc.
5.1 Opinion of Kirkland & Ellis LLP.
8.1 Opinion of Kirkland & Ellis LLP regarding federal tax consequences.
10.1 Credit Agreement dated as of April 16, 2003 by and among Town Sports
International, Inc., the financial institutions referred to therein and
Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit
10.1 to Form S-4 of Town Sports International, Inc. (File No. 333-82607)).
10.2 First Amendment, dated as of January 27, 2004, to Credit Agreement by and
among Town Sports International, Inc., the financial institutions referred
to therein and Deutsche Bank Trust Company Americas.
10.3 Restructuring Agreement, dated as of February 4, 2004, by and among Town
Sports International, Inc., Town Sports International Holdings, Inc.
Bruckman, Rosser, Sherril & Co., L.P. the individuals and entities listed
on the BRS Co-Investor Signature Pages thereto, Farallon Capital Partners,
L.P., Farralon Capital Institutional Partners, L.P., RR Capital Partners,
L.P., and Farallon Capital Institutional Partners II, L.P., Canterbury
Detroit Partners, L.P., Canterbury Mezzanine Capital, L.P., Rosewood
Capital, L.P., Rosewood Capital IV, L.P., Rosewood Capital IV Associates,
L.P., CapitalSource Holdings LLC, Keith Alessi, Paul Arnold, and certain
stockholders of the Company listed on the Executive Signature Pages
thereto.
10.4 Stockholders Agreement, dated as of February 4, 2004, by and among Town
Sports International Holdings, Inc., Town Sports International, Inc.,
Bruckman, Rosser, Sherril & Co., L.P. the individuals and entities listed
on the BRS Co-Investor Signature Pages thereto, Farallon Capital Partners,
L.P., Farralon Capital Institutional Partners, L.P., RR Capital Partners,
L.P., and Farallon Capital Institutional Partners II, L.P., Canterbury
Detroit Partners, L.P., Canterbury Mezzanine Capital, L.P., Rosewood
Capital, L.P., Rosewood Capital IV, L.P., Rosewood Capital IV Associates,
L.P., CapitalSource Holdings LLC, Keith Alessi, Paul Arnold, and certain
stockholders of the Company listed on the Executive Signature Pages
thereto.
10.5 Registration Rights Agreement, dated as of February 4, 2004, by and among
Town Sports International Holdings, Inc., Town Sports International, Inc.,
Bruckman, Rosser, Sherril & Co., L.P. the individuals and entities listed
on the BRS Co-Investor Signature Pages thereto, Farallon Capital Partners,
L.P., Farralon Capital Institutional Partners, L.P., RR Capital Partners,
L.P., and Farallon Capital Institutional Partners II, L.P., Canterbury
Detroit Partners, L.P., Canterbury Mezzanine Capital, L.P., Rosewood Capital,
L.P., Rosewood Capital IV, L.P., Rosewood Capital IV Associates, L.P.,
CapitalSource Holdings LLC, Keith Alessi, Paul Arnold, and certain stockholders
of the Company listed on the Executive Signature Pages thereto.
10.6 Tax Sharing Agreement, dated as of February 4, 2004, by and among Town
Sports International Holdings, Inc., Town Sports International, Inc., and
the other signatories thereto.
10.7 The 2004 Common Stock Option Plan of Town Sports International Holdings,
Inc.
10.8 Pledge Agreement, dated as of February 4, 2004, between Town Sports
International Holdings, Inc. and Deutsche Bank Trust Company Americas, as
collateral agent, for the benefit of the Secured Creditors (as defined
therein).
10.9 Security Agreement, dated as of February 4, 2004, made by Town Sports
International Holdings, Inc., in favor of Deutsche Bank Trust Company
Americas, as collateral agent, for the benefit of the Secured Creditors
(as defined therein).
10.10 Holdco Guaranty, dated as of February 4, 2004, made by Town Sports
International Holdings, Inc.
12.1 Statement regarding computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Kirkland & Ellis LLP (included in Exhibit 5.1 and 8.1).
25.1 Statement of Eligibility of Trustee on Form T-1.