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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT
OF 1934
FOR THE TRANSITION PERIOD FROM
COMMISSION FILE NUMBER: 333-40907
TOWN SPORTS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW YORK 13-2749906
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
registrant: Not applicable
As of March 16, 2000, there were 1,014,086 shares of Class A Common Stock
of the Company outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registrant's Registration Statements on
Form S-1 and Forms S-4 (File Nos. 333-61439, 333-40907 and 333-82607, as
amended) are incorporated by reference into Part III of this Report on Form
10-K.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 8
3. Legal Proceedings........................................... 11
4. Submission of Matters to a Vote of Security Holders......... 11
PART II
5. Market for Registrant's Common Stock and Related Shareholder
Matters..................................................... 11
6. Selected Financial Data..................................... 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
7A. Quantitative and Qualitative Disclosures About Market
Risks....................................................... 22
8. Financial Statements and Supplementary Data................. 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 22
PART III
10. Directors and Executive Officers of the Registrant.......... 22
11. Executive Compensation...................................... 24
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
13. Certain Relationships and Related Transactions.............. 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 30
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TOWN SPORTS INTERNATIONAL, INC.
PART I
ITEM 1. BUSINESS
GENERAL
Town Sports International, Inc. (collectively with its subsidiaries, "Town
Sports" or the "Company") is 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, 1999, the Company operated 86 clubs that collectively served
approximately 213,000 members. The Company develops clusters of clubs to serve
densely populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income of $50,000.
The Company's goal is to develop the premier health club network in each of
the major metropolitan regions in which it operates. Management believes that
clustering clubs allows the Company to achieve strategic operating advantages
that enhance its ability to achieve this goal. When entering new regions, the
Company develops its 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, 1999, approximately 47.3% of the
Company's members participated in a membership plan that allows unlimited access
to all of the Company's clubs for a higher membership fee.
The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its New York Sports Club ("NYSC")
brand name. The Company is the largest fitness club operator in Manhattan with
27 locations and operates a total of 66 clubs under the NYSC name within a
defined radius of New York City. The Company operates 11 clubs surrounding
Washington, DC under its Washington Sports Club ("WSC") brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its
Boston Sports Club ("BSC") and Philadelphia Sports Club ("PSC") brand names,
respectively. The Company employs localized brand names for its 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.
In 1998, the Company changed its fiscal year end from May 31 to December
31, which resulted in a transition period of seven months ended December 31,
1998. The decision to change the fiscal year was made for more convenience in
both internal and external communications.
The Company has 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. From June 1, 1994 to December 31, 1999, the Company acquired 39
existing clubs, opened 26 greenfield clubs, and relocated two clubs to increase
its total clubs under operation from 23 to 86. The Company has plans to acquire
or open at least 20 more clubs prior to December 31, 2000. The Company has
achieved revenue growth over the five year and seven month period ended December
31, 1999 at a compound annual rate of approximately 40.8% from $33.3 million for
the year ended May 31, 1995 to $159.8 million for the year ended December 31,
1999. This growth has been driven not only by the addition of acquired and
greenfield club locations, but also through comparable club revenue growth,
which has ranged from 14.7% to 27.3% for the five year and seven month period
ended December 31, 1999 and was 16.0% for the year ended December 31, 1999.
Comparable club revenue growth has enabled the Company to increase revenue per
weighted average club over the five year and seven month period ended December
31, 1999. Revenue per weighted average club (as defined in Selected Financial
Data) has risen from $1.8 million in fiscal 1995 to $2.1 million for the year
ended December 31, 1999. Based on the Company's historical experience, a new
club tends to achieve significant increases in revenues during its first three
years of operation as it reaches maturity. Because clubs experience little
incremental cost associated with such revenue increases,
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the Company realizes a greater proportionate increase in profitability. This
operating leverage has allowed it to achieve EBITDA growth over the five year
and seven month period ended December 31, 1999 at a compound annual rate of
approximately 93.3% from $1.5 million for the year ended May 31, 1995 to $31.8
million for the year ended December 31, 1999.
The Company's model club ranges in size from approximately 15,000 to 25,000
square feet and averages approximately 21,000 square feet. Clubs typically have
an open space to accommodate cardiovascular and strength-training exercise, as
well as special purpose rooms to accommodate aerobic class instruction and other
exercise programs. Locker rooms generally include a sauna and steam room.
Management seeks to provide a broad array of high quality exercise programs and
equipment that is both popular and effective, while reinforcing the quality
exercise experience the Company strives to make available to its members. While
the Company does not generally build locations with amenities such as swimming
pools or racquet and basketball courts, the Company does strive to establish at
least one flagship club that has such amenities in each of its markets.
Management believes that it is generally more economical to acquire clubs with
such amenities than to develop them as greenfield clubs.
Management engages in a detailed site analysis and selection process based
upon information provided by the Company's proprietary development software to
identify potential target areas for additional clubs based upon population
demographics, traffic and commuting patterns, availability of sites and
competitive market information. In addition to the Company's existing 86 clubs
under operation and the 12 sites for which the Company has entered into lease
commitments, management has identified approximately 100 target areas in which
it may add clubs under the brand names NYSC, WSC, BSC or PSC. Management
estimates that it will identify approximately 50 additional target areas in
which it may add clubs under these brand names. Once the Company begins to
approach saturation of these regions, management will explore expansion
opportunities in contiguous regions along the East Coast and the Mid-Atlantic.
The Company possesses an experienced management team, the top five
executives of which have been working together at the Company since 1990.
Management believes that it has the depth, experience and motivation to manage
the Company's internal and external growth, and that the Company has put in
place the infrastructure and systems to manage effectively the Company's planned
expansion. Management believes that the presence of such infrastructure will
enable the Company over time to leverage certain fixed cost aspects of overhead
to realize increased EBITDA margins as the Company continues to expand its club
base. This operating leverage has already helped the Company to increase its
EBITDA margin by more than 105% to approximately 19.9% for the year ended
December 31, 1999 compared to approximately 9.7% in fiscal 1997.
INDUSTRY OVERVIEW
According to published industry sources, total fitness club industry
revenues have increased at a compound annual rate of approximately 8.3% from
$5.5 billion in 1991 to $9.6 billion in 1998. Over the same period of time,
fitness club memberships have increased at a compound annual rate of 5.0% from
21.0 million to 29.5 million and have increased over 50% since 1987. These
statistics imply that average revenue per member has grown at a compound annual
rate of 3.2% for the industry since 1991. Membership and revenue growth have
dramatically outpaced the growth of fitness clubs, which has grown at a compound
annual rate of only 2.2% to approximately 14,100 in 1998 from approximately
12,150 in 1991. Management believes that fitness clubs, on average, have
experienced significant excess capacity historically. Only more recently has the
industry as a whole experienced the level of membership and revenue per club to
realize the benefits of the inherent operating leverage in the industry.
Management believes that the growth in fitness club memberships is
attributable to several factors. Americans are focused on achieving a healthier,
more active lifestyle. Of the factors members consider very important in their
decision to join a fitness club, the most commonly mentioned is health, closely
followed by appearance related factors including muscle tone, looking better and
weight control. Management believes 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. Management also believes that fitness clubs provide a
more convenient
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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.
According to industry sources, the four major trends that are driving
changes in the health and fitness industry include: (i) an influx of
institutional capital investment is leading a transformation of club ownership
from private to public; (ii) large operators are beginning to build regional and
national platforms to consolidate the industry and, in turn, are providing
liquidity for many small operators; (iii) the aging of the American population
is creating an awareness of and a need for healthy living and physical fitness;
(iv) insurers are beginning to partner with corporations to promote preventative
healthcare programs such as fitness clubs memberships.
Across the industry, monthly membership dues have averaged between $54.00
and $58.00 per month for a single adult from 1994 through 1998. Around this
average monthly fee, management believes 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 $80.00 per month;
(ii) a middle tier consisting of clubs with monthly membership dues averaging
between $80.00 and $40.00 per month; and (ii) a lower tier consisting of clubs
with monthly membership dues averaging less than $40.00 per month. The Company
competes in the middle tier in terms of pricing and is positioned toward the
upper end of this tier. Based upon the quality and service the Company provides
its members, management believes that the Company provides an attractive value
to its members at the monthly membership dues it charges.
The fitness club industry is highly fragmented. In 1998, the ten largest
operators accounted for less than 6.0% of total club ownership and approximately
18.0% of total industry revenues. In addition, approximately 65.0% of the total
industry clubs are operated by single club operators. Based upon this data,
management believes that considerable consolidation will occur in the industry.
MARKETING
The Company's marketing campaign is directed by its in-house media
department which is headed by the Chief Operating Officer. This team develops
advertising strategies to convey each of the Company's regionally branded
networks as the premier network of fitness clubs in that region. Advertisements
are designed to highlight the consistent quality and high value-to-price ratio
management believes the Company provides through a combination of its membership
programs, club facilities and personnel. The media team's goal is to achieve
broad awareness of the Company's regional brand names primarily through
newspaper, billboard, radio, television and direct mail advertising. Management
believes that the Company's clustering of clubs creates economies in its
marketing and advertising strategy that increase the efficiency and
effectiveness of these campaigns.
Advertisements generally feature creative slogans that communicate the
serious approach the Company takes toward fitness in a provocative and/or
humorous tone, rather than pictures of the Company's clubs or members
exercising. Promotional marketing campaigns will typically feature opportunities
to participate in value-added services such as personal training for a limited
time at a discount to the standard rate. On occasion, the Company will also
offer reduced initiation fees to encourage enrollment. Additionally, the Company
frequently sponsors member referral incentive programs. Approximately one-third
of the Company's new members cite a referral from an existing member as a reason
for joining. Such incentive programs include a free month of membership,
personal training sessions, sports equipment such as a free gym bag or a gift
certificate for other in-club purchases. In addition, the Company maintains four
Internet sites that provide information about club locations, program offerings
and on-line promotions.
The Company also engages in public relations and special events to promote
its image in the local communities. Management believes that these public
relations efforts enhance the Company's image and the
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image of its local brand names in the communities in which it operates. The
Company also seeks to build its community image through co-operative advertising
campaigns with local sporting goods retailers.
We maintain the following internet sites: www.nysc.com,
www.bostonsportsclubs.com, www.philadelphiasportsclubs.com,
www.washingtonsports.com and www.tsag.com, that provide information about club
locations, program offerings and on-line promotions.
SALES
Sales of new memberships are generally handled at the club level. The
Company employs approximately 250 "in-club" membership consultants who are
responsible for new membership sales. Each club generally has two full-time and
one part-time membership consultants. These consultants report both to the
general manager of the club as well as to one of the Company's ten area sales
managers, who in turn report to the Company's Vice President Sales. Membership
consultants' compensation consists of a base salary plus commission. Sales
commissions range from $45.00 to $65.00 per new member enrolled. The Company
provides additional incentive-based compensation in the form of bonuses
contingent upon individual, club and Company-wide enrollment goals. Membership
consultants must successfully complete a three-month, in-house training program
through which they learn the Company's sales strategy. In making a sales
presentation, membership consultants emphasize: (i) the proximity of its clubs
to concentrated commercial and residential areas convenient to where target
members live and work; (ii) 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. Management believes that providing
employees with opportunities for career advancement is essential to the
Company's ability to attract and retain qualified sales personnel. The Company
also employs a full-time corporate sales manager whose sole responsibility is to
solicit group memberships through senior level corporate contacts.
Management believes that clustering clubs allows the Company to sell
memberships based upon the opportunity for members to utilize multiple club
locations to differing degrees. The Company has streamlined its membership
structure to simplify the sales process. In addition, the proprietary
centralized computer software utilized by the Company ensures consistency of
pricing and controls enrollment processing at the club level. The Company offers
three principal types of memberships:
The Passport Membership, priced from $67.00 to $83.00 per month, is
the Company's highest priced membership and entitles members to use any
Town Sports club at any time. This membership is held by approximately
47.3% of members.
The Gold Membership, priced from $44.00 to $75.00 per month based on
the market area of enrollment, enables members to use a specific club, or a
group of specific clubs, at any time and any Town Sports club during
off-peak times. This membership is held by over 51.5% of members.
The Off-peak Membership, priced from $44.00 to $68.00 per month, is
the least expensive membership, and allows members to use any Town Sports
club only during off-peak times. This membership is held by approximately
1.2% of members.
By clustering a group of clubs in a geographic area, the value of Company
memberships is enhanced by the ability to offer Passport Memberships, which
allow the member to use any Company club at any time. Approximately 47.3% of all
members choose the Passport Membership option. Management believes the
popularity of the Passport Membership results from the broader privileges and
greater convenience this membership plan provides through the opportunity for
members to access club facilities near to both their homes and offices.
Management also believes that Passport Memberships will increase as a percentage
of total memberships as the Company continues to build its clusters in the
Washington, DC, Boston and Philadelphia regions. The Boston and Philadelphia
regions, in particular, have not yet developed the critical mass to support
substantial sales of Passport Memberships. The Company's clustering strategy
also allows it to provide access to special facilities such as squash, tennis,
basketball and racquetball courts and swimming pools through flagship locations
strategically located in key target areas without offering such facilities in
every location.
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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. For the year ended December 31, 1999, initiation fees averaged
$105.50. Monthly Electronic Funds Transfer "EFT" membership dues averaged
approximately $60.45 per month during that same period. The Company collects
approximately 89.6% of all monthly membership dues through EFT. Substantially
all other monthly membership dues are paid in advance. EFT members can generally
cancel memberships at any time upon 30 days notice. Based upon detailed
statistical studies of the membership base at the Company's mature clubs,
however, the average length of the Company's memberships is approximately 24
months. The membership agreement calls for monthly dues to be collected by EFT
based on credit card or bank account debit authorization contained in the
agreement. Management believes that its EFT program of monthly dues collection
provides a predictable and stable cash flow for the Company, eliminates the
traditional accounts receivable function, and minimizes bad-debt write-offs
while providing a significant competitive advantage in terms of the sales
process, dues collection, working capital management and membership retention.
In addition, it enables the Company to increase its dues in an efficient and
consistent manner. During the first week of each month, the Company receives the
EFT dues for that month by wire transfers initiated by Checkfree Corporation.
Discrepancies and insufficient funds incidents are researched and resolved by an
in-house staff. For the year ended December 31, 1999, the Company experienced an
average of uncollected EFT receivables of less than 1.0%.
The Company's total EFT revenue has increased by $8.7 million per month
from $2.4 million in May, 1995 to $11.1 million in December, 1999. While the
Company strongly encourages monthly EFT memberships, approximately 10.4% of the
Company's members (often corporate group members) purchase paid-in-full
memberships for a one year term. Annually the Company raises its monthly dues by
between 1% and 3%.
CLUB FORMAT AND LOCATIONS
The Company's 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. Fitness clubs generally have relatively high "retail" visibility, and
close proximity to transportation. In the New York City and Washington, DC
markets, the Company has created clusters of clubs in urban areas and their
commuter suburbs in accordance with the Company's operating strategy of offering
its target members the convenience of multiple locations close to where they
live and work, reciprocal use privileges and standardized facilities and
services.
The Company's clubs generally range in size from 15,000 to 25,000 square
feet and averages approximately 21,000 square feet. Membership for each club
ranges from 2,500 to 4,500 members at maturity. Although club members represent
a cross-section of the population in a given geographic market, the Company's
typical member is college educated, between the ages of 20 and 44 and earns an
annual income of $50,000.
The Company's facilities include state-of-the-art cardiovascular equipment,
including Lifecycles, StairMasters, treadmills, and elliptical motion machines;
strength equipment and free weights, including Cybex, Icarian, Nautilus and
Hammer Strength equipment; group exercise and cycling studio(s); E-Zone and
Cardio-Theater entertainment systems; 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. Additional
services and facilities such as physical therapy programs, swimming pools,
basketball, tennis, racquetball and/or squash courts and climbing walls are
available in flagship locations.
CLUB OPERATIONS
The Company emphasizes consistency and quality in all of its club
operations, including:
Management. The Company believes that its success is largely
dependent on the selection and training of its staff and management. The
Company's management structure is designed, therefore, to support the
professional development of highly motivated managers who will execute the
Company's directives and support growth.
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Corporate departments are responsible for each area of club services,
such as exercise classes, fitness programming, personal training, facility
and equipment maintenance, housekeeping and laundry. This centralization
allows local general managers at each club to focus on customer service,
club staffing and providing a high quality exercise experience. General
managers are responsible for the day-to-day management of each club, and
directly report to area managers, who liaise with corporate staff ensuring
consistent service at all locations.
The Company provides performance-based incentives to its management.
Senior management compensation, for example, is tied to overall Company
performance. Departmental directors, area managers and general managers
have bonuses tied to financial and member retention targets for a
particular club or group of clubs.
Personal Training. All of the Company's fitness clubs offer
one-on-one personal training, which is sold by the single session or in
multi-session packages, to assist the Company's members with their daily
workouts. Personal trainers are divided into three tiers: House Trainers,
Professional Trainers and Master Trainers. House Trainers are stationed on
a club's fitness floor to provide orientations to new members and to assist
with the operation of equipment. House Trainers who exhibit superior skills
receive a commission on personal training sessions. House Trainers become
Professional Trainers once they have completed the Company's advanced
certification program. As a Professional Trainer, the employee is entitled
to a higher commission on personal training. Finally, trainers, who have
obtained national certification and have developed an established client
base, are permitted to collect the highest commission and to move from club
to club to service club members as a Master Trainer. The Company believes
that its personal training programs provide valuable guidance to its
members and a significant source of incremental revenue from value-added
services for the Company.
Group Fitness. The Company's commitment to providing a quality
workout experience to its members extends to the employment of program
instructors, who teach aerobics, cycling, strength conditioning, boxing,
yoga and step aerobics classes, among others. The Company's clustering
strategy enables it to staff program instructors and professional personal
trainers at more than one club. As a result, the Company can vary a given
club's instructors, while providing instructors sufficient classes to
effectively and economically treat these instructors as full-time
employees. The Company offers its employees various benefits including;
health, dental, disability, insurance and a 401(k) plan. Management
believes the availability of employee benefits provides the Company a
strategic advantage in attracting and retaining quality program instructors
and professional personal trainers and that this strategic advantage in
turn translates into a more consistent and higher quality workout
experience for those members who utilize such services. All program
instructors report to a centralized management structure, headed by the
Director of Programming who is responsible for overseeing auditions and
providing in-house training to keep instructors current in the latest
training techniques and program offerings.
PROPRIETARY CENTRALIZED INFORMATION SYSTEMS
The Company has developed a proprietary system to track and analyze sales,
leads, and membership statistics which, in conjunction with its other systems,
allows the Company to track the frequency of member workouts, multi-club
utilization, value-added services and demographic profiles by member, which
enables the Company to develop targeted direct marketing programs and to modify
its broadcast and print advertising to improve consumer response. These systems
also assist the Company in evaluating staffing needs and program offerings. In
addition, the Company relies on certain data gathered through its information
systems to assist in the identification of new markets for clubs and site
selection within those markets.
PROPRIETARY SOFTWARE AND INTELLECTUAL PROPERTY
The Company uses information technology in virtually every area of the
business, including business development, sales and marketing, staffing and
other operational systems. The Company has begun a multi-year information
technology project by which it has implemented, among other things: (i) the
industry's first
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multi-site online contracting system designed to control membership pricing and
streamline the creation, processing and management of the Company's sales
contracts for new members; (ii) a sales compensation system; (iii) a system that
automatically updates existing member records; (iv) extensive club site
development databases; (v) a class exercise scheduling and payroll system; and
(vi) a personal training revenue tracking and payroll system, as part of a
larger fitness programming project.
The Company has registered, and is in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office,
including NEW YORK SPORTS CLUBS, WASHINGTON SPORTS CLUBS, BOSTON SPORTS CLUBS,
PHILADELPHIA SPORTS CLUBS, TSI, E2R and TOWN SPORTS INTERNATIONAL, INC.
COMPETITION
The fitness club industry is highly competitive. The Company competes 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. The Company also
competes with other entertainment and retail businesses for the discretionary
income of its target markets. There can be no assurance that the Company will be
able to compete effectively in the future in the markets in which it operates.
Competitors, which may include companies which are larger and have greater
resources than the Company, may enter these markets to the detriment of the
Company. These competitive conditions may limit the Company's 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, thereby increasing costs associated with
expansion through both acquisitions, and lease negotiation and real estate
availability for greenfields.
Management believes that its market leadership, experience and operating
efficiencies enable it to provide the consumer with a superior product in terms
of convenience, quality and affordability. Management believes that there are
significant barriers to entry in its 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, 1999, the Company had approximately 4,400 employees, of
which approximately 1,700 were employed full-time. Approximately 200 employees
were corporate personnel working in the Manhattan or the Washington, DC offices.
The Company is not a party to any collective bargaining agreement with its
employees. The Company has never experienced any significant labor shortages nor
had any difficulty in obtaining adequate replacements for departing employees
and considers its relations with its employees to be good. Management believes
that it offers its employees benefits (including health, dental, disability,
insurance and a 401(k) plan) which are superior to those generally offered by
its competitors.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at the federal, state and, in some cases, local levels. State and
local consumer protection laws and regulations govern the Company's advertising,
sales and other trade practices.
Statutes and regulations affecting the fitness industry have been enacted
in states in which the Company conducts business; many other states into which
the Company 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
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term of contracts. In addition, the Company is 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. The Company maintains internal
review procedures in order to comply with these requirements, and believes that
its 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, the Company's 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 to the
Company upon cancellation and the Company may offset such amount against any
refunds owed.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K of the Company for
the year ended December 31, 1999 are forward-looking statements, including,
without limitation, statements regarding future financial results and
performance, potential sales revenue and tax benefits. These statements are
subject to various risks and uncertainties, many of which are outside the
control of the Company, including the level of market demand for the Company's
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 the Company. The information contained herein represents management's best
judgement as of the date hereof based on information currently available;
however, the Company does not intend to update this information to reflect
development or information obtained after the date hereof and disclaims any
legal obligation to the contrary.
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- -------- ------- --------------
<S> <C> <C> <C>
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........................... 380 Madison Avenue January, 1990
5. Manhattan........................... 151 Reade Street January, 1990
6. Manhattan........................... 1601 Broadway September, 1991
7. Manhattan........................... 50 West 34th Street August, 1992
8. Manhattan........................... 349 East 76th Street April, 1994
9. Manhattan........................... 248 West 80th Street May, 1994
10. Manhattan........................... 502 Park Avenue February, 1995
11. Manhattan........................... 117 Seventh Avenue South March, 1995
12. Manhattan........................... 303 Park Avenue South December, 1995
13. Manhattan........................... 30 Wall Street May, 1996
14. Manhattan........................... 1635 Third Avenue October, 1996
15. Manhattan........................... 575 Lexington Avenue November, 1996
16. Manhattan........................... 278 Eighth Avenue December, 1996
17. Manhattan........................... 200 Madison Avenue February, 1997
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- -------- ------- --------------
<S> <C> <C> <C>
18. Manhattan........................... 131 East 31st Street February, 1997
19. Manhattan........................... 2162 Broadway November, 1997
20. Manhattan........................... 633 Third Avenue April, 1998
21. Manhattan........................... 1657 Broadway July, 1998
22. Manhattan........................... 217 Broadway March, 1999
23. Manhattan........................... 23 West 73rd Street April, 1999
24. Manhattan........................... 34 West 14th Street July, 1999
25. Manhattan........................... 503-511 Broadway July, 1999
26. Manhattan........................... 1372 Broadway October, 1999
27. Manhattan+.......................... 300 West 125th Street Opening 2000
28. Manhattan+.......................... 14 West 44th Street Opening 2000
29. Manhattan+.......................... Battery Park City Opening 2000
30. Brooklyn, NY........................ 110 Boerum Place October, 1985
31... Brooklyn, NY........................ 1736 Shore Parkway June, 1998
32. Queens, NY.......................... 69-33 Austin Street, Forest Hills April, 1997
33. Queens, NY.......................... 153-67 A Cross Island Parkway June, 1998
34. Staten Island, NY................... 300 West Service Road June, 1998
35. Great Neck, NY...................... 15 Barstow Road July, 1989
36. Scarsdale, NY....................... 696 White Plains Road October, 1995
37. Mamaroneck, NY...................... 124 Palmer Avenue January, 1997
38. White Plains, NY.................... 1 North Broadway September, 1997
39. Croton-on-Hudson, NY................ 420 South Riverside Drive January, 1998
40. Nanuet, NY.......................... 58 Demarest Mill Road May, 1998
41. Larchmont, NY....................... 15 Madison Avenue December, 1998
42. East Meadow, NY..................... 625 Merrick Avenue January, 1999
43. Commack, NY......................... 6136 Jericho Turnpike January, 1999
44. Oceanside, NY....................... 2909 Lincoln Avenue May, 1999
45. Long Beach, NY...................... 265 East Park Avenue July, 1999
46. Syosset, NY*........................ 49 Ira Road Opening 2000
47. Garden City, NY+.................... 833 Franklin Avenue Opening 2000
48. Huntington, NY*..................... 350 New York Avenue Opening 2000
49. Stamford, CT........................ 6 Landmark Square December, 1997
50. Stamford, CT........................ 106 Commerce Road January, 1998
51. Danbury, CT......................... 38 Mill Plain Road January, 1998
52. Stamford, CT........................ 1063 Hope Street November, 1998
53. Norwalk, CT......................... 250 Westport Avenue March, 1999
54. Greenwich, CT....................... 6 Liberty Way May, 1999
55. East Brunswick, NJ.................. 8 Cornwall Court January, 1990
56. Princeton, NJ....................... 301 North Harrison Street May, 1997
57. Freehold, NJ........................ 200 Daniels Way April, 1998
58. Matawan, NJ......................... 163 Route 34 April, 1998
59. Old Bridge, NJ...................... Gaub Road and Route 516 April, 1998
60. Marlboro, NJ........................ 34 Route 9 North April, 1998
61. Fort Lee, NJ........................ 1355 15th Street June, 1998
62. Ramsey, NJ.......................... 1100 Route 17 North June, 1998
63. Mahwah, NJ.......................... 7 Leighton Place June, 1998
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- -------- ------- --------------
<S> <C> <C> <C>
64. Parsippany, NJ...................... 2651 Route 10 August, 1998
65. Springfield, NJ..................... 215 Morris Avenue August, 1998
66. Colonia, NJ......................... 1250 Route 27 August, 1998
67. Franklin Park, NJ................... 3911 Route 27 August, 1998
68. Plainsboro, NJ...................... 10 Schalks Crossing August, 1998
69. Somerset, NJ........................ 120 Cedar Grove Lane August, 1998
70. Hoboken, NJ......................... 221 Washington Street October, 1998
71. West Caldwell, NJ................... Bloomfield Avenue April, 1999
WASHINGTON SPORTS CLUBS:
72. Washington, DC...................... 214 D Street, S.E. January, 1980
73. Washington, DC...................... 1835 Connecticut Avenue, N.W. January, 1990
74. Washington, DC...................... 1990 M Street, N.W. February, 1993
75. Washington, DC...................... 2251 Wisconsin Avenue, N.W. May, 1994
76. Washington, DC+..................... 1211 Connecticut Avenue Opening 2000
77. Bethesda, MD........................ 4903 Elm Street May, 1994
78. North Bethesda, MD.................. 10400 Old Georgetown Road June, 1998
79. Germantown, MD...................... 12623 Wisteria Drive July, 1998
80. Centreville, VA..................... Old Centreville Crossing December, 1997
81. Alexandria, VA...................... 3654 King Street June, 1999
82. Sterling, VA........................ 21800 Town Center Plaza October, 1999
83. Fairfax, VA......................... Lee Highway October, 1999
84. Springfield, VA*.................... Old Keene Mill Opening 2000
BOSTON SPORTS CLUBS:
85. Boston, MA.......................... 561 Boylston Street November, 1991
86. Allston, MA......................... 15 Gorham Street July, 1997
87. Boston, MA.......................... 1 Bulfinch Place August, 1998
88. Framingham, MA...................... Sherwood Plaza, 124 Worcester Rd September, 1998
89. Weymouth, MA........................ 553 Washington Street May, 1999
90. Boston, MA+......................... 201 Brookline Avenue Opening 2000
PHILADELPHIA SPORTS CLUBS:
91. Philadelphia, PA.................... 220 South 5th Street January, 1999
92. Philadelphia, PA.................... 2000 Hamilton Street July, 1999
93. Chalfont, PA........................ One Highpoint Drive January, 2000
94. Cherry Hill, NJ+.................... Route 70 and Kings Highway Opening 2000
95. Philadelphia, PA*................... 1735 Market Street Opening 2000
96. Philadelphia, PA*................... Rittenhouse Square Opening 2002
SWISS SPORTS CLUBS:
97. Basel, Switzerland.................. St. Johanns-Vorstadt 41 August, 1987
98. Zurich, Switzerland................. Glarnischstrasse 35 August, 1987
</TABLE>
- ---------------
+ Under construction, club in "pre-sales."
* Signed leases for greenfield club development.
In addition to the club locations listed above, the Company owns the 151
East 86th Street location, which houses a Company club and a retail tenant that
generated approximately $525,000 of rental income for the Company during twelve
months ended December 31, 1999. One of our clubs operates under a month to month
lease; all other clubs occupy leased space pursuant to long-term leases
(generally 15 to 25 years, including
10
<PAGE> 13
options). In the next five years (ending December 31, 2004), only two of the
Company's other club leases will expire without any renewal option.
The Company leases approximately 50,000 square feet of office space in New
York City, and 3,500 square feet of office space in Washington, DC, for
administrative, accounting and general corporate purposes. The Company also
leases warehouse and commercial space in Long Island City, New York, for storage
purposes and for the operation of a centralized laundry facility for certain New
York clubs.
As of December 31, 1999, 82 of the existing clubs were wholly-owned by the
Company and four were managed and/or partly-owned by the Company (the "Managed
Clubs"). The Managed Clubs are operated by the Company, which acts as either
general partner or managing agent, and are operated by the Company in the same
manner as wholly owned clubs, subject to certain rights held by the Company's
partners or the club owners, according to the applicable partnership or
management agreements. As partner or manager, the Company receives a share of
club cash flow, which varies from club to club, but is typically 40.0%. These
amounts appear on the Company's operating statements as management fees and
other. However, the gross revenue generated by the Managed Clubs (approximately
$7.3 million per year) is not reflected in the financial statements, because the
Managed Clubs are not consolidated. The Company acquired two Managed Clubs
during fiscal 1995 and three Managed Clubs during fiscal 1998 which were
originally party to management agreements with the Company. In the future, the
Company may seek to acquire Managed Clubs, if such opportunities arise.
ITEM 3. LEGAL PROCEEDINGS
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 adverse effect on the Company's business, results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Not applicable
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT CLUB AND MEMBERSHIP DATA)
Set forth below are selected historical consolidated financial, other
operating data and club and membership data of the Company as of the dates and
for the periods presented. The selected historical consolidated statement of
operations data for the years ended May 31, 1997, 1998, the seven months ended
December 31, 1998 and the year ended December 31, 1999, and the selected
historical consolidated balance sheet data as of May 31, 1998 and December 31,
1998 and 1999, were derived from the audited Consolidated Financial Statements
of the Company, which are included herein. The selected historical consolidated
statement of operations data for the seven months ended December 31, 1997, were
derived from the unaudited consolidated financial statements of the Company
which are included herein and the selected historical consolidated statements of
operations data for the year ended December 31, 1998 and the selected historical
consolidated balance sheet data as of December 31, 1997 were derived from the
unaudited consolidated financial statements which are not included herein. The
selected historical consolidated statement of operations data for the years
ended May 31, 1995 and 1996 and the selected historical consolidated balance
sheet data as of May 31, 1995, 1996 and 1997 were derived from the 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.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------
1995 1996 1997 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $33,349 $43,755 $ 56,567 $ 82,350
Operating expenses:
Payroll and related................................ 16,105 18,626 23,321 33,309
Club operating..................................... 11,740 14,542 18,044 25,858
General and administrative......................... 3,321 3,562 3,774 5,825
Depreciation and amortization...................... 2,168 2,929 4,219 7,736
Compensation expense incurred in connection with
stock options(1)................................. 635 1,967 5,933 1,442
------- ------- -------- --------
Operating income (loss).............................. (620) 2,129 1,276 8,180
Interest expense, net of interest income............. 654 952 2,455 5,902
------- ------- -------- --------
Income (loss) before provision (benefit) for income
tax................................................ (1,274) 1,177 (1,179) 2,278
Provision (benefit) for income tax................... (541) 628 (243) 1,131
Extraordinary item(2)................................ -- -- -- (782)
Cumulative effect of change in accounting
policy(3).......................................... -- -- -- (88)
------- ------- -------- --------
Net income (loss).................................... (733) 549 (936) 277
Accreted dividends on preferred stock................ (258) (400) (1,286) (2,387)
Net Income (loss) attributable to common
stockholders....................................... $ (991) $ 149 $ (2,222) $ (2,110)
======= ======= ======== ========
OTHER DATA:
EBITDA(4)............................................ $ 1,548 $ 5,058 $ 5,495 $ 15,916
EBITDA margin(4)..................................... 4.6% 11.6% 9.7% 19.3%
Deferred lease expense............................... $ 1,232 $ 1,277 $ 1,620 $ 2,671
Cash provided by (used in):
Operating activities............................... 3,283 5,695 12,302 15,733
Investing activities............................... (7,674) (5,487) (13,571) (36,040)
Financing activities............................... $ 4,244 $ 144 $ 2,809 $ 40,836
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------
1995 1996 1997 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
CLUB AND MEMBERSHIP DATA:
New clubs opened(5).................................. 2 2 3 1
Clubs acquired(5).................................... -- 1 5 13
Wholly owned clubs operated at end of period(5)...... 20 23 28 45
Total clubs operated at end of period(6)............. 25 28 35 49
Members at end of period(7).......................... 48,300 54,800 78,600 125,100
Comparable club revenue increase(8).................. 14.7% 27.3% 17.7% 26.2%
Revenue per weighted average club (in
thousands)(9)...................................... $ 1,794 $ 2,017 $ 2,267 $ 2,287
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 42,990 $ 71,662 $111,022 $159,779
Operating expenses:
Payroll and related............................ 17,621 28,001 43,689 62,412
Club operating................................. 13,258 24,261 36,861 52,619
General and administrative..................... 2,742 5,828 8,911 10,908
Depreciation and amortization.................. 3,944 8,818 12,610 20,935
Compensation expense incurred in connection
with stock options(1)....................... 397 434 1,479 2,042
-------- -------- -------- --------
Operating income................................. 5,028 4,320 7,472 10,863
Interest expense, net of interest income......... 3,270 5,279 7,911 10,243
-------- -------- -------- --------
Income (loss) before provision (benefit) for
income tax..................................... 1,758 (959) (439) 620
Provision (benefit) for income tax............... 888 (399) (156) 571
Extraordinary item(2)............................ (782) -- -- --
Cumulative effect of change in accounting
policy(3)...................................... (88) -- -- --
-------- -------- -------- --------
Net income (loss)................................ -- (560) (283) 49
Accreted dividends on preferred stock............ (1,485) (2,146) (3,048) (7,880)
Net (loss) attributable to common stockholders... $ (1,485) $ (2,706) $ (3,331) $ (7,831)
======== ======== ======== ========
OTHER DATA:
EBITDA(4)........................................ $ 8,972 $ 13,138 $ 20,082 $ 31,798
EBITDA margin(4)................................. 20.9% 18.3% 18.1% 19.9%
Deferred lease expense........................... $ 1,354 $ 1,493 $ 2,809 $ 3,061
Cash provided by (used in):
Operating activities........................... 7,193 7,393 15,933 29,496
Investing activities........................... (12,362) (47,352) (71,030) (55,078)
Financing activities........................... $ 42,361 $ 36,116 $ 34,591 $ 33,553
CLUB AND MEMBERSHIP DATA:
New clubs opened(5).............................. -- 4 5 14
Clubs acquired(5)................................ 5 16 25 4
Wholly owned clubs operated at end of
period(5)...................................... 35 65 65 82
Total clubs operated at end of period(6)......... 40 69 69 86
Members at end of period(7)...................... 99,900 178,700 178,700 203,059
Comparable club revenue increase(8).............. 24.1% 25.5% 17.3% 16.0%
Revenue per weighted average club
(in thousands)(9).............................. $ 1,289 $ 1,184 $ 2,156 $ 2,130
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF DECEMBER 31,
-------------------------------------- ------------------------------
1995 1996 1997 1998 1997 1998 1999
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $(2,329) $(4,048) $(8,436) $ 5,898 $ 26,772 $ 478 $ (1,015)
Total assets................. 27,274 34,805 52,923 111,977 104,948 157,416 215,678
Long-term debt, including
current installments....... 10,430 10,453 41,071 88,289 89,368 89,524 132,202
Redeemable senior preferred
stock...................... -- -- -- -- -- 36,735 42,066
Stockholders' equity
(accumulated deficit)...... $ 1,987 $ 5,474 $(6,951) $ (5,107) $ (6,342) $ (2,333) $ (5,597)
</TABLE>
- ---------------
(1) Represents non-cash charges related to the vesting of certain stock options
issued to management and the accretion of preferred dividends related to
preferred stock underlying certain of such options.
(2) Reflects the write-off of previously capitalized fees and expenses of
$782,000, net of taxes of $624,000, related to the repayment of certain
indebtedness. See Note 15 to the Company's Consolidated Financial
Statements.
(3) Prior to fiscal 1998, the Company capitalized direct costs incurred to
obtain leases for new clubs to be constructed by the Company. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement
of Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5")
which requires that these costs be expensed as incurred. In connection with
the adoption of SOP 98-5 the Company, effective June 1, 1997, recorded a
pre-tax charge of $88,000 net of $70,000 in taxes, as the cumulative effect
of this accounting change. See Note 2(n) to the Company's Consolidated
Financial Statements.
(4) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, extraordinary charges and cumulative effect of changes in
accounting policy. EBITDA is presented because management believes it
provides useful information regarding the operating performance and
financial condition of the Company. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows, or other
consolidated income (loss) or cash flow data prepared in accordance with
GAAP or as a measure of the Company's profitability or liquidity. EBITDA
Margin is defined as EBITDA as a percentage of revenues.
(5) During fiscal 1995, the Company acquired two formerly managed clubs. During
fiscal 1997, the Company opened or acquired six clubs and relocated one club
upon the expiration of its lease. During fiscal 1998, the Company opened or
acquired 14 clubs and acquired three formerly managed clubs. During calendar
1998, the Company acquired one formerly managed club. During 1999 the
company relocated one club.
(6) Includes all clubs whether wholly-owned or managed.
(7) Represents members at wholly-owned clubs only.
(8) The Company defines comparable clubs as those clubs operated by the Company
for at least 13 full months.
(9) Revenue per weighted average club is calculated as club 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, or the seven months ended
December 31 as applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHANGE OF FINANCIAL REPORTING PERIOD
In 1998 the Company changed its fiscal year end from May 31 to December 31,
which resulted in a transition period of seven months ended December 31, 1998.
The decision to change the fiscal year was made for more convenience in both
internal and external communications. To aid comparative analysis, the Company
has elected to present the results of operations for the years ended December
31, 1999 and December 31, 1998, unaudited and the seven month periods ended
December 31, 1998, and December 31,
14
<PAGE> 17
1997, unaudited, along with the previously reported results of operations for
the years ended May 31, 1998, and May 31, 1997.
HISTORICAL CLUB GROWTH
<TABLE>
<CAPTION>
SEVEN
MONTHS
YEAR ENDED MAY 31, ENDED YEAR ENDED
---------------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Clubs at beginning of period.......... 23 25 28 35 49 69
Greenfield clubs...................... 2 2 3 1 4 14
Acquired clubs........................ -- 1 5 13 16 4
Sold or relocated clubs............... -- -- (1) -- -- (1)
-- -- -- -- -- --
Clubs at end of period................ 25 28 35 49 69 86
== == == == == ==
Number of managed clubs included at
the end of period................... 5 5 7 4 4 4
</TABLE>
INTRODUCTION
The Company is 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, 1999, the Company operated 86 clubs that collectively served approximately
213,000 members. The Company develops clusters of clubs to serve densely
populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income in excess of
$50,000.
The Company's goal is to develop the premier health club network in each of
the major metropolitan regions it enters. Management believes that clustering
clubs allows the Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. In entering new regions, the Company develops
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, 1999, approximately half of the Company's members
participated in a membership plan that allows unlimited access to all of the
Company's clubs for a higher membership fee.
The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its NYSC brand name. The Company
is the largest fitness club operator in Manhattan with 30 locations and operates
a total of 66 clubs under the NYSC name within a defined radius of New York
City. The Company is in the process of more fully developing clusters within a
smaller radius surrounding Washington, DC under its WSC brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its BSC
and PSC brand names, respectively. The Company employs localized brand names for
its 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.
The Company's 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, the Company has increased revenues and
EBITDA by expanding its club base in the New York, Washington, DC, Boston and
Philadelphia. As a result of the Company's expanding club base and relatively
fixed nature of the Company's operating costs, the Company's EBITDA has
increased from $1.5 million in fiscal 1995 to $31.8 million for the year ended
December 31, 1999, and EBITDA as a percentage of revenues has increased from
4.6% to 19.9% over the same period. Management expects the strong growth in
revenues, and EBITDA to continue as the 60 clubs opened or acquired since the
beginning of
15
<PAGE> 18
fiscal 1997 continue to mature. Based on the Company's 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. The Company believes that the
revenues, EBITDA (before corporate overhead) and operating income (before
corporate overhead) of these 60 clubs will increase as they mature. As a result
of the Company's accelerated expansion, however, management expects EBITDA and
operating income margins to be negatively impacted in the near term, as further
new clubs are added.
COMPARABLE CLUB REVENUE
The Company defines comparable clubs as those clubs that were operated by
the Company for the entire period of the period presented and that same period
of the preceeding year. Under this definition, comparable clubs for twelve month
periods are those clubs that were operated by the Company for at least 24
months. The Company's comparable club revenue increased 16.0%, 25.5%, 26.2% and
17.7%, for year ended December 31, 1999, the seven months ended December 31,
1998, and fiscal 1998 and 1997, respectively.
NET LOSSES
The Company incurred a net loss of $283,000, $560,000, $936,000 and
$733,000 for the year ended December 31, 1998, the seven months ended December
31, 1998, fiscal 1997 and fiscal 1995 respectively. Losses have resulted from a
variety of costs, including, but not limited to, amortization of goodwill and
debt financing costs resulting from the Company's acquisition strategy as well
as compensation expense incurred in connection with the vesting of certain stock
options held by management. Increased goodwill, amortization, depreciation and
financing costs associated with future acquisitions and greenfield club openings
will impact profitability and may result in net losses in the future.
RECENT DEVELOPMENTS
From January 1, 2000 through March 15, 2000, the Company acquired one club,
and closed one club which was at the end of its lease term. The aggregate
purchase price of the acquired club totaled $4,190 which included a cash payment
of $3,790 and the issuance of a note payable totaling $400. The members of the
club that closed were transferred to a newly opened club nearby. In February
2000, the Company began a vitamin and supplement program for which it will sell
vitamins and nutrition bars under the brand name E2R.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS ENDED YEAR ENDED
MAY 31, DECEMBER 31, DECEMBER 31,
-------------- -------------- --------------
1997 1998 1997 1998 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Payroll and related................ 41.2 40.4 41.0 39.1 39.4 39.1
Club operating..................... 31.9 31.4 30.8 33.9 33.2 32.9
General and administrative......... 6.7 7.1 6.4 8.1 8.0 6.8
Depreciation and amortization...... 7.5 9.4 9.2 12.3 11.4 13.1
Compensation expense incurred in
connection with stock options.... 10.5 1.8 0.9 0.6 1.3 1.3
----- ----- ----- ----- ----- -----
Operating income................... 2.2 9.9 11.7 6.0 6.7 6.8
Interest expense, net of interest
income........................... 4.3 7.2 7.6 7.3 7.1 6.4
----- ----- ----- ----- ----- -----
Income (loss) before provision
(benefit) for income tax......... (2.1) 2.7 4.1 (1.3) (0.4) 0.4
Provision (benefit) for income
tax.............................. (0.4) 1.4 2.1 (0.5) (0.1) 0.4
Extraordinary item................. -- (0.9) (1.8) -- -- --
Cumulative effect of change in
accounting Policy................ -- (0.1) (0.2) -- -- --
----- ----- ----- ----- ----- -----
Net income (loss).................. (1.7) 0.3 -- (0.8) (0.3) --
Accreted dividend on preferred
stock............................ 2.2 2.9 3.4 3.0 2.7 4.9
----- ----- ----- ----- ----- -----
Net (loss) attributable to common
stockholders..................... (3.9)% (2.6)% (3.4)% (3.8)% (3.0)% (4.9)%
===== ===== ===== ===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO
THE YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased $48.8 million or 43.9%, to $159.8 million
during 1999 from $111.0 million in 1998. This increase resulted from the
maturation of the ten clubs opened or acquired during 1997 (approximately $4.4
million), the 30 clubs opened or acquired in 1998 (approximately $25.6 million),
and the 18 clubs opened or acquired in 1999 (approximately $9.4 million). In
addition, revenues increased during 1999 due to revenue growth at the Company's
mature clubs resulting from membership growth (approximately $9.4 million).
OPERATING EXPENSES. Operating expenses increased $45.4 million, or 43.8%
to $148.9 million in 1999, from $103.6 million in 1998. This increase was
primarily due to a 45.8% increase in total months of club operations to 901 in
1999 from 618 in 1998, as highlighted by the following factors:
Payroll and related increased by $18.7 million, or 42.9% to $62.4
million in 1999, from $43.7 million in 1998. This increase was primarily
attributable to the acquisition or opening of 18 clubs in 1999 and a full
year of operating the 30 clubs opened or acquired in 1998.
Club operating increased by $15.8 million, or 42.7% to $52.6 million
in 1999, from $36.9 million in 1998. This increase is primarily
attributable to the acquisition or opening of 18 clubs in 1999 and the
additional expenses attributable to operating the 30 clubs opened or
acquired in 1998.
General and administrative increased by $2.0 million, or 22.4% to
$10.9 million in 1999, from $8.9 million in 1998. This increase is
attributable to expenses associated with our expansion, including the
17
<PAGE> 20
expansion of our corporate office and staff. In March, 1999, our membership
billing processing center was moved to a purpose-built location separate
from our corporate office.
Depreciation and amortization increased by $8.3 million, or 66.0% to
$20.9 million in 1999, from $12.6 million in 1998. This increase is
attributable to the increased fixed assets placed in service and intangible
assets acquired arising out of acquisition or opening of new clubs.
Compensation expense incurred in connection with stock options
increased by $563,000, or 38.1% to $2.0 million in 1999, from $1.5 million
in 1998. The increase in compensation expense is principally due to more
stock options vesting in the year ended 1999 when compared to 1998.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense, net of
interest income, increased $2.3 million to $10.2 million in fiscal 1999 from
$7.9 million in 1998, primarily as a result of increased indebtedness due to the
$40.0 million of Senior Notes issued in June, 1999.
PROVISION (BENEFIT) FOR INCOME TAX. Provision for income tax (benefit)
changed by $727,000 to a provision of $571,000 in 1999 from a benefit of
($156,000) in 1998. In 1999, the Company's effective tax rate was increased
principally due to non-deductible expenses, state minimum taxes and changes in
state tax rates. With the exception of deferred tax assets of $284,000 related
to certain state net operating loss carry-forwards which have been fully
reserved for, the Company expects future taxable income to be sufficient to
realize the $12.1 million of net deferred tax assets. Because the profitability
of clubs improve with maturation; the company expects increases in profitability
as the 48 clubs opened or acquired in 1998 and 1999 mature.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $4.8 million to $7.9 million during 1999, from $3.0 million in
1998. This increase is due to the issuance of Redeemable Senior Preferred Stock
in November, 1998.
SEVEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
SEVEN MONTHS ENDED DECEMBER 31, 1997
REVENUES. Revenues increased approximately $28.7 million, or 66.7%, to
$71.7 million during the seven months ended December 31, 1998 from $43.0 million
in the seven months ended December 31, 1997. This increase resulted primarily
from maturation of the 16 clubs opened or acquired during fiscal 1998
(approximately $13.2 million) and the 20 clubs opened or acquired during the
seven months ended December 31, 1998 (approximately $8.0 million). In addition,
revenues increased during the period by $7.1 million at the Company's mature
clubs resulting from increased membership and non membership revenues such as
private training.
OPERATING EXPENSES. Operating expenses increased $29.3 million, or 77.4%,
to $67.3 million in the seven months ended December 31, 1998, from $38.0 million
in the seven months ended December 31, 1997. The increase was primarily due to
an 89.5% increase in total months of club operations to 417 in the seven months
ended December 31, 1998 from 220 in the seven months ended December 31, 1997, as
highlighted by the following factors:
Payroll and related increased by $10.4 million, or 58.9% to $28.0
million in the seven months ended December 31, 1998, from $17.6 million in
the seven months ended December 31, 1997. This increase was attributable to
the acquisition or opening of 16 clubs in fiscal 1998 and 20 clubs during
the seven month period ended December 31, 1998.
Club operating increased by $11.0 million, or 83.0% to $24.3 million
in the seven months ended December 31, 1998, from $13.3 million in the
seven months ended December 31, 1997. This increase is attributable to the
acquisition or opening of 16 clubs in fiscal 1998 and 20 clubs during the
seven month period ended December 31, 1998.
General and administrative increased by $3.1 million, or 112.5% to
$5.8 million in the seven months ended December 31, 1998, from $2.7
million, in the seven months ended December 31, 1997. This increase is
attributable to expenses associated with the Company's expansion, including
the expansion of the Company's corporate office and upgrade of the
Company's management information systems. In
18
<PAGE> 21
addition the Company wrote-off $169,000 of expenses associated with the
preparation for an initial public offering, which has been postponed due to
market volatility.
Depreciation and amortization increased by $4.9 million, or 123.6% to
$8.8 million in the seven months ended December 31, 1998, from $3.9 million
in the seven months ended December 31, 1997. This increase is attributable
primarily to the increased fixed and intangible assets arising out of new
club acquisitions and openings during the seven months ended December 31,
1998, and depreciation and amortization for fixed asset additions,
acquisitions or openings since December 31, 1997. Fixed and intangible
assets acquired during the last five months ended May 31, 1998 totaled
$12.6 million and $9.8 million, respectively. Fixed and intangible assets
acquired during the first seven months ended December 31, 1998 totaled
$33.0 million and $20.7 million respectively.
Compensation expense incurred in connection with stock options
increased $37,000, or 9.3% to $434,000 in the seven months ended December
31, 1998, from $397,000 in the seven months ended December 31, 1997, as a
result of a compounding feature in the calculation of dividends on the
Preferred stock options.
INTEREST EXPENSE. Interest expense increased $1.8 million to $5.6 million
during the seven months ended December 31, 1998, from $3.8 million in the seven
months ended December 31, 1997. The increased level of interest expense was
primarily due to a full period of interest related to the Senior Notes (drawn
down in October 1997), as well as drawings under the line of credit to fund
certain acquisitions during 1998.
INTEREST INCOME. Interest income decreased $254,000 to $272,000 during the
seven months ended December 31, 1998, from $526,000 in the seven months ended
December 31, 1997. The decreased level of interest income was primarily due to
lower cash on hand as the Company invested in acquisitions and new club
construction.
PROVISION (BENEFIT) FOR INCOME TAX. The income tax benefit for the seven
months ended December 31, 1998 was ($399,000) compared to a tax expense of
$888,000 for the seven months ended December 31, 1997. During the seven months
ended December 31, 1998, the Company's effective tax rate was impacted by net
operating losses incurred by certain clubs located in states where such losses
could not currently be utilized and higher tax-exempt interest income.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5 (Accounting for the Costs of Start-up Activities), the Company has
expensed all Organizational Costs capitalized in previous fiscal years.
Accordingly, $158,000 was written off, $88,000 net of a tax effect of $70,000.
EXTRAORDINARY ITEM. During the seven months ended December 31, 1997, the
Company issued 9 3/4% Senior Notes due 2004 pursuant to which the Company repaid
its existing indebtedness. Accordingly, previously capitalized fees and expenses
of $1.4 million relating to the former debt were written off, $782,000 net of a
tax effect of $624,000.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $0.6 million to $2.1 million in the seven months ended December
31, 1998, from $1.5 million in the seven months ended December 31, 1997. This
increase is as a result of a compounding feature in the calculation of the
accretion of dividends on the Series A and B preferred stock, as well as
dividends subsequent to the issuance of redeemable senior preferred stock.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
REVENUES. Revenues increased approximately $25.8 million, or 45.6%, to
$82.4 million during fiscal 1998 from $56.6 million in fiscal 1997. This
increase resulted from the maturation of three clubs opened or acquired during
fiscal 1996 (approximately $3.0 million); the six clubs opened or acquired
during fiscal 1997 (approximately $8.1 million) and 14 clubs opened or acquired
during fiscal 1998 (approximately $10.1 million). In addition, revenues
increased during fiscal 1998 by $4.2 million at the Company's mature clubs.
19
<PAGE> 22
OPERATING EXPENSES. Operating expenses increased $18.9 million, or 34.1%,
to $74.2 million in fiscal 1998 from $55.3 million in fiscal 1997. This increase
was primarily due to a 40.4% increase in total months of club operations to 417
in fiscal 1997 from 297 in fiscal 1996, as highlighted by the following factors:
Payroll and related increased by $10.0 million, or 42.8%, to $33.3
million in fiscal 1998, from $23.3 million in fiscal 1997. This increase
was attributable to the acquisition or opening of 14 clubs in fiscal 1998
and a full year of operating the six clubs opened or acquired in fiscal
1997.
Club operating increased by $7.9 million, or 43.3%, to $25.9 million
in fiscal 1998, from $18.0 million in fiscal 1997. This increase is
attributable to the acquisition or opening of 14 clubs in fiscal 1998 and
the additional expenses attributable to operating the six clubs opened or
acquired in fiscal 1997.
General and administrative increased by $2.0 million, or 54.3%, to
$5.8 million in fiscal 1998, from $3.8 million in fiscal 1997. This
increase is attributable to associated expenses as a result of the
Company's expansion, such as the expansion of the Company's corporate
office, the change in accounting policy to expense certain Organizational
Costs in the period in which they are incurred rather than capitalizing
them.
Depreciation and amortization increased by $3.5 million, or 83.4%, to
$7.7 million in fiscal 1998, from $4.2 million in fiscal 1997. This
increase is attributable primarily to increased fixed assets and intangible
assets arising out of new club acquisitions and openings during fiscal
1998, and a full year of depreciation and amortization for fixed asset
additions, acquisitions or openings during fiscal 1997. Intangible assets
acquired in fiscal 1997 and 1998 totaled $1.7 million and $14.5 million,
respectively.
Compensation expense in connection with stock options decreased by
$4.5 million, or 75.7%, to $1.4 million in fiscal 1998, from $5.9 million
in fiscal 1997. In 1997, this expense was attributable to the adjustment of
the Company's stock options to fair market value in connection with the
Recapitalization.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense, net of
interest income increased $3.4 million to $5.9 million during fiscal 1998 from
$2.5 million in fiscal 1997. The increased level of interest expense was
primarily due to the issuance of the Senior Notes.
PROVISION (BENEFIT) FOR INCOME TAX. The income tax provision for fiscal
1998 was $1.1 million compared to a tax benefit of ($243,000) for fiscal 1997.
For fiscal 1998, the Company's effective tax rate was negatively impacted by
high state and local tax rates combined with a tax rate change. In fiscal 1997,
the income tax benefit was reduced by adjustments to expected tax refunds
reduced in part by the reversal of a valuation allowance on state net operating
losses carryforward, which was no longer needed.
EXTRAORDINARY ITEM. During fiscal 1998, the Company issued 9 3/4% Senior
Notes due 2004 pursuant to which the Company repaid its existing indebtedness.
Accordingly, previously capitalized fees and expenses of $1.4 million relating
to the former debt were written off, $782,000 net of a tax effect of $624,000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5 (Accounting for the Costs of Start-up Activities), the Company has
expensed all Organizational Costs capitalized in previous fiscal years.
Accordingly, $158,000 was written off, $88,000 net of a tax effect of $70,000.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $1.1 million to $2.4 million during fiscal 1998, from $1.3
million in fiscal 1997. This increase is the result of the Preferred Stock being
outstanding for a full year in 1998 and for only five months in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its 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 and renovate
existing clubs.
20
<PAGE> 23
Operating Activities. Net cash provided by operating activities for the
year ended December 31, 1999 was $29.5 million compared to $15.9 million during
the year ended December 31, 1998. The increase in cash provided by operating
activities was primarily due to improved performance by the Company's mature
clubs offset by recently opened or acquired clubs which are immature and not yet
operating at normal operating margins. Excluding cash and cash equivalents, the
Company normally operates with a working capital deficit because it receives
dues or fee revenue either (i) during the month services are rendered, or (ii)
when paid-in-full, in advance. As a result, the Company has no material accounts
receivable. The Company also records a deferred revenue liability, because
initiation fees are received at enrollment and are recognized over the estimated
average term of membership. Management believes that the Company's working
capital deficit is an important source of cash flow from operating activities
that it believes will continue to grow as the Company's membership revenues
increase.
Investing Activities. The Company invested $56.3 million and $70.5 million
in capital expenditures and asset acquisitions during the year ended December
31, 1999 and 1998, respectively, primarily as a result of the Company's
expansion efforts. The Company estimates that for the year ended December 31,
2000, it will invest an additional amount of approximately $66.0 million in
capital expenditures and asset acquisitions, which includes $3.6 million that
management intends to invest to renovate and expand certain existing clubs, $6.9
million to maintain certain existing clubs and $3.0 million to further upgrade
its management information system. These expenditures will be funded by cash
flow generated from operations, available cash and credit facilities.
Financing Activities. In June, 1999, the Company issued $40.0 million
Senior Notes thereby increasing the total Senior Notes outstanding to $125.0
million. These notes were issued at a price of 98.75%, providing the Company
with $39,500 of proceeds before expenses related to the issuance. After payment
of fees and expenses of $3.9 million, the Company received net proceeds of $35.6
million. Other cash flow financing activities during 1997, 1998 and 1999 include
borrowings under the Credit Facility, the repayment of long-term debt, and the
issuance of redeemable senior preferred stock "Senior Stock".
As of December 31, 1999, the Company has approximately $23.3 million
available under the current Credit Facility, which matures in October 2002, and
has no scheduled amortization requirements. The Credit Facility was amended to
allow for maximum borrowings of $25.0 million. Although management believes that
the Company will be able to obtain or generate sufficient funds to finance the
Company's current operating and growth plans through the end of 2000, any
material acceleration or expansion of that plan through additional greenfields
or acquisitions (to the extent such acquisitions include cash payments) may
require the Company to pursue additional sources of financing prior to the end
of 2000. There can be no assurance that such financing will be available or that
it will be available on acceptable terms. The inability to finance such further
or accelerated expansion on acceptable terms may negatively impact the Company's
competitive position and or materially adversely affect the Company's business,
results of operations or financial condition. The Credit Facility accrues
interest at variable rates based on market conditions, accordingly, future
increases in interest rates could have a negative impact on net income.
In November 1998, the Company sold $40.0 million of Senior stock. After
payment of fees and expenses of approximately $400,000 the Company received net
proceeds of $39.6 million. The Senior stock is redeemable in November 2008, and
carries a cumulative 12.0% annual dividend which is added to the liquidation
value of such preferred shares, if not paid in cash, at the option of the
Company.
In October 1997, the Company issued $85.0 million Senior Notes and entered
into the Credit Facility. After payment of fees and expenses of $3.3 million,
the Company received net proceeds of $81.7 million, of which $41.5 million was
used for the repayment of certain indebtedness. The Senior Notes contain
restrictive covenants and restrict the payment of dividends. The Credit Facility
notes contain restrictive covenants, including a leverage ratio and interest
coverage ratio and dividend payment restrictions and is collaterlized by all the
assets of the Company.
21
<PAGE> 24
Effect of Recent Changes in Accounting Standards
The Company believes future adoption of recently issued accounting
standards will not have a material impact on the financial statements.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three year and seven month period ended December
31, 1999.
YEAR 2000 COMPLIANCE
Computer hardware and software systems were initially designed to represent
a given year using two (2) digits. These systems, if left unaddressed, could
potentially create systems failures and disruption of business operations
through the incorrect representation of "00" as the year 1900. Among other
things, our operations depend on the availability of utility services,
principally electricity and reliable performace by telecommunication services. A
substantial disruption in any of these services due to providers of these
services failing to achieve Y2K compliance could have a significant adverse
impact on our financial results depending on the length and severity of the
disruption.
We have successfully completed a multi-phase program developed to identify
and resolve Year 2000 ("Y2K") issues related to integrity and reliability of our
computerized information systems, computer systems embedded in the machinery and
equipment used in our operations, as well as third party or in-house developed
software. We have not encountered any issues or interruptions to date in regards
to Y2K.
As of December 31, 1999 we have spent approximately $500,000 in addition to
our normal internal information technology costs in connection with our Y2K
program. We do not expect to incur additional costs in regards to the Y2K
program.
The estimates and conclusions herein contain forward-looking statements and
are based on our best estimates of future events. Risks include the ability of
suppliers to bring their systems into Y2K compliance.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K of the Company for
the year ended December 31, 1999 are forward-looking statements, including,
without limitation, statements regarding future financial results and
performance, potential sales revenue and tax benefits. These statements are
subject to various risks and uncertainties, many of which are outside the
control of the Company, including the level of market demand for the Company's
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 the Company. The information contained herein represents management's best
judgement as of the date hereof based on information currently available;
however, the Company does not intend to update this information to reflect
development or information obtained after the date hereof and disclaims any
legal obligation to the contrary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's financial statements and supplementary data are listed in
the index appearing under item 14(a)(1) and 14(a)(2) .
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and a brief account of the
business experience of each person who is currently a director or executive
officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark Smith................................... 40 Chief Executive Officer and Director
Robert Giardina.............................. 42 President and Chief Operating Officer
Alexander Alimanestianu...................... 40 Executive Vice President, Development
Richard Pyle................................. 41 Executive Vice President and Chief Financial
Officer
Deborah Smith................................ 40 Senior Vice President, Operations
Keith Alessi................................. 45 Director
Paul Arnold.................................. 53 Director
Bruce Bruckmann.............................. 46 Director
Stephen Edwards.............................. 36 Director
Jason Fish................................... 42 Director
</TABLE>
Mark Smith joined the Company in 1985 and was appointed Chief Executive
Officer in 1995. Prior to this appointment, he held the position of Executive
Vice President of Development and International Operations. Mr. Smith has also
served as a director of the Company since September 1995. Mr. Smith has had
primary responsibility for the development and/or acquisition of the Company's
clubs since 1990, as well as responsibility for the Company's Managed Clubs in
Switzerland. Before joining the Company, Mr. Smith was a chartered accountant
with Coopers & Lybrand in New York City, London and New Zealand, and a
professional squash player.
Robert Giardina has served as President and Chief Operating Officer of the
Company since 1992. Mr. Giardina joined the Company in 1981 (when the Company
had four clubs) after six years of employment with other fitness club companies.
With over 20 years of experience in the club industry, Mr. Giardina has
expertise in virtually every aspect of facility management and club operations.
In addition to operations, Mr. Giardina has primary responsibility for sales and
marketing.
Alexander Alimanestianu joined the Company in 1990, and became Executive
Vice President, Development in 1995. From 1990 to 1995, Mr. Alimanestianu served
as Vice President and Senior Vice President. Before joining the Company, he
worked as a corporate attorney for six years with one of the Company's outside
law firms. Mr. Alimanestianu has been involved in the development or acquisition
of over 40 of the Company's clubs.
Richard Pyle, a British chartered accountant, joined the Company in 1987
and has been chiefly responsible for the Company's financial matters since that
time, as a Vice President in 1988, Senior Vice President and Chief Financial
Officer in 1992 and Executive Vice President in 1995, successively. Before
joining the Company, Mr. Pyle worked in public accounting (in the United States,
Bermuda, Spain and in England) specializing in the hospitality industry, and as
the corporate controller for a British public company in the leisure industry.
Deborah Smith joined the Company in 1987, and served as Vice President
before her appointment as a Senior Vice President of Operations in 1995. Ms.
Smith has been responsible for the startup and operation of Company clubs in New
York, Switzerland, Maryland and Washington, DC. She oversees club operations in
all U.S. geographic areas.
Keith Alessi has served as a director of the Company since April, 1997. Mr.
Alessi is President, Chief Executive Officer and a director of Telespectrum
Worldwide, Inc., a position he has held since March 1998. From May 1996 to March
1998, Mr. Alessi served as Chairman, President and Chief Executive Officer of
Jackson Hewitt, Inc. Prior to that, Mr. Alessi held various positions with Farm
Fresh, Inc. including Chief Financial Officer and President.
23
<PAGE> 26
Paul Arnold has served as a director of the Company since April, 1997. Mr.
Arnold has served as President and Chief Executive Officer of Cort Business
Services, Inc., a leading national supplier of high end rental furniture since
1992.
Bruce Bruckmann has served as a director of the Company since December,
1996. Since 1994, Mr. Bruckmann has served as a principal of BRS. From 1983
until 1994, Mr. Bruckmann served as an officer and subsequently a Managing
Director of Citicorp Venture Capital, Ltd. ("CVC"). Mr. Bruckmann is currently a
director of Mediq Inc., Penhall International, Inc., Jitney Jungle Stores of
America, Inc., Mohawk Industries, Inc., AmeriSource Health Corporation,
Chromcraft Revington Corporation, Cort Business Services, Inc. and Anvil
Knitwear, Inc. and a director of several private companies.
Stephen Edwards has served as a director of the Company since December,
1996. Since 1994, Mr. Edwards has served as a principal of BRS. From 1993 until
1994, Mr. Edwards served as an officer of CVC. From 1988 through 1991, he was an
associate of CVC. Prior to joining CVC, Mr. Edwards worked with
Citicorp/Citibank in various corporate finance positions. Mr. Edwards is
currently a director of Anvil Knitwear, Inc. and O'Sullivan Industries and a
director of several private companies.
Jason Fish has been a director of the Company since December, 1996. Mr.
Fish has been a Managing Member of Farallon Capital Management, L.L.C. ("FCM")
and Farallon Partners, L.L.C., the Farallon's two management entities, since
April 1996. Mr. Fish was a General Partner of the Farallon investment
partnerships and a Managing Director of FCM's predecessor, Farallon Capital
Management, Inc., from 1990 to 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following summarizes, for the fiscal year indicated, the principal
components of compensation for the Company's Chief Executive Officer and the
four highest compensated executive officers (collectively, the "named executive
officers"). The compensation set forth below fully reflects compensation for
work performed on behalf of the Company.
<TABLE>
<CAPTION>
OTHER ANNUAL LONG-TERM COMPENSATION
NAME AND SALARY BONUS(1) COMPENSATION AWARDS COMMON STOCK
PRINCIPAL POSITION PERIOD ($) ($) ($) UNDERLYING OPTIONS/SARS(#)
- ------------------ ------ ------- -------- ------------- --------------------------
ANNUAL COMPENSATION
<S> <C> <C> <C> <C> <C>
Mark Smith................ 1999(2) 379,979 338,000 -- --
Chief Executive Officer 1998(3) 216,600 209,764 -- --
1998(4) 360,500 330,000 -- --
1997(4) 350,000 176,000 -- 8,830
Robert Giardina........... 1999(2) 360,381 257,260 -- --
President and Chief 1998(3) 205,429 158,782 -- --
Operating Officer 1998(4) 341,906 250,000 -- --
1997(4) 331,948 118,000 -- 8,829
Richard Pyle.............. 1999(2) 197,525 196,855 -- --
Executive Vice President 1998(3) 112,596 119,626 -- --
and Chief Financial
Officer 1998(4) 187,399 187,500 -- --
1997(4) 181,941 85,000 -- 8,828
Alexander Alimanestianu... 1999(2) 197,525 196,855 -- --
Executive Vice 1998(3) 112,596 119,626 -- --
President, Development 1998(4) 187,399 187,500 -- --
1997(4) 178,711 85,000 -- 8,828
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
OTHER ANNUAL LONG-TERM COMPENSATION
NAME AND SALARY BONUS(1) COMPENSATION AWARDS COMMON STOCK
PRINCIPAL POSITION PERIOD ($) ($) ($) UNDERLYING OPTIONS/SARS(#)
- ------------------ ------ ------- -------- ------------- --------------------------
ANNUAL COMPENSATION
<S> <C> <C> <C> <C> <C>
Deborah Smith............. 1999(2) 158,832 130,511 -- --
Senior Vice President, 1998(3) 90,539 79,391 -- --
Operations 1998(4) 141,100 125,000 -- 400
1997(4) 136,990 63,475 -- 5,350
</TABLE>
- ---------------
(1) Includes annual bonus payments under the Company's Annual Bonus Plan for
fiscal 1999, 1998 and 1997, and the seven month period ended December 31,
1999.
(2) Includes the twelve month period ended December 31, 1999.
(3) Includes the seven months ended December 31, 1998.
(4) Includes the twelve month period ended May 31.
OPTION/SAR GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999
There were no options granted to named executive officers by the Company
during the year ended December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1998
AND 1998 YEAR-END OPTION/SAR VALUES
The following summarizes exercises of stock options (granted in prior
years) by the named executive officers during the year ended December 31, 1999
as well as the number and value of all unexercised options held by the named
executive officers as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
AT FY-END(#) OPTIONS/SARS
SHARES UNDERLYING UNEXERCISED AT FY-END($)(1)
ACQUIRED ON VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXERCISE(#) REALIZED($) ------------------------- -----------------------------
NAME COMMON COMMON COMMON PREFERRED COMMON PREFERRED
- ---- ----------- ----------- ------------ ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark Smith........... -- -- 6,331/2,499 42,812/0 378,917/149,559 1,618,277/0
Robert Giardina...... -- -- 6,330/2,499 32,793/0 378,874/149,542 1,239,581/0
Richard Pyle......... -- -- 6,330/2,498 27,569/0 378,831/149,525 1,042,108/0
Alexander
Alimanestianu...... -- -- 6,330/2,498 27,199/0 378,831/149,525 1,028,134/0
Deborah Smith........ -- -- 4,043/1,707 9,530/0 238,546/ 98,991 360,245/0
</TABLE>
- ---------------
(1) Value realized is based upon the fair market value of the stock at the
exercise date minus the exercise price. Fair market value was determined in
good faith by the Board of Directors and was based upon the historical and
projected financial performance of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Bruce Bruckmann,
Stephen Edwards and Mark Smith. Messrs. Bruckmann and Edwards are non-employee
directors of the Company.
MANAGEMENT EQUITY AGREEMENTS
Simultaneously with the Recapitalization, the Company entered into
Executive Stock Agreements with certain of the officers and other key employees
of the Company. Pursuant to the Executive Stock Agreements, the executives each
have purchased shares of Common Stock and/or shares of Series B Preferred of the
Company at a purchase price of $1.00 per share of Common Stock and $35.00 per
share of Series B Preferred Stock.
25
<PAGE> 28
COMPANY BENEFIT PLANS
In April 1996, the Company implemented a 401(k) salary deferral plan (the
"401(k) Plan") which is available to eligible employees, as defined. The 401(k)
Plan provides for the Company to make discretionary contributions. The Company,
however, elected not to make contributions for the year ended December 31, 1999,
the seven months ended December 31, 1998, fiscal 1998, 1997 or 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth (as of December 31, 1999) 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 the Company's voting securities; (ii) each
named executive officer and director of the Company; and (iii) all directors and
named executive officers of the Company as a group.
<TABLE>
<CAPTION>
COMMON PERCENTAGE OF
STOCK COMMON REDEEMABLE
BENEFICIALLY STOCK SENIOR SERIES A SERIES B
NAME OWNED(1) OUTSTANDING(1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
- ---- ------------ -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BRS(2)
126 East 56th Street,
29th Floor
New York, New York 10022..... 504,456 38.4% -- 104,330 --
The Farrallon Entities(3)
One Maritime Plaza,
Suite 1325
San Francisco, California
94111........................ 270,091 20.5% 20,000 41,045 --
The Canterbury Entities
600 Fifth Avenue,
23rd Floor
New York, New York 10020(4).. 139,437 10.6% 15,000 -- --
Rosewood Capital L.P.(5)
One Maritime Plaza,
Suite 1330
San Francisco, California
94111........................ 17,908 1.4% 5,000 -- --
EXECUTIVE OFFICERS AND
DIRECTORS:
Mark Smith(6).................. 63,639 4.8% -- -- 42,812
Robert Giardina(6)............. 50,228 3.8% -- -- 32,793
Richard Pyle(6)................ 43,234 3.3% -- -- 27,569
Alexander Alimanestianu(6)..... 42,739 3.3% -- -- 27,199
Deborah Smith(6)............... 17,830 1.4% -- -- 10,080
Bruce C. Bruckmann(7).......... 517,642 39.4% -- 107,057 --
Stehpen Edwards(8)............. 504,456 38.4% -- 104,330 --
Jason Fish(9).................. 270,091 20.5% 20,000 41,045 --
Paul Arnold.................... * * -- 591 --
Keith Alessi................... * * -- 591 --
EXECUTIVE OFFICERS AND
DIRECTORS AS A GROUP:
10 Persons(10)................. 1,011,118 76.9% 20,000 149,284 140,453
</TABLE>
- ---------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable or
26
<PAGE> 29
exercisable within 60 days of March 15, 1999 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of any other person.
(2) Excludes shares held individually by Mr. Bruckmann and other individuals
(and affiliates and family members thereof), each of whom are employed by
BRS.
(3) Includes shares held by each of Farallon Capital Partners, L.P., Farallon
Capital Institutional Partners, L.P., Farallon Capital Institutional
Partners II, L.P. and R.R. Capital Partners, L.P. (the "Farallon
Entities"). Farallon Partners, L.L.C. is the general partner of each of the
Farallon Entities. Farallon Partners, L.L.C. disclaims beneficial ownership
of such shares. Also includes warrants to purchase 71,630 shares of Common
Stock with an exercise price of $.01 per share and an expiration date of
November 30, 2008.
(4) Includes a warrant to purchase 75,714 shares of Common Stock with an
exercise price of $.01 per share and an expiration date of December 10,
2006 and warrants to purchase 53,723 shares of Common Stock with an
exercise price of $.01 and an expiration date of November 15, 2008.
(5) Includes warrants to purchase 17,908 shares of Common Stock with an
exercise price of $.01 per share and an expiration date of November 30,
2008.
(6) Includes options to acquire, exercisable within 60 days, Common Stock, and
Series B Preferred Stock options, exercisable within 60 days, pursuant to
the Old Option Plan and the Preferred Option Plan, respectively. Messrs.
Smith, Giardina, Pyle, Alimanestianu and Ms. Smith each hold such options
on 8,830, 8,829, 8,828, 8,828 and 5,430 shares of Common Stock,
respectively. All shares of Series B Preferred Stock beneficially owned by
such persons are in the form of Series B Options, except with respect to
Ms. Smith only, 9,530 shares are in the form of Series B Options. The
address for each of these named executive officers is the same as the
address of the Company's principal executive offices.
(7) Includes 504,456 shares held by BRS, and approximately 2,276 shares held by
certain other family members of Mr. Bruckmann. Mr. Bruckmann disclaims
beneficial ownership of such shares held by BRS.
(8) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
such shares.
(9) Includes shares held by each of the Farallon Entities. Mr. Fish is a
managing member of Farallon Partners, L.L.C., which is the general partner
of each of the Farallon Entities. Mr. Fish disclaims beneficial ownership
of such shares.
(10) Includes (i) shares held by BRS, which may be deemed to be owned
beneficially by Messrs. Bruckmann and Edwards, and (ii) shares held by the
Farallon Entities, which may be deemed to be owned beneficially by Mr.
Fish.
Excluding the shares beneficially owned by BRS and the Farallon Entities,
the directors and named executive officers as a group beneficially own (i)
223,384 shares of Common Stock (which represents approximately 17.0% of the
Common Stock on a fully diluted basis), (ii) no shares of Redeemable Senior
Preferred Stock, (iii) 1,182 shares of Series A Preferred Stock, and (iv)
140,453 shares of Series B Preferred Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE RECAPITALIZATION
In December 1996, the Company consummated the Recapitalization pursuant to
which, among other things: (i) all shares of the Company's preferred stock
outstanding prior to the Recapitalization were redeemed or converted into shares
of the Company's then authorized common stock ("Old Common Stock"); (ii) all
shares of Old Common Stock (other than shares held by certain members of the
Company's management team) were exchanged for cash; and (iii) BRS and the
Farallon Entities acquired shares of the Company's Common Stock and Series A
Preferred Stock, representing approximately 73.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, certain members of the
Company's management acquired shares of the Company's Common Stock and Series B
Preferred Stock representing approximately 27.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, pursuant to
27
<PAGE> 30
the Recapitalization, the Company instituted the Old Option Plan and the
Preferred Option Plan, which granted certain members of the Company's
management, options to acquire the Company's Common Stock and Series B Options,
respectively.
REDEEMABLE SENIOR PREFERRED STOCK
In November 1998, the Company issued 40,000 shares of Redeemable Senior
Preferred Stock ("Senior"). After the payment of fees and expenses of
approximately $400,000 the Company received net proceeds of approximately $39.6
million. The Senior stock is redeemable in November 2008. The Senior stock may,
at the option of the holder, be converted into Common stock upon the initial
public offering of common stock of the Company.
REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, the Company, BRS, the Farallon
Entities, Canterbury Mezzanine Capital, L.P. ("CMC"), certain members of
management and other shareholders of the Company entered into a Registration
Rights Agreement, dated December 10, 1996 (as amended on November 13, 1998, in
connection with the issuance of Senior Preferred Stock, the "Registration Rights
Agreement"). Pursuant to the terms of the Registration Rights Agreement, BRS,
the Farallon Entities and CMC have the right to require the Company, at the
expense of the Company 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 the
Company has consummated an initial registered public offering of its 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 the Company paying all expenses of the
Offering, whenever the Company proposes to register its 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, the Company has agreed to
indemnify all holders of Registrable Securities against certain liabilities,
including certain liabilities under the Securities Act.
PROFESSIONAL SERVICES AGREEMENT AND TRANSACTION FEES
In connection with the Recapitalization, Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS Co."), an affiliate of BRS, and the Company entered into a
Professional Services Agreement, whereby BRS Co. agreed to provide certain
advisory and consulting services to the Company. 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 the outstanding Common Stock of the Company. The Company also
paid BRS Co. and the Farallon Entities transaction fees of $584,000 and
$216,000, respectively for investment banking advisory services rendered to the
Company in connection with the Recapitalization.
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 16, 2000.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ MARK SMITH
------------------------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ MARK SMITH
--------------------------------------------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
By: /s/ RICHARD PYLE
--------------------------------------------------------
Richard Pyle
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
By: /s/ KEITH ALESSI
--------------------------------------------------------
Keith Alessi
Director
By: /s/ PAUL ARNOLD
--------------------------------------------------------
Paul Arnold
Director
By: /s/ BRUCE BRUCKMAN
--------------------------------------------------------
Bruce Bruckmann
Director
By: /s/ STEPHEN EDWARDS
--------------------------------------------------------
Stephen Edwards
Director
By: /s/ JASON FISH
--------------------------------------------------------
Jason Fish
Director
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Document List
1. Financial Statements
The following consolidated financial statements of the Company are included
in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent accountants........................... F-1
Consolidated balance sheets at May 31, 1998, December 31,
1998 and 1999............................................. F-2
Consolidated statements of operations for the years ended
May 31, 1997, 1998, the seven months ended December 31,
1997 (Unaudited), 1998 and the year ended December 31,
1999...................................................... F-3
Consolidated statements of stockholders' equity (deficit)
for the years ended May 31, 1997, 1998, the seven months
ended December 31, 1998 and the year ended December 31,
1999...................................................... F-4
Consolidated statements of cash flows for the years ended
May 31, 1997, 1998, the seven months ended December 31,
1997 (Unaudited), 1998 and the year ended December 31,
1999...................................................... F-5
Notes to consolidated financial statements.................. F-6
2. Financial Statement Schedule includes:
Report of independent accountants on financial statement
schedule.................................................. F-24
Schedule II, Valuation and Qualifying Accounts.............. F-25
</TABLE>
(b) Reports on Form 8-K
None.
(c) Exhibits:
<TABLE>
<C> <S>
2.1.. Agreement and Plan of Merger dated as of November 8, 1996 by
and among the Company, various Sellers and Option Holders
and TSI Recapitalization Sub, Inc.+
2.2.. Amendment to Agreement and Plan of Merger dated as of
December 10, 1996 among TSI Merger Sub, Inc., the Company
and certain stockholders and option holders of the Company.+
3.1.. Amended and Restated Certificate of Incorporation of the
Company.+
3.2.. By-Laws of the Company.+
3.3.. Certificate of Amendment of the Certificate of Incorporation
of the Company, dated as of November 13, 1998.***
4.1.. Indenture dated as of October 16, 1997 between the Company
and United States Trust Company of New York.+
4.2.. Purchase Agreement dated as of October 9, 1997 among the
Company and BT Alex. Brown Incorporated.+
4.3.. Purchases Agreement dated as of June 10, 1999 between Town
Sports International, Inc. and Deutsche Bank Securities,
Inc.**
4.4.. Registration Rights Agreement dated as of October 16, 1997
among the Company, and BT Alex. Brown Incorporated.+
4.5.. Registration Rights Agreement dated as of December 10, 1996
by and among the Company, BRS and various investors, the
Farallon Entities, CMC, and certain Town Sports
stockholders.+
4.6.. Registration Rights Agreement dated as of June 21, 1999
between Town Sports International, Inc., and Deutsche Bank
Securities, Inc.**
4.7.. First Amendment to Registration Rights Agreement by and
among the Company, BRS, CMC, Canterbury Detroit Partners
L.P. "CDP", Rosewood Capital Partners L.P. "RC", the
Farallon Entities and certain other stockholders of the
Company, dated as of November 13, 1998.***
10.1.. Amended and Restated Credit Agreement among the Company,
Various Lending Institutions and Bankers Trust Company, as
Administrative Agent dated as of October 16, 1997.+
</TABLE>
30
<PAGE> 33
<TABLE>
<C> <S>
10.2.. First Amendment to the Amended and Restated Credit Agreement
among the Company, Various Lending Institutions and Bankers
Trust Company, as Administrative Agent dated as of August 6,
1998.*
10.3.. Second Amendment to the Amended and Restated Credit
Agreement among the Company, Various Lending Institutions
and Bankers Trust Company, as Administrative Agent dated as
of January 28, 1999.
10.4.. Third Amendment to the Amended and Restated Credit
Agreement, among Town Sports International, Inc., Various
Lending Institutions and Bankers Trust Company, as
Administrative Agent, dated as of June 9, 1999.***
10.5.. Fourth Amendment to the Amended and Restated Credit
Agreement, among Town Sports International, Inc., Various
Lending Institutions and Bankers Trust Company as
administrative Agent dated as of March 1, 2000.
10.6.. Stock Purchase Agreement among the Company, CMC and CDP,
dated as of November 13, 1998.***
10.7.. Stock Purchase Agreement among the Company, the Farallon
Entities and RC, dated as of November 30, 1998.***
10.8.. Shareholders' Agreement dated as of December 10, 1996 by and
among the Company, BRS, the Farallon Entities, CMC and
certain other stockholders of the Company.+
10.9.. Amended and Restated Shareholders' Agreement among the
Company, BRS, the Farallon Entities, RC, CMC, and CDP, dated
as of November 13, 1998.***
21.1.. Subsidiaries of the Company.
27.1.. Financial Data Schedule.
</TABLE>
- ---------------
+ Incorporated by reference to the Registrant's Registration Statement on Form
S-4, File No. 333-40907.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 333-61439.
** Incorporated by reference to the Registrant's Registration Statement on Form
S-4, File No. 333-82607.
*** Incorporated by reference to the Registrant's December 31, 1998 Form 10-K.
31
<PAGE> 34
<TABLE>
<S> <C>
[PRICEWATERHOUSECOOPERS LOGO]
PRICEWATERHOUSECOOPERS LLP
1301 Avenue of the Americas
New York NY 10019-6013
Telephone (212) 259 1000
Facsimile (212) 259 1301
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES at May 31, 1998, December
31, 1998 and 1999, and the results of their operations and their cash flows for
each the years ended May 31, 1997, 1998, for the seven months ended December 31,
1998 and for the year ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2n to the consolidated financial statements, the
Company changed its method of accounting for organizational costs effective June
1, 1997.
[/s/ PricewaterhouseCoopers LLP]
February 18, 2000
F-1
<PAGE> 35
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ALL FIGURES $'000, EXCEPT SHARE DATA
MAY 31, 1998, DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, --------------------
1998 1998 1999
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 22,997 $ 19,154 $ 27,125
Accounts receivable...................................... 420 628 576
Inventory................................................ 673 1,253 1,070
Prepaid expenses and other current assets................ 677 1,205 1,475
-------- -------- --------
Total current assets............................. 24,767 22,240 30,246
Fixed assets, net.......................................... 54,518 81,426 123,894
Intangible assets, net..................................... 19,923 37,064 37,648
Deferred tax asset......................................... 7,159 8,570 11,829
Deferred membership costs.................................. 4,933 7,005 10,841
Other assets............................................... 677 1,111 1,220
-------- -------- --------
Total assets..................................... $111,977 $157,416 $215,678
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and capital lease
obligations........................................... $ 2,036 $ 2,191 $ 2,276
Accounts payable......................................... 2,451 3,711 3,146
Accrued expenses......................................... 7,869 6,305 9,811
Corporate income taxes payable........................... 122 62 305
Deferred revenue......................................... 6,391 9,493 15,723
-------- -------- --------
Total current liabilities........................ 18,869 21,762 31,261
Long-term debt and capital lease obligations............... 86,253 87,333 129,926
Deferred lease liabilities................................. 9,298 10,791 13,852
Deferred revenue........................................... 1,890 2,446 2,049
Other liabilities.......................................... 774 682 2,121
-------- -------- --------
Total liabilities................................ 117,084 123,014 179,209
-------- -------- --------
Commitments and contingencies (Notes 6, 7, 8 and 13)
Redeemable senior preferred stock, $1.00 par value;
liquidation value $40,488 and $45,478 at December 31,
1998 and 1999, respectively; authorized 100,000 shares;
no shares issued and outstanding at May 31, 1998, 40,000
shares at December 31, 1998 and 1999..................... -- 36,735 42,066
-------- -------- --------
Stockholders' deficit:
Series A preferred stock, at liquidation value........... 18,736 20,351 23,216
Series B preferred stock, at liquidation value........... 164 179 204
Class A voting common stock, $.001 par value; issued and
outstanding 1,015,714 shares at May 31, 1998 and
December 31, 1998 and 1,014,086 at December 31,
1999.................................................. 1 1 1
Paid-in capital............................................ 3,994 7,844 8,556
Unearned compensation...................................... (2,546) (2,546) (1,240)
Accumulated deficit........................................ (25,456) (28,162) (36,334)
-------- -------- --------
Total stockholders' deficit...................... (5,107) (2,333) (5,597)
-------- -------- --------
Total liabilities and stockholders' deficit...... $111,977 $157,416 $215,678
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 36
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ALL FIGURES $'000
FOR THE YEARS ENDED MAY 31, 1997, 1998, THE SEVEN MONTHS ENDED
DECEMBER 31, 1997 (UNAUDITED), 1998 AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31, YEAR ENDED
------------------ ---------------------- DECEMBER 31,
1997 1998 1997 1998 1999
------- ------- ----------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Club operations................... $54,164 $79,719 $41,490 $69,964 $157,440
Management fees and other......... 2,403 2,631 1,500 1,698 2,339
------- ------- ------- ------- --------
56,567 82,350 42,990 71,662 159,779
------- ------- ------- ------- --------
Operating expenses:
Payroll and related............... 23,321 33,309 17,621 28,001 62,412
Club operating.................... 18,044 25,858 13,258 24,261 52,619
General and administrative........ 3,774 5,825 2,742 5,828 10,908
Depreciation and amortization..... 4,219 7,736 3,944 8,818 20,935
Compensation expense incurred in
connection with stock
options........................ 5,933 1,442 397 434 2,042
------- ------- ------- ------- --------
55,291 74,170 37,962 67,342 148,916
------- ------- ------- ------- --------
Operating income............... 1,276 8,180 5,028 4,320 10,863
Interest expense, net of interest
income of $115, $1,228, $526,
$272, and $1,284, respectively.... 2,455 5,902 3,270 5,279 10,243
------- ------- ------- ------- --------
Income (loss) before provision
(benefit) for corporate
income taxes................. (1,179) 2,278 1,758 (959) 620
Provision (benefit) for corporate
income taxes...................... (243) 1,131 888 (399) 571
------- ------- ------- ------- --------
Income (loss) before
extraordinary item and
cumulative effect of change
in accounting policy......... (936) 1,147 870 (560) 49
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit of $624........ -- (782) (782) -- --
------- ------- ------- ------- --------
Income (loss) before cumulative
effect of change in
accounting policy............ (936) 365 88 (560) 49
Cumulative effect on prior years of
a change in accounting for club
organizational costs, net of
income tax benefit of $70......... -- (88) (88) -- --
------- ------- ------- ------- --------
Net income (loss).............. (936) 277 -- (560) 49
Accreted dividends on preferred
stock............................. (1,286) (2,387) (1,485) (2,146) (7,880)
------- ------- ------- ------- --------
Net loss attributable to common
stockholders................. $(2,222) $(2,110) $(1,485) $(2,706) $ (7,831)
======= ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 37
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ALL FIGURES $'000, EXCEPT SHARE DATA
FOR THE YEARS ENDED MAY 31, 1997, 1998, THE SEVEN MONTHS ENDED DECEMBER 31,
1998, AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------------------------------- -------------------
SERIES A SERIES A SERIES B CLASS A
($1.00 PAR) ($.10 PAR) ($1.00 PAR) ($.001 PAR)
----------------- --------------- --------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- ------ ------ ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996............................... 496
Liquidation of Series A Preferred Stock, for $1,000
per share, redemption of Class A and B Common Stock
for a cash price of $35 per share and change in
equity related to exercise of stock options.......... (496)
Issuance of Series A and B Preferred and Common Stock
at cash price of $100, $35 and $1, respectively...... 152,455 $15,245 3,857 $135 1,000,000 1
Warrant exercise at $.01 per share.................... 10,000
Original issue discount in connection with the
issuance of warrants and subordinated debt...........
Compensation expense incurred in connection with
common stock options.................................
Compensation expense incurred in connection with
Series B Preferred Stock options.....................
Amortization of unearned compensation
Accretion of Series A and Series B preferred stock
dividend ($6.59 and $2.32 per share, respectively.... 1,005 9
Net loss..............................................
------- ------- ---- -- ----- ---- ---------- --
Balance at May 31, 1997............................... 152,455 16,250 -- -- 3,857 144 1,010,000 1
==== == ===== ==== ========== ==
Issuance of Series A Preferred Stock and Class A
Common Stock......................................... 1,182 119 5,714 --
Unearned Compensation incurred in connection with
common stock options.................................
Amortization of unearned compensation.................
Compensation expense incurred in connection with
Series B Preferred stock options.....................
Accretion of Series A and Series B preferred stock
dividend ($15.14 and $5.44 per share,
respectively)........................................ 2,367 20
Net income............................................
------- ------- ----- ---- ---------- --
Balance at May 31, 1998............................... 153,637 18,736 3,857 164 1,015,714 1
Warrant issuance in connection with Redeemable Senior
Preferred Stock......................................
Compensation expense incurred in connection with
Series B Preferred stock options.....................
Accretion of Series A and Series B preferred stock
dividend ($10.51 and $3.89 per share,
respectively)........................................ 1,615 15
Accretion of redeemable senior preferred stock
dividend ($12.20 per share plus accretion to
liquidation value)...................................
Net loss..............................................
------- ------- ----- ---- ---------- --
Balance at December 31, 1998.......................... 153,637 20,351 3,857 179 1,015,714 1
Compensation expense incurred in connection with
Series B Preferred stock options.....................
Amortization of unearned compensation.................
Accretion of Series A and Series B preferred stock
dividend ($18.64 and $6.48 per share,
respectively)........................................ 2,865 25
Accretion of redeemable senior preferred stock
dividend ($124.75 per share plus accretion to
liquidation value)...................................
Cancellation of unvested options......................
Repurchase of shares.................................. (2) -- (1,628) --
Net income............................................
------- ------- ----- ---- ---------- --
Balance at December 31, 1999.......................... 153,637 $23,216 3,855 $204 $1,014,086 $1
======= ======= ===== ==== ========== ==
<CAPTION>
COMMON STOCK
-----------------------------------
CLASS A CLASS B
($.01 PAR) CONVERTIBLE
----------------- --------------- PAID-IN UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
-------- ------ ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996............................... 576,306 $6 2,351 $ 5,126
Liquidation of Series A Preferred Stock, for $1,000
per share, redemption of Class A and B Common Stock
for a cash price of $35 per share and change in
equity related to exercise of stock options.......... (576,306) (6) (2,351) (11,228)
Issuance of Series A and B Preferred and Common Stock
at cash price of $100, $35 and $1, respectively...... (226)
Warrant exercise at $.01 per share....................
Original issue discount in connection with the
issuance of warrants and subordinated debt........... 123
Compensation expense incurred in connection with
common stock options................................. 5,660
Compensation expense incurred in connection with
Series B Preferred Stock options..................... 273
Amortization of unearned compensation
Accretion of Series A and Series B preferred stock
dividend ($6.59 and $2.32 per share, respectively.... 272
Net loss..............................................
-------- -- ------ -- --------
Balance at May 31, 1997............................... -- -- -- -- --
======== == ====== ==
Issuance of Series A Preferred Stock and Class A
Common Stock......................................... 6
Unearned Compensation incurred in connection with
common stock options................................. 3,352 $(3,352)
Amortization of unearned compensation................. 806
Compensation expense incurred in connection with
Series B Preferred stock options..................... 636
Accretion of Series A and Series B preferred stock
dividend ($15.14 and $5.44 per share,
respectively)........................................
Net income............................................
-------- -------
Balance at May 31, 1998............................... 3,994 (2,546)
Warrant issuance in connection with Redeemable Senior
Preferred Stock...................................... 3,416
Compensation expense incurred in connection with
Series B Preferred stock options..................... 434
Accretion of Series A and Series B preferred stock
dividend ($10.51 and $3.89 per share,
respectively)........................................
Accretion of redeemable senior preferred stock
dividend ($12.20 per share plus accretion to
liquidation value)...................................
Net loss..............................................
-------- -------
Balance at December 31, 1998.......................... 7,844 (2,546)
Compensation expense incurred in connection with
Series B Preferred stock options..................... 784
Amortization of unearned compensation................. 1,258
Accretion of Series A and Series B preferred stock
dividend ($18.64 and $6.48 per share,
respectively)........................................
Accretion of redeemable senior preferred stock
dividend ($124.75 per share plus accretion to
liquidation value)...................................
Cancellation of unvested options...................... (48) 48
Repurchase of shares.................................. (24)
Net income............................................
-------- -------
Balance at December 31, 1999.......................... $ 8,556 $(1,240)
======== =======
<CAPTION>
(ACCUMULATED TOTAL
DEFICIT) RETAINED STOCKHOLDERS'
EARNINGS EQUITY (DEFICIT)
----------------- ----------------
<S> <C> <C>
Balance at May 31, 1996............................... $ 342 $ 5,474
Liquidation of Series A Preferred Stock, for $1,000
per share, redemption of Class A and B Common Stock
for a cash price of $35 per share and change in
equity related to exercise of stock options.......... (21,466) (32,700)
Issuance of Series A and B Preferred and Common Stock
at cash price of $100, $35 and $1, respectively...... 15,155
Warrant exercise at $.01 per share....................
Original issue discount in connection with the
issuance of warrants and subordinated debt........... 123
Compensation expense incurred in connection with
common stock options................................. 5,660
Compensation expense incurred in connection with
Series B Preferred Stock options..................... 273
Amortization of unearned compensation
Accretion of Series A and Series B preferred stock
dividend ($6.59 and $2.32 per share, respectively.... (1,286)
Net loss.............................................. (936) (936)
-------- --------
Balance at May 31, 1997............................... (23,346) (6,951)
Issuance of Series A Preferred Stock and Class A
Common Stock......................................... 125
Unearned Compensation incurred in connection with
common stock options.................................
Amortization of unearned compensation................. 806
Compensation expense incurred in connection with
Series B Preferred stock options..................... 636
Accretion of Series A and Series B preferred stock
dividend ($15.14 and $5.44 per share,
respectively)........................................ (2,387)
Net income............................................ 277 277
-------- --------
Balance at May 31, 1998............................... (25,456) (5,107)
Warrant issuance in connection with Redeemable Senior
Preferred Stock...................................... 3,416
Compensation expense incurred in connection with
Series B Preferred stock options..................... 434
Accretion of Series A and Series B preferred stock
dividend ($10.51 and $3.89 per share,
respectively)........................................ (1,630)
Accretion of redeemable senior preferred stock
dividend ($12.20 per share plus accretion to
liquidation value)................................... (516) (516)
Net loss.............................................. (560) (560)
-------- --------
Balance at December 31, 1998.......................... (28,162) (2,333)
Compensation expense incurred in connection with
Series B Preferred stock options..................... 784
Amortization of unearned compensation................. 1,258
Accretion of Series A and Series B preferred stock
dividend ($18.64 and $6.48 per share,
respectively)........................................ (2,890)
Accretion of redeemable senior preferred stock
dividend ($124.75 per share plus accretion to
liquidation value)................................... (5,331) (5,331)
Cancellation of unvested options......................
Repurchase of shares.................................. (24)
Net income............................................ 49 49
-------- --------
Balance at December 31, 1999.......................... $(36,334) $ (5,597)
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 38
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALL FIGURES $'000
FOR THE YEARS ENDED MAY 31, 1997, 1998, THE SEVEN MONTHS ENDED
DECEMBER 31, 1997 (UNAUDITED), 1998 AND THE YEAR ENDED DECEMBER 31, 1999
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31, YEAR ENDED
-------------------- ----------------------- DECEMBER 31,
1997 1998 1997 1998 1999
-------- -------- ----------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ (936) $ 277 $ -- $ (560) $ 49
-------- -------- -------- -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Compensation expense incurred in connection
with stock options........................... 5,933 1,442 397 434 2,042
Depreciation and amortization.................. 4,219 7,736 3,944 8,818 20,935
Amortization of debt issuance costs............ 156 412 245 363 1,147
Losses from extinguishment of debt............. -- 1,406 1,377 -- --
Write-off of organization costs................ -- 158 158 -- --
Noncash rental expense, net of noncash rental
income....................................... 1,620 2,670 1,354 1,493 3,061
Net change in certain working capital
components................................... 4,389 4,316 1,620 204 9,596
Increase in deferred tax asset................. (2,058) (1,187) (1,081) (1,411) (3,259)
Increase in deferred membership costs.......... (847) (1,403) (708) (2,072) (3,836)
Other.......................................... (174) (94) (113) 124 (239)
-------- -------- -------- -------- --------
Total adjustments.......................... 13,238 15,456 7,193 7,953 29,447
-------- -------- -------- -------- --------
Net cash provided by operating
activities............................... 12,302 15,733 7,193 7,393 29,496
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures, net of effect of acquired
businesses..................................... (11,403) (16,170) (5,304) (21,815) (53,364)
Acquisition of businesses........................ (1,888) (19,733) (7,058) (25,103) (2,932)
Intangible and other assets...................... (280) (137) -- (434) (33)
Landlord contributions........................... -- -- -- -- 1,251
-------- -------- -------- -------- --------
Net cash used in investing activities........ (13,571) (36,040) (12,362) (47,352) (55,078)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of stock, net of expenses............... 15,155 125 125 -- --
Issuance of Senior Preferred Stock, net of
expenses....................................... -- -- -- 39,635 --
Redemption and liquidation of stock, including
expenses....................................... (38,820) -- -- -- (24)
Proceeds from borrowings, net of expenses........ 40,081 85,841 85,570 16,975 35,581
Repayments of borrowings......................... (13,607) (45,130) (43,334) (20,494) (2,004)
-------- -------- -------- -------- --------
Net cash provided by financing activities.... 2,809 40,836 42,361 36,116 33,553
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ 1,540 20,529 37,192 (3,843) 7,971
Cash and cash equivalents at beginning of period... 928 2,468 2,468 22,997 19,154
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period... $ 2,468 $ 22,997 $ 39,660 $ 19,154 $ 27,125
======== ======== ======== ======== ========
Summary of the change in certain working capital
components, net of effects of acquired
businesses:
(Increase) decrease in accounts receivable....... $ 469 $ (108) $ 69 $ (208) $ 272
(Increase) decrease in inventory................. (39) (343) (323) (580) 183
(Increase) decrease in prepaid expenses and other
current assets................................. 631 30 (18) (336) 43
Increase (decrease) in accounts payable and
accrued expenses............................... 2,055 1,895 981 (2,330) 3,022
Decrease in prepaid corporate income taxes....... 156 324 - - 243
Increase in deferred revenue..................... 1,117 2,518 911 3,658 5,833
-------- -------- -------- -------- --------
Net change in certain working capital
components................................. $ 4,389 $ 4,316 $ 1,620 $ 204 $ 9,596
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 39
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALL FIGURES $'000, EXCEPT SHARE DATA
1. NATURE OF BUSINESS
Town Sports International, Inc. and Subsidiaries (the "Company") owns,
operates or manages 66 fitness clubs ("clubs") in the New York metropolitan
market, 11 clubs in Washington, D.C., five clubs in Boston, two in Philadelphia
and two clubs in Switzerland as of December 31, 1999. The Company's geographic
concentration in the New York metropolitan market may expose the Company to
adverse developments related to competition, demographic changes, real estate
costs and economic down turns. The Company operates in a single segment as
defined by Statement of Financial Accounting Standards No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
On December 10, 1996, the Company completed a restructuring of its
ownership and debt capitalization. The restructuring was undertaken to increase
stockholder value by providing access to growth capital and financial advisory
skills thereby enabling the Company to optimize its competitive advantage in the
market place, and to present certain existing equity holders the opportunity to
diversify their respective equity interests in the Company. The restructuring
was accounted for as a leveraged recapitalization whereby new investors, on a
fully-diluted basis, effectively acquired 73% of the Company resulting in a
reduction of equity of $32,700. The reduction in equity included the liquidation
of Series A Preferred Stock of $496, and the redemption of stock and stock
options outstanding immediately prior to the recapitalization of $28,025 and
$4,179, respectively. In addition, 368,333 shares of Series B Redeemable
Preferred Stock, which had been accounted for as mezzanine financing, were
redeemed at a cost of $6,121. New and existing investors acquired newly
constituted preferred and common stock. Closing fees paid to certain new
investors totaled approximately $800. Senior and subordinated debt facilities
were obtained to finance the repayment of existing bank facilities and to
provide growth capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Town Sports International, Inc. and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
B. CHANGE IN YEAR END
On January 7, 1999, the Company's board of directors approved a change in
the Company's fiscal year end from May 31 to December 31, effective
beginning with the seven month period ended December 31, 1998 ("the
transition period").
C. REVENUE RECOGNITION
The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time
with 30 days notice. Initiation fees and related direct expenses, primarily
salaries and sales commissions payable to membership consultants, are
deferred and recognized, on a straight-line basis, in operations over an
estimated membership period of twenty four (24) months. Dues that are
received in advance are recognized on a pro-rata basis over the periods in
which services are to be provided.
In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $2,375 pursuant to various state consumer
protection laws.
F-6
<PAGE> 40
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
Management fees earned for services rendered are recognized at the time the
related services are performed.
The Company recognizes revenue from merchandise sales upon delivery to the
member.
D. INVENTORY
Inventory consists of athletic equipment, supplies and clothing for sale to
members and club supplies. Inventories are valued at the lower of cost or
market by the first-in, first-out method.
E. FIXED ASSETS
Fixed assets are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which are thirty years for
building and improvements, five years for club equipment, furniture,
fixtures and computer equipment, and three years for proprietary computer
software. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining period of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred. The cost
and related accumulated depreciation or amortization of assets retired or
sold are removed from the respective accounts and any gain or loss is
recognized in operations.
F. ADVERTISING AND CLUB PREOPENING COSTS
Advertising costs and club preopening costs are charged to operations during
the period in which they are incurred. Total advertising costs incurred by
the Company during the years ended May 31, 1997, 1998, the seven months
ended December 31, 1998, and the year ended December 31, 1999 totaled
$1,627, $2,147, $2,081 and $5,024, respectively.
G. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
The most significant assumptions and estimates relate to the useful lives
and recoverability of fixed and intangible assets, deferred income tax
valuation, valuation of and expense incurred in connection with stock
options and warrants and the estimated membership period.
H. CORPORATE INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined on the basis of the difference between the financial
statement and tax bases of assets and liabilities ("temporary differences")
at enacted tax rates in effect for the 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-7
<PAGE> 41
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
I. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31, YEAR ENDED
------------------ --------------------- DECEMBER 31,
1997 1998 1997 1998 1999
------- ------- ----------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid:
Interest (net of amounts
capitalized).............. $1,603 $6,978 $2,430 $4,705 $10,083
Taxes........................ 1,655 1,300 455 1,072 3,577
Noncash investing and financing
activities:
Acquisition of fixed assets
included in accounts
payable................... 850 2,496 99 1,394 1,500
Acquisition of equipment
financed by suppliers or
lessors................... 1,411 562 261 -- 3,386
See Notes 9 and 10 for
additional noncash investing
and financing activities
</TABLE>
J. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments which have
maturities of three months or less when acquired to be cash equivalents. The
carrying amounts reported in the balance sheets for cash and cash equivalents
approximate fair value.
K. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE
The Company recognizes rental expense for leases with scheduled rent
increases on the straight-line basis over the life of the lease.
L. FOREIGN CURRENCY
Transactions denominated in a foreign currency have been translated into
U.S. dollars at the rates of exchange at the transaction dates. Assets and
liabilities have been translated at the respective year-end exchange rates. For
the years ended May 31, 1997, 1998, the seven months ended December 31, 1998 and
the year ended December 31, 1999, the Company recognized foreign exchange gains
(losses) of approximately ($65), ($3), $1 and ($2) respectively. These gains
(losses) relate to certain management fees earned in Switzerland.
M. INVESTMENTS IN AFFILIATED COMPANIES
The Company has investments in Capitol Hill Squash Club Associates and
Kalorama Sports Management Associates (collectively referred to as the
"Affiliates"). The Affiliates have operations, which are similar, or related to,
those of the Company. The Company accounts for these Affiliates in 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.
F-8
<PAGE> 42
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
N. INTANGIBLE ASSETS
Intangible assets consist of membership lists, debt issuance costs,
goodwill and covenants-not-to-compete. Such intangibles are stated at cost and,
except debt issuance costs, are being amortized by the straight-line method over
their estimated lives. Debt issuance costs are amortized as additional interest
expense over life of the underlying debt using the interest method. Effective
June 1, 1997, the Company changed the estimated useful lives of membership lists
from three to two years. The effect on operating results for the year ended May
31, 1998 of decreasing the useful life was to increase amortization expense by
$234, $117 net of taxes. Goodwill is being amortized over the remaining lives of
the respective leases, five to fifteen years, and debt issuance costs are being
amortized over the term of the respective borrowings, five to seven years.
Prior to the year ended May 31, 1998, the Company capitalized direct costs
(legal fees and real-estate commissions) incurred to obtain leases for new clubs
to be constructed by the Company ("Organizational Costs"). Such amounts were
amortized over a five year period using the straight-line method. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement of
Position 98-5 Reporting on the costs of start-up activities ("SOP 98-5") which
requires that Organizational Costs be expensed as incurred. In connection with
the adoption of SOP 98-5, the Company restated its first-quarter operating
results as if adoption had occurred on June 1, 1997 and recorded a pre-tax
charge of $158, $88 net of taxes, as the cumulative effect of this accounting
change.
O. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as fixed assets and intangible assets, including
goodwill, are reviewed for impairment when events or circumstances indicate that
their carrying value may not be recoverable. Estimated undiscounted expected
future cash flows are used to determine if an asset is impaired in which case
the asset's carrying value would be reduced to fair value. For all periods
presented, no impairment losses were recorded.
P. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents. Such amounts are
held, primarily, in a single commercial bank. The Company holds no collateral
for these financial instruments.
Q. STOCK-BASED EMPLOYEE COMPENSATION
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method ("APB No. 25"). In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Company's stock is
not greater than the amount an 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 options or
warrants granted to nonemployees for financing are included in operating results
as an expense.
Disclosures, including pro forma operating results had the Company prepared
its financial statements in accordance with the fair value based method of
accounting for stock-based compensation, have been included in Note 9.
F-9
<PAGE> 43
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
R. OTHER RECENT ACCOUNTING PRONOUNCEMENTS
During the transition period, the Company adopted the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the
Company to capitalize certain costs incurred in connection with developing
software to be used internally. The amounts capitalized during the period were
$558.
3. FIXED ASSETS
Fixed assets as of May 31, 1998, December 31, 1998 and 1999, are shown at
cost, less accumulated depreciation and amortization, and are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, --------------------
1998 1998 1999
------- -------- --------
<S> <C> <C> <C>
Leasehold improvements.............................. $39,029 $ 58,835 $ 98,567
Club equipment...................................... 13,394 19,984 29,543
Furniture, fixtures and computer equipment.......... 6,841 10,794 17,395
Building and improvements........................... 4,995 4,995 4,995
Land................................................ 986 986 986
Construction in progress............................ 6,937 8,488 8,796
------- -------- --------
72,182 104,082 160,282
Less, Accumulated depreciation and amortization... 17,664 22,656 36,388
------- -------- --------
$54,518 $ 81,426 $123,894
======= ======== ========
</TABLE>
Depreciation and leasehold amortization expense for the years ended May 31,
1997, 1998, the seven months ended December 31, 1998, and the year ended
December 31, 1999, was approximately $3,843, $6,130, $5,664 and $15,056,
respectively.
4. INTANGIBLE ASSETS
Intangible assets as of May 31, 1998, December 31, 1998 and 1999 are shown
at cost, less accumulated amortization, and are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ------------------
1998 1998 1999
------- ------- -------
<S> <C> <C> <C>
Goodwill arising on acquisition of businesses......... $14,755 $32,627 $34,682
Membership lists...................................... 3,154 5,712 6,024
Debt issuance costs................................... 4,103 4,203 8,630
Covenants-not-to-compete.............................. 400 550 1,251
------- ------- -------
22,412 43,092 50,587
Less, Accumulated amortization...................... 2,489 6,028 12,939
------- ------- -------
$19,923 $37,064 $37,648
======= ======= =======
</TABLE>
Amortization expense of intangible assets for the years ended May 31, 1997,
1998, the seven months ended December 31, 1998 and the year ended December 31,
1999, was approximately $532, $2,018, $3,517 and $7,026, respectively. Such
amount includes amortization expense of debt issuance costs of $156, $412, $363
and $1,147 respectively, which has been classified as interest expense for
financial reporting purposes.
F-10
<PAGE> 44
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ----------------
1998 1998 1999
------- ------ ------
<S> <C> <C> <C>
Accrued payroll.......................................... $3,359 $2,210 $2,908
Accrued interest......................................... 1,171 2,017 2,773
Accrued other............................................ 2,089 2,078 4,130
Amounts payable under agreement to purchase a club....... 1,250 -- --
------ ------ ------
$7,869 $6,305 $9,811
====== ====== ======
</TABLE>
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -------------------
1998 1998 1999
------- ------- --------
<S> <C> <C> <C>
Series B 9 3/4% Senior Notes, due 2004............... $85,000 $85,000 $125,000
Notes payable for acquired businesses................ 1,826 3,739 3,777
Capital lease obligations............................ 1,463 785 3,425
------- ------- --------
88,289 89,524 132,202
Less, Current portion due within one year............ 2,036 2,191 2,276
------- ------- --------
Long-term portion.................................. $86,253 $87,333 $129,926
======= ======= ========
</TABLE>
The aggregate long-term debt and capital lease obligations maturing during
the next five years and thereafter is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT DUE
- ------------------------ ----------
<S> <C>
2000........................................................ $ 2,276
2001........................................................ 1,689
2002........................................................ 1,395
2003........................................................ 1,304
2004........................................................ 125,311
Thereafter.................................................. 227
--------
$132,202
========
</TABLE>
On October 16, 1997, the Company issued $85,000 of Series B 9 3/4% Senior
Notes ("Senior Notes"), due October 2004. The net proceeds from the Senior Notes
totaled approximately $81,700 of which $41,500 was used to repay the term loan,
the line of credit and the subordinated note payable. The transaction fees of
approximately $3,300, were accounted for as deferred financing costs. On June
21, 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. Expenses relating to the issuance amounted to approximately $3,900.
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, 2001, the Company
would be required to pay a premium as defined. The Senior Notes are
non-collateralized and rank "pari passu" with all unsubordinated debt and senior
in right of payment with all subordinated indebtedness of the Company. The note
indenture under which the Senior Notes were issued contains certain covenants
that, among other things, limit the Company's ability to incur additional
indebtedness, pay dividends or make certain other restricted payments, engage in
transactions with affiliates, incur liens and engage in asset sales.
F-11
<PAGE> 45
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The Company has a line of credit with its principal bank for direct
borrowings and letters of credit of up to $25,000. The line of credit carries
interest at the Company's option based upon the Eurodollar borrowing rate plus
2.50% or the bank's prime rate plus 1.50%, as defined and the Company is
required to pay a commitment commission of 0.375% per annum based upon the daily
unutilized amount. There were no outstanding borrowings against this line of
credit as of December 31, 1999; however the amount available for borrowing has
been reduced by outstanding letters of credit totaling $1,680 (see Note 8). This
line of credit expires on October 15, 2002. The line of credit, as amended,
contains various covenants including interest coverage and a leverage ratio as
well as restrictions on the payment of dividends. The line of credit is
collateralized by a mortgage on land, building and equipment, which, as of
December 31, 1999, had an aggregate book value of approximately $3,350, and by
all other assets of the Company.
Notes payable were incurred upon the acquisition of various fitness clubs
and are subject to the Company's right of offset for possible post acquisition
adjustments arising out of operations of the acquired clubs. These notes are
stated at a discount from face value at rates of between 5% and 7%, and are non-
collateralized.
The carrying value of long-term debt, other than the Senior Notes,
approximates fair market value as of May 31, 1998, December 31, 1998 and 1999 as
the debt is generally short term in nature. The Senior Notes have a fair value
of approximately $121,875 as of December 31, 1999, based on the quoted market
price.
The Company's interest expense and capitalized interest related to funds
borrowed to finance club facilities under construction for the years ended May
31, 1997, 1998, the seven months ended December 31, 1998 and the year ended
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED MAY 31, ENDED YEAR ENDED
------------------ DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Interest costs expensed................. $2,570 $7,130 $5,551 $11,527
Interest costs capitalized.............. 28 526 308 455
------ ------ ------ -------
$2,598 $7,656 $5,859 $11,982
====== ====== ====== =======
</TABLE>
The Company leases equipment under noncancelable capital leases. The
initial lease terms range from three to five years, after which the Company is
required to purchase the equipment at amounts defined by the agreements.
As of December 31, 1999, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
- ------------------------ -------------
<S> <C>
2000........................................................ $1,241
2001........................................................ 1,068
2002........................................................ 1,030
2003........................................................ 777
------
4,116
Less, Amounts representing interest....................... 691
------
Present value of minimum capital lease payments........ $3,425
======
</TABLE>
The cost of leased equipment included in club equipment was approximately
$5,033, $5,033 and $8,419 at May 31, 1998, December 31, 1998 and 1999,
respectively; related accumulated depreciation was $2,234, $3,222 and $4,110,
respectively.
F-12
<PAGE> 46
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
a. The Company entered into a management agreement with Town Sports AG
("TSAG"). The Company, together with the shareholders of TSAG, is contingently
liable to fund shortfalls in operating cash flow of TSAG, as defined. The terms
of the agreement provide for the Company to fund a maximum amount of operating
cash flow of approximately $125 ("Advances"). As of May 31, 1998, December 31,
1998 and 1999, the Company had no outstanding Advances to TSAG.
Management fees earned during the years ended May 31, 1997, 1998, the seven
months ended December 31, 1998 and the year ended December 31, 1999 amounted to
approximately $223, $239, $224, and $271, respectively.
b. The Company entered into a professional service agreement with
Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS"), for strategic and financial
advisory services on December 10, 1996. Fees for such services are $250 per
annum, and are payable while BRS owns 20% or more of the outstanding Common
stock of the Company. Amounts due BRS on May 31, 1998, which are included in
accounts payable, were $104. No amounts were due BRS at December 31, 1998 and
1999.
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 $1,680 as of December 31, 1999.
The leases expire at various times through December 31, 2021, and certain
leases may be extended at the Company's option.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
- ------------------------ -------------
<S> <C>
2000........................................................ $ 25,872
2001........................................................ 27,208
2002........................................................ 27,153
2003........................................................ 26,905
2004........................................................ 26,955
Aggregate thereafter........................................ 224,539
--------
$358,632
========
</TABLE>
Rent expense, including the effect of deferred lease liabilities, for the
years ended May 31, 1997, 1998, the seven months ended December 31, 1998 and the
year ended December 31, 1999 was approximately $10,169, $15,493, $13,914 and
$30,325 respectively. Such amounts include additional rent of $2,146, $2,590,
$2,087 and $4,634, respectively.
The Company, as landlord, leases space under noncancelable operating
leases. In addition to base rent, certain leases provide for additional rent
based on increases in real estate taxes, indexation, utilities and
F-13
<PAGE> 47
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
defined amounts based on the operating results of the lessee. The leases expire
at various times through December 31, 2013. Future minimum rentals receivable
under noncancelable leases are as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
- ------------------------ -------------
<S> <C>
2000........................................................ $1,155
2001........................................................ 1,098
2002........................................................ 1,005
2003........................................................ 821
2004........................................................ 417
Aggregate thereafter........................................ 726
------
$5,222
======
</TABLE>
Rental income, including noncash rental income, for the years ended May 31,
1997, 1998, the seven months ended December 31, 1998, and the year ended
December 31, 1999, was approximately $936, $963, $822 and $1,529, respectively.
Such amounts included additional rental charges above the base rent of $620,
$651, $608 and $431, respectively.
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK
A. CAPITALIZATION
The Company's certificate of incorporation, as amended in November 1998,
provides for the issuance of up to 3,500,000 shares of capital stock, consisting
of 2,500,000 shares of Class A Voting Common Stock ("Class A"), par value $0.001
per share; 500,000 shares of Class B Non-voting Common Stock ("Class B"), par
value of $0.001 per share, (Class A and Class B are collectively referred to
herein as "Common Stock"); 100,000 shares of Redeemable Senior Preferred Stock
("Senior"), par value $1.00 per share; 200,000 shares of Series A Preferred
Stock, ("Series A") par value $1.00 per share, and 200,000 shares of Series B
Preferred Stock ("Series B") par value $1.00 per share.
All stockholders have preemptive rights to purchase a pro-rata share of any
future sales of securities, as defined.
Redeemable Senior Preferred Stock
During November 1998, the Company issued 40,000 shares of mandatorily
redeemable Senior stock and 143,261 warrants. The Senior stock has no voting
rights except as required by law. The warrants have an exercise price of $0.01,
expire in November 2008 and are exercisable into an equal number of shares of
Class A Common Stock. After payment of fees and expenses of approximately $365
the Company received net proceeds of $39,635. Upon issuance, a $3,416 value was
ascribed to the warrants. The initial fair value of the Senior stock ($36,219)
is being accreted to its liquidation value using the interest method. The
accreted amount for the seven months ended December 31, 1998 and the year ended
December 31, 1999 was $28 and $341, respectively. The Senior stock is redeemable
in November 2008. In the event that certain defined events occur, the number of
warrants exercisable will be reduced.
The Senior stock has liquidation preferences over Series A, Series B and
Common stock. The Senior stock may, at the option of the holder, be converted
into Common stock upon the initial public offering ("IPO") of the Company's
common stock at a conversion rate equal to the IPO price.
The Senior stock has a liquidation value of $1,000 per share plus
cumulative unpaid dividends of $5,478, as of December 31, 1999. The Senior
stockholders are entitled to a cumulative 12% annual dividend, based upon the
per share price of $1,000.
F-14
<PAGE> 48
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
A summary of transactions related to the Senior stock for the one year and
seven month period ended December 31, 1999 is as follows:
<TABLE>
<S> <C>
Proceeds received in connection with the issuance of Senior
stock and warrants........................................ $40,000
Expenses incurred in connection with issuance............... (365)
Fair value ascribed to warrants at issuance................. (3,416)
-------
Fair value of senior stock at date of issuance............ 36,219
Accretion to Senior stock liquidation value................. 28
Accretion of Senior stock dividends......................... 488
-------
December 31, 1998 Senior stock carrying value............... 36,735
Accretion to Senior stock liquidation value................. 341
Accretion of Senior stock dividends......................... 4,990
-------
December 31, 1999, Senior stock carrying value.............. $42,066
=======
</TABLE>
Cumulative unpaid dividends on Senior stock are payable upon certain
defined events which include: the dissolution, liquidation or winding up of the
Company; the redemption of such shares; or the sale of substantially all of the
assets of the Company.
Preferred Stock
The Preferred Stock has liquidation preferences over Common Stock. The
Company's Series A and Series B stock have no conversion features or voting
rights except as required by law, and rank "pari passu."
Series A stock has a liquidation value of $100 per share plus cumulative
unpaid dividends of 7,852 as of December 31, 1999. Series A stockholders are
entitled to a cumulative 14% annual dividend based upon the per share price of
$100.
Series B stock has a liquidation value of $35 per share plus cumulative
unpaid dividends of $69 as of December 31, 1999. Series B stockholders are
entitled to a cumulative 14% annual dividend based upon the per share price of
$35.
Cumulative unpaid dividends on all Preferred Stock are payable upon certain
defined events which include: the dissolution liquidation or winding up of the
Company; the redemption of such shares; or the sale of substantially all of the
assets of the Company.
Common Stock
Class A stock and Class B stock each have identical terms with the
exception that Class A stock is entitled to one vote per share, while Class B
stock has no voting rights, except as required by law. In addition, Class B
stock is convertible into an equal number of Class A shares, at the option of
the holder of the majority of the Class B stock. To date, the Company has not
issued Class B stock.
F-15
<PAGE> 49
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
B. STOCK OPTIONS AND WARRANTS
The following table summarizes the stock option activity for the years
ended May 31, 1997, 1998, the seven months ended December 31, 1998, and the year
ended December 31, 1999:
<TABLE>
<CAPTION>
CLASS A CLASS A
COMMON COMMON CLASS B CLASS B
($0.01 PAR ($.001 PAR CONVERTIBLE REDEEMABLE SERIES B
STOCK OPTIONS VALUE) VALUE) COMMON PREFERRED PREFERRED
------------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at June 1, 1996.......... 130,000 118,300 21,251
Options granted...................... 57,142 20,000 164,783
Options exercised.................... (130,000) (138,300) (21,251)
--------- ------- --------- -------- --------
Outstanding at May 31, 1997........ -- 57,142 -- -- 164,783
========= ========= ========
Options granted...................... 14,700
------- --------
Outstanding at May 31, 1998 and
December 31, 1998................ 71,842 164,783
Options granted...................... 12,600 --
Options exercised.................... (718)(i) (1,093)(i)
Options cancelled.................... (2,162) --
------- --------
Outstanding at December 31, 1999... 81,562 163,690
======= ========
Weighted average price of outstanding
options at June 1, 1996.............. $ 3.55 $ 10.06 $ 3.00
Options granted...................... $ 1.00(ii) 6.00(iii) $ 10.00(iii)
Options exercised.................... 3.55 9.47 3.00
--------- ------- --------- -------- --------
Weighted average price of outstanding
options at June 1, 1997.............. -- 1.00 -- -- 10.00
========= ========= ========
Options granted...................... 17.50(iii)
------- --------
Weighted average price of outstanding
options at May 31, 1998 and December
31, 1998............................. 4.38 10.00
--------
Options granted...................... 53.00(ii) --
Options exercised.................... 5.73 10.00
Options cancelled.................... 21.49 --
------- --------
Weighted average price of outstanding
options at December 31, 1999......... $ 11.42 $ 10.00
======= ========
</TABLE>
- ---------------
(i) The Company repurchased 655 shares of common stock and 1,093 shares of
Series B Preferred stock related to these exercises.
(ii) Option exercise price equal to market price on the grant date based upon
independent appraisal.
(iii) Option exercise price less than market price on the grant date based upon
independent appraisal.
All Series B Redeemable Preferred stock options were exercisable upon
grant. As of May 31, 1997, 1998, December 31, 1998 and 1999, 11,428, 25,797,
25,797 and 49,511 Class A Common stock options were exercisable, respectively.
F-16
<PAGE> 50
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The following table summarizes stock option information as of December 31,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Class A Common:
1997 Grants............ 55,862 84 months $ 1.00 40,033 $ 1.00
1998 Grants............ 13,700 100 months $17.50 7,078 $17.50
1999 Grants............ 12,000 108 months $53.00 2,400 $53.00
-------
81,562
=======
Series B Preferred....... 163,690 263 months $10.00 163,690 $10.00
=======
</TABLE>
Class A Common Stock ($.001 par value) Options
During the year ended May 31, 1997 the Company adopted the Town Sports
International Inc. 1997 Common Stock Option Plan (the "1997 Plan"). The
provisions of the 1997 Plan, as amended and restated, provide for the Company's
Board of Directors to grant to executives and key employees options to acquire
82,569 shares of Class A stock.
The Company granted 57,142 options ("1997 Grants") with an exercise price
of $1.00 on December 10, 1996. The 1997 Grants have a term of 10 years and
originally vested based on the achievement of annual equity values as defined.
During the year ended May 31, 1998, the 1997 Grants were amended. The amendment
impacted 45,714 options, which had not previously vested (the "Amended Grants")
by adding a provision whereby unvested outstanding options would automatically
vest on December 10, 2005. Vesting will be accelerated in the event that certain
defined events occur including the achievement of certain equity values, the
sale of the Company, or an initial public offering of equity securities as
defined.
During the year ended May 31, 1998, the Company granted 14,700 options
("1998 Grants") with an exercise price of $17.50 and a term of 10 years. This
exercise price was below the estimated fair value of the Class A stock of $60.50
on the date of grant. The 1998 Grants vest in full on December 10, 2005;
however, vesting will be accelerated in the event that certain defined events
occur including the achievement of annual equity values or the sale of the
Company.
During the year ended December 31, 1999 the Company granted 12,600 options
("1999 Grants") with an exercise price of $53.00 and a term of 10 years. The
exercise price was the then estimated fair market value. The 1999 Grants vest in
full on July 1, 2009; however, vesting will be accelerated in the event the
certain defined events occur including the achievement of annual equity values
or the sale of the Company.
In accordance with APB No. 25, the Company recorded unearned compensation
in connection with the Amended Grants and the 1998 Grants. Such amount is
included within stockholders' deficit and represented the difference between the
estimated fair value of the Class A stock on the date of amendment or grant,
respectively, and the exercise price. Unearned compensation will be amortized as
compensation expense over the vesting period. During the year ended May 31, 1998
and December 31, 1999, amortization of unearned compensation totaled $806 and
$1,258, respectively. For the seven months ended December 31, 1998, no
additional options vested and accordingly there was no amortization of unearned
compensation.
As of December 31, 1999, shares reserved for future option awards totaled
1,007.
F-17
<PAGE> 51
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
Series B Preferred Stock Options
During the year ended May 31, 1997, the Company granted 164,783 options
("Series B Options") to certain employees which entitle the holders to purchase
an equal number of shares of Series B stock at an exercise price of $10.00 per
share. The estimated fair value of the Series B stock on the date of grant was
$35.00 per share. Accordingly, the Company recognized an aggregate charge for
the difference between the Series B Options' exercise price and the estimated
fair value of the Series B stock, which totaled $4,120. Series B Options were
fully vested on the date of grant and expire on December 31, 2021. The terms of
the Series B Options also contain provisions whereby the exercise price will be
reduced or in certain cases, the option holder will receive cash in accordance
with a formula as defined. The aggregate value of either a reduction in exercise
price or the distribution of cash will be deemed compensatory and accordingly
the Company will record compensation expense. For the years ended May 31, 1997
and 1998, the seven months ended December 31, 1998, and the year ended December
31, 1999 compensation expense recognized in connection with Series B Options
totaled $273, $636, $434 and $784, respectively. There are no shares of Series B
Preferred Stock reserved for future option grants.
Class A ($0.01 par value) and Class B Convertible Options
During the year ended May 31, 1997, in connection with the granting of
Class A Common Stock ($0.001 par value) and Class B Convertible Common Stock
Options, the Company recognized a compensation charge of approximately $5,933.
Such charge represented the difference between the exercise price of the
respective options and the fair market value of the underlying stock as
determined by the Board of Directors.
Pro Forma Operating Results
The following table summarizes the pro forma operating results of the
Company had compensation costs for the outstanding options been determined in
accordance with the fair value based method of accounting for stock-based
compensation. There were no options granted during the year ended May 31, 1996
and the seven months ended December 31, 1998.
Since option grants vest over several years and additional grants are
expected in the future, the pro forma results noted below are not likely to be
representative of the effects on future years of the application of the fair
value based method. No additional options vested during the seven months ended
December 31, 1998, therefore the effects of the fair value based method on
operating results for that period was immaterial.
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------
MAY 31,
------------------ DECEMBER 31,
1997 1998 1999
------- ------- ------------
<S> <C> <C> <C>
Pro forma amounts:
Net loss to common stockholders.................. $(1,826) $(1,804) $(7,723)
======= ======= =======
</TABLE>
For the purposes of the above pro forma information, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. For the years ending May 31, 1997, 1998, and the year ended
December 31, 1999, the weighted-average fair value of the option grants was
approximately $26.00, $44.00, and $30.10 respectively. The following
weighted-average assumptions were used in computing the fair value of options
grants: expected volatility of 60% for all periods; risk-free interest rate of
approximately 6.5%, 5.5% and 5.7% for May 31, 1997, 1998, and December 31, 1999,
respectively, expected lives of five years for May 31, 1997 and December 31,
1999, and three to five years for May 31, 1998; and a zero dividend yield for
all periods.
F-18
<PAGE> 52
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
Warrants to buy Common Stock
In connection with the issuance of the Subordinated note payable on
December 10, 1996, warrants to buy 124,022 Class A Common Shares were issued at
an exercise price of $0.01 per share. Original issue discount arising upon this
issue, totaled approximately $123. 10,000 warrants were exercised on December
10, 1996. The amount of warrants outstanding was reduced during the seven months
ended December 31, 1998 by 38,308 to 75,714 in connection with the issuance of
the Senior stock. As of December 31, 1999, the remaining outstanding warrants
are fully exercisable and expire in December 2006.
10. ASSET ACQUISITIONS
During the years ended May 31, 1997, 1998, the seven months ended December
31, 1998, and the year ended December 31, 1999, the Company completed the
acquisition of 39 fitness clubs. With the exception of the Ultrafit, Inc. and
Affiliates ("Ovox") and Lifestyle Fitness of Springfield, Inc. and Affiliates
("Lifestyle") acquisitions, as discussed below, the individual acquisitions were
not material to the financial position or results of operations of the Company.
The table below summarizes the aggregate purchase price and the purchase price
allocation to assets acquired:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED MAY 31, ENDED YEAR ENDED
------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Number of clubs acquired............... 3 16 16 4
====== ======= ======= ======
Purchase prices payable in cash at
closing.............................. $1,888 $19,733 $25,103 $2,932
Issuance and assumption of notes
payable.............................. 2,250 4,110 4,654 1,476
------ ------- ------- ------
Total purchase prices........ $4,138 $23,843 $29,757 $4,408
====== ======= ======= ======
Allocation of purchase prices:
Fixed assets......................... $2,462 $ 9,011 $ 9,177 $ 986
Membership lists..................... 177 2,978 2,559 427
Goodwill............................. 1,484 11,157 17,871 2,318
Covenants-not-to-compete............. 400 150 701
Other net assets (liabilities)
acquired.......................... 15 297 (24)
------ ------- ------- ------
Total allocation of purchase
prices..................... $4,138 $23,843 $29,757 $4,408
====== ======= ======= ======
</TABLE>
For financial reporting purposes, these acquisitions have been accounted
for under the purchase method and, accordingly, the purchase prices have been
assigned to the assets and liabilities acquired on the basis of their respective
fair values on the date of acquisition. The excess of purchase prices over the
net tangible assets acquired has been allocated to membership lists acquired,
covenant-not-to compete and goodwill. Intangible assets are amortized by the
straight-line basis over the estimated life of the asset. Acquired membership
lists are amortized over a 2 year period and goodwill is amortized over
remaining lives of the leases of the acquired fitness club which range from 3.5
to 15 years. Covenants-not-to-compete are amortized over the life of the
respective agreements, generally 5 years. The results of operations of the clubs
have been included in the Company's consolidated financial statements from the
respective dates of acquisition and the impact of these acquisitions on the
consolidated financial statements of the Company was not material, with the
exception of the following acquisitions.
On April 6, 1998, the Company acquired Ovox. Ovox's operations consisted of
four fitness clubs in New Jersey which were owned and operated by a common group
of investors. The purchase price totaled $8,177, which included $7,750 of cash
and notes payable of $236. Transaction costs amounted to $191. The excess of the
purchase price over the net fair value of the assets acquired was $6,589, and
has been allocated to the
F-19
<PAGE> 53
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
membership lists acquired and goodwill. The following unaudited pro forma
information has been prepared assuming the Ovox acquisition had taken place at
the beginning of the respective periods. The pro forma adjustments give effect
to amortization of goodwill, interest expense on acquisition debt, and related
income tax effects:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
----------------------------
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................... $60,898 $87,158
Pro forma net income (loss) before extraordinary items and
cumulative effect of change in accounting policy.......... (862) 1,127
Proforma net loss to common stockholders.................... $(2,148) $(2,130)
</TABLE>
On August 6, 1998 the Company acquired Lifestyle. Lifestyle's operations
consisted of six fitness clubs in New Jersey, which were owned and operated by a
common group of investors. The purchase price totaled $10,752, which included
$10,000 of cash and notes payable of $300. Transaction costs amounted to $452.
The following unaudited pro forma information has been prepared assuming the
Lifestyle Acquisition had taken place at the beginning of the respective periods
reported herein. The pro forma adjustments give effect to amortization of
goodwill, interest expense on acquisition debt, and the related income tax
effects:
<TABLE>
<CAPTION>
FOR THE SEVEN
FOR THE YEAR MONTHS ENDED
ENDED DECEMBER 31,
MAY 31, 1998 1998
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................. $90,037 $72,989
Pro forma net income (loss) before extraordinary items and
cumulative effect of change in accounting policy........ 1,130 (644)
Proforma net loss to common stockholders.................. $(2,128) $(2,790)
</TABLE>
This unaudited proforma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company and the acquired clubs had
been a single entity for the respective periods presented, nor is it indicative
of the results of operations which may occur in the future. Anticipated
efficiencies from the consolidation of the acquired clubs and the Company have
been excluded from the amounts included in the proforma summary presented above.
11. REVENUE FROM CLUB OPERATIONS
Revenues from club operations for the years ended May 31, 1997, 1998, the
seven months ended December 31, 1997 (Unaudited), 1998 and the year ended
December 31, 1999 are summarized below:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31, YEAR ENDED
------------------ ---------------------- DECEMBER 31,
1997 1998 1997 1998 1999
------- ------- ----------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Membership dues............. $45,916 $66,878 $34,987 $59,105 $132,467
Initiation Fees............. 3,308 4,408 2,423 3,374 7,635
Other club revenues......... 4,940 8,433 4,080 7,485 17,338
------- ------- ------- ------- --------
$54,164 $79,719 $41,490 $69,964 $157,440
======= ======= ======= ======= ========
</TABLE>
F-20
<PAGE> 54
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
12. CORPORATE INCOME TAXES
The (benefit) provision for income taxes for the years ended May 31, 1997,
1998, the seven months ended December 31, 1998 and the year ended December 31,
1999 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1997
-------------------------------
STATE
FEDERAL AND LOCAL TOTAL
------- --------- -------
<S> <C> <C> <C>
Current............................................... $ 1,053 $ 762 $ 1,815
Deferred.............................................. (1,226) (832) (2,058)
------- ------- -------
$ (173) $ (70) $ (243)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
-------------------------------
STATE
FEDERAL AND LOCAL TOTAL
------- --------- -------
<S> <C> <C> <C>
Current............................................... $ 1,383 $ 935 $ 2,318
Deferred.............................................. (751) (436) (1,187)
------- ------- -------
$ 632 $ 499 $ 1,131
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
DECEMBER 31, 1998
-------------------------------
STATE
FEDERAL AND LOCAL TOTAL
------- --------- -------
<S> <C> <C> <C>
Current............................................... $ 588 $ 425 $ 1,013
Deferred.............................................. (952) (460) (1,412)
------- ------- -------
$ (364) $ (35) $ (399)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-------------------------------
STATE
FEDERAL AND LOCAL TOTAL
------- --------- -------
<S> <C> <C> <C>
Current............................................... $ 2,432 $ 1,398 $ 3,830
Deferred.............................................. (1,932) (1,327) (3,259)
------- ------- -------
$ 500 $ 71 $ 571
======= ======= =======
</TABLE>
F-21
<PAGE> 55
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset as of May 31, 1998, December
31, 1998 and 1999 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ------------------
1998 1998 1999
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Deferred lease liabilities.......................... $ 4,106 $ 4,750 $ 5,927
Compensation expense incurred in connection with
stock options.................................... 2,445 2,611 3,335
Fixed assets and intangible assets.................. 358 1,176 2,291
State net operating loss carry-forwards............. 214 286 646
Deferred revenue.................................... 2,349 2,964 4,487
Other............................................... 56 162 154
------- ------- -------
9,528 11,949 16,840
------- ------- -------
Deferred tax liabilities:
Accrued expenses.................................... $ (150) $ (149) $ (65)
Deferred costs...................................... (2,035) (2,946) (4,662)
------- ------- -------
(2,185) (3,095) (4,727)
------- ------- -------
Net deferred tax assets, prior to valuation
allowance................................. 7,343 8,854 12,113
Valuation allowance................................... (184) (284) (284)
------- ------- -------
Net deferred tax assets..................... $ 7,159 $ 8,570 $11,829
======= ======= =======
</TABLE>
As of December 31, 1999, the Company has state net operating loss
carry-forwards of approximately $2,900. Such amounts expire between December 31,
2000 and December 31, 2008.
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income (loss) before provision (benefit) for corporate
income taxes:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
MAY 31, ENDED YEAR ENDED
------------ DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
---- ---- ------------ ------------
<S> <C> <C> <C> <C>
Federal statutory tax rate.................. (34)% 34% (34)% 34%
State and local income taxes, net of federal
tax benefit and change of valuation
allowance................................. (14) 15 (13) 8
Change in state effective income tax rate... -- -- 14 40
Non-deductible goodwill and other permanent
differences............................... -- -- -- 10
Adjustment to prior year's tax refund....... 25 -- -- --
Non-taxable interest income................. -- -- (11) --
Other....................................... 2 1 2 --
--- -- --- --
(21)% 50% (42)% 92%
=== == === ==
</TABLE>
F-22
<PAGE> 56
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
13. CONTINGENCIES
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.
14. 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; however,
the Company elected not to make contributions for the years ended May 31, 1997,
1998, the seven months ended December 31, 1998, and the year ended December 31,
1999.
15. EXTRAORDINARY ITEM
During the year ended May 31, 1998, the Company completed a $85,000
financing. As part of this financing, an existing term loan, a line of credit
and a subordinated note were repaid. Accordingly, previously capitalized fees
and expenses relating to obtaining such financing of $1,406 were written off,
net of taxes of $624.
16. SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company acquired one fitness club.
This acquisition will be accounted for in accordance with the purchase method.
The aggregate purchase price totaled $4,190 which included $3,790 payable at
closing and the issuance of a note payable totaling $400.
F-23
<PAGE> 57
<TABLE>
<S> <C>
[PRICEWATERHOUSECOOPERS LOGO]
PRICEWATERHOUSECOOPERS LLP
1301 Avenue of the Americas
New York NY 10019-6013
Telephone (212) 259 1000
Facsimile (212) 259 1301
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
Our audits on the consolidated financial statements referred to in our
report dated February 18, 2000 appearing in this Form 10-K on page F-1 also
included an audit of the financial statement schedule which appears on page F-25
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
[/s/ PricewaterhouseCoopers LLP]
February 18, 2000
F-24
<PAGE> 58
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
FOR EACH OF THE YEARS ENDED MAY 31, 1997, 1998, THE SEVEN PERIOD
ENDED DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
COL. B COL. C COL. D COL. E
---------- ------------------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Deferred tax asset valuation
allowance:
1997.............................. $284 ($100)(1) $184
1998.............................. 184 184
The seven months ended December
31, 1998....................... 184 $100(2) 284
The year ended December 31,
1999........................... 284 284
</TABLE>
- ---------------
(1) Reduction of valuation allowance from the utilization of state net operating
loss carryforwards which were no longer required.
(2) Increase in valuation allowance required for state net operating loss
carryforwards.
F-25
<PAGE> 1
EXHIBIT 10.3
SECOND AMENDMENT
SECOND AMENDMENT (this "Amendment"), dated as of January 28, 1999
among TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the "Borrower"),
the various lending institutions party to the Credit Agreement referred to below
(the "Banks"), and BANKERS TRUST COMPANY, as administrative agent (the
"Administrative Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement referred to below.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Administrative Agent are
parties to an Amended and Restated Credit Agreement, dated as of October 16,
1997, (the "Credit Agreement"); and,
WHEREAS, the Banks and the Administrative Agent are willing to amend
the Credit Agreement to permit the Borrower to cause its fiscal year to end on
December 31 of each year;
NOW, THEREFORE, it is agreed that as of the Second Amendment Effective
Date (as defined below):
1. Section 1.08 of the Credit Agreement is hereby amended by
deleting the text "August, November, February and May" appearing in the first
sentence of Section 1.08(d) and replacing such text with "September, December,
March and June".
2. Section 7.09 of the Credit Agreement is hereby amended by (i)
deleting Section 7.09 in its entirety and (ii) replacing it with the following
new Section 7.09 as set forth below:
The Borrower will, for financial reporting and tax purposes, cause (i)
each of its, and each of its Subsidiaries' fiscal years to end on December 31 of
each year and (ii) each of its, and each of its Subsidiaries' fiscal quarters to
end on September 30, December 31, March 31, and June 30 of each year.
3. Section 8.09 of the Credit Agreement is hereby amended by (i)
deleting the table appearing therein and (ii) replacing it with the following
new table as set forth below:
<TABLE>
<CAPTION>
Date Ratio
---- -----
<S> <C>
November 30, 1997 1.75:1
February 28, 1998 1.75:1
May 31, 1998 1.75:1
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
August 31, 1998 1.75:1
November 30, 1998 1.8:1
March 31, 1999 1.9:1
June 30, 1999 2.0:1
September 30, 1999 2.0:1
December 31, 1999 2.1:1
March 31, 2000 2.2:1
June 30, 2000 2.3:1
September 30, 2000 2.3:1
December 31, 2000 2.4:1
March 31, 2001 2.4:1
The Last Day of Each Fiscal Quarter Thereafter 2.5:1
</TABLE>
4. Section 8.10 of the Credit Agreement is hereby amended by (i)
deleting the table appearing therein and (ii) replacing it with the following
new table as set forth below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Effective Date through Fiscal quarter ending November 30, 1998 5:5:1
November 30, 1998 through December 31, 1998 5.4:1
December 31, 1998 through January 31, 1999 5.3:1
January 31, 1999 through February 28, 1999 5.2:1
February 28, 1999 through March 31, 1999 5.0:1
March 31, 1999 through April 30, 1999 4.8:1
April 30, 1999 through May 31, 1999 4.6:1
May 31, 1999 through Fiscal quarter ending September 30, 1999 4.5:1
Fiscal quarter ending December 31, 1999 4.2:1
Fiscal quarter ending March 31, 2000 4.1:1
Fiscal quarter ending June 30, 2000 4.0:1
Fiscal quarter ending September 30, 2000 3.9:1
Fiscal quarter ending December 31, 2000 3.85:1
Fiscal quarter ending March 31, 2001 3.80:1
Each Fiscal Quarter Thereafter 3.75:1
</TABLE>
5. In order to induce the Banks to enter into this Second
Amendment, the Borrower hereby represents and warrants that on the Second
Amendment Effective Date, both before and after giving effect to this Second
Amendment and the transactions contemplated hereby, (1) no Default or Event of
Default shall exist and (2) all of the representations and warranties contained
in the Credit Documents shall be true and correct in all material respects,
-2-
<PAGE> 3
with the same effect as though such representations and warranties had been made
on and as of the Second Amendment Effective Date (it being understood that any
representation or warranty made as of a specific date shall be true and correct
in all material respects as of such specific date).
6. This Second Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
7. This Second Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.
8. THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
9. This Second Amendment shall become effective as of the date
hereof (the "Second Amendment Effective Date") when the Borrower, the Required
Banks (including each Bank whose Commitment is increased pursuant hereto) and
the Administrative Agent shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of telecopier) the
same to the Administrative Agent.
-3-
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
Address:
888 Seventh Avenue, 25th Floor TOWN SPORTS INTERNATIONAL, INC.
New York, New York 10106
Telephone (212) 246-6700
Facsimile: (212) 246-8422
By /S/ R. G. Pyle
---------------------------------
Title: Chief Financial Officer
Attention: Richard Pyle
One Bankers Trust Plaza -34th Floor BANKERS TRUST COMPANY,
New York, New York 10006 Individually and as Administrative
Assistant
Telephone: (212) 250-5175
Facsimile (212) 250-7218
By /S/ Patricia M. Hogan
---------------------------------
Title: Principal
Attention: Patricia M. Hogan
565 Fifth Avenue BANK OF SCOTLAND
New York, New York 10017
Telephone: (212) 450-0871
Facsimile: (212) 557-9460
By: /S/ Annie Chin Tat
---------------------------------
Attention: Annie Chin Tat Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.5
FOURTH AMENDMENT
FOURTH AMENDMENT (this "Amendment"), dated as of March 1, 2000, among
TOWN SPORTS INTERNATIONAL, INC., a New York corporation (the "Borrower"), the
various lending institutions party to the Credit Agreement referred to below
(the "Banks"), and BANKERS TRUST COMPANY, as administrative agent (the
"Administrative Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement referred to below.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Administrative Agent are
parties to an Amended and Restated Credit Agreement, dated as of October 16,
1997 as amended through the date hereof, (the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as
herein provided;
NOW, THEREFORE, it is agreed that as of the Fourth Amendment Effective
Date (as defined below):
1. Section 1.01(a) of the Credit Agreement is hereby amended by
deleting Section 1.01(a) in its entirety and inserting the following new Section
1.01(a) in lieu thereof:
"(a) Subject to and upon the terms and conditions set forth herein,
each Bank severally agrees to make, at any time and from time to time on and
after the Fourth Amendment Effective Date and prior to the Maturity Date, a loan
or loans to the Borrower, which loans (i) shall, at the option of the Borrower,
be denominated in (x) U.S. Dollars (each a "U.S. Dollar Revolving Loan" and,
collectively, the "U.S. Dollar Revolving Loans") or (y) Swiss Francs (each a
"Swiss Franc Revolving Loan" and, collectively, the "Swiss Franc Revolving
Loans" and together with the U.S. Dollar Revolving Loans, the "Revolving
Loans"), (ii) except as hereinafter provided, shall, at the option of the
Borrower, in the case of U.S. Dollar Revolving Loans, be maintained as either
Base Rate Loans or Eurodollar Loans (subject to the option to convert pursuant
to Section 1.06(a) into Loans of the other Type) or, in the case of Swiss Franc
Revolving Loans, be maintained as Swiss Franc Base Rate Loans or Eurofranc Loans
(subject to the option to convert pursuant to Section 1.06(b)), provided that
all Revolving Loans pursuant to the same Borrowing shall be of the same Type and
shall be denominated in the same currency, (iii) may be repaid and re-borrowed
in accordance with the provisions hereof and (iv) shall not exceed for any Bank
at any time that aggregate principal amount (determined for this purpose by
taking the principal amount of all U.S. Dollar Revolving Loans and the U.S.
Dollar Equivalent of all Swiss Franc Revolving Loans) which, when combined with
the aggregate outstanding principal amount of all other Revolving Loans of such
Bank and with such Bank's Adjusted Percentage, if any, of the sum of (I) the
Letter of Credit Outstandings (exclusive of Unpaid
<PAGE> 2
Drawings which are repaid with the proceeds of, and simultaneously with the
incurrence of, the respective incurrence of Revolving Loans) at such time and
(II) the outstanding principal amount of Swingline Loans (exclusive of Swingline
Loans which are repaid with the proceeds of, and simultaneously with the
incurrence of, the respective incurrence of Revolving Loans) at such time,
equals (1) if such Bank is a Non-Defaulting Bank, the Adjusted Commitment, if
any, of such Bank at such time and (2) if such Bank is a Defaulting Bank, the
Commitment, if any, of such Bank at such time. Notwithstanding anything to the
contrary contained above, no more than an aggregate principal amount of Swiss
Franc Revolving Loans with a U.S. Dollar Equivalent equal to $1,500,000 may be
incurred at any time.
2. Section 1.02 of the Credit Agreement is hereby amended by
deleting the last sentence contained therein and inserting the following new
sentence in lieu thereof:
"More than one Borrowing may be incurred on any day, provided, that at
no time shall there be outstanding more than an aggregate of ten Borrowings of
Eurodollar Loans and Eurofranc Loans"
3. Section 1.04(a) of the Credit Agreement is hereby amended by
deleting the first two sentences contained therein and inserting the following
two sentences in lieu thereof:
"No later than 1:00 P.M. (New York time) on the date specified in each
Notice of Borrowing, each Bank will make available its pro rata share of each
Borrowing requested to be made on such date in U.S. Dollars or Swiss Francs, as
the case may be, in the manner provided below, provided, that all Swingline
Loans shall be made available by BTCo no later than 3:00 P.M. (New York time) on
the date so requested. All such amounts shall be made available to the
Administrative Agent in U.S. Dollars or Swiss Francs, as the case may be, and
immediately available funds at the Payment Office and the Administrative Agent
promptly will make available to the Borrower by depositing to its account at the
Payment Office the aggregate of the amounts so made available in the type of
funds received."
4. Section 1.06 of the Credit Agreement is hereby amended by
deleting it in its entirety and inserting the following new Section 1.06 in lieu
thereof:
"1.06 Conversions. (a) The Borrower shall have the option to convert
on any Business Day occurring on or after the Fourth Amendment Effective Date,
all or a portion at least equal to the applicable Minimum Borrowing Amount of
the outstanding principal amount of the U.S. Dollar Revolving Loans owing by the
Borrower into a Borrowing or Borrowings of another Type of Loan (other than
Swingline Loans, which at all times shall be maintained as Base Rate Loans);
provided, that (i) except as otherwise provided in Section 1.10(b), Eurodollar
Loans may be converted into Base Rate Loans only on the last day of an Interest
Period applicable thereto and no partial conversion of a Borrowing of Eurodollar
Loans shall reduce the outstanding principal amount of the Eurodollar Loans made
pursuant to such Borrowing to less than the Minimum Borrowing Amount applicable
thereto, (ii) Base Rate Loans may not be converted into Eurodollar Loans if a
violation of Sections 9.01 or 9.05 or an Event of Default is in existence on the
date of the conversion and the Administrative Agent or the Required Banks have
determined that such conversion at such time would be disadvantageous to the
Banks and (iii) Borrowings of
-2-
<PAGE> 3
Eurodollar Loans resulting from this Section 1.06(a) shall be limited in number
as provided in Section 1.02.
(b) The Borrower shall have the option to convert on any Business
Day occurring on or after the Fourth Amendment Effective Date, all or a portion
at least equal to the applicable Minimum Borrowing Amount of the outstanding
principal amount of the Swiss Franc Revolving Loans, owing by the Borrower into
a Borrowing or Borrowings of another Type of Loan; provided, that (i) except as
otherwise provided in Section 1.10(b), Eurofranc Loans may be converted into
Swiss Franc Base Rate Loans only on the last day of an Interest Period
applicable thereto and no partial conversion of a Borrowing of Eurofranc Loans
shall reduce the outstanding principal amount of the Eurofranc Loans made
pursuant to such Borrowing to less than the Minimum Borrowing Amount applicable
thereto, (ii) Swiss Franc Base Rate Loans may not be converted into Eurofranc
Loans if a violation of Sections 9.01 or 9.05 or an Event of Default is in
existence on the date of the conversion and the Administrative Agent or the
Required Banks have determined that such conversion at such time would be
disadvantageous to the Banks and (iii) Borrowings of Eurofranc Loans resulting
from this Section 1.06(b) shall be limited in number as provided in Section
1.02.
(c) Each conversion pursuant to this Section 1.06 shall be effected
by the Borrower giving the Administrative Agent at its Notice Office, prior to
11:00 A.M. (New York time), at least three Business Days' (or two Business
Days', in the case of a conversion into Base Rate Loans or Swiss Franc Base Rate
Loans, as the case may be) prior written notice (or telephonic notice promptly
confirmed in writing) (each a "Notice of Conversion") specifying the Loans to be
so converted, the Type of Loans to be converted into and, if to be converted
into a Borrowing of Eurodollar Loans or Eurofranc Loans, as the case may be, the
Interest Period to be initially applicable thereto. The Administrative Agent
shall give each Bank prompt notice of any such proposed conversion affecting any
of its Loans.
5. Section 1.08 of the Credit Agreement is hereby amended by (i)
deleting each reference to "Base Rate Loan" and inserting "Base Rate Loan or
Swiss Franc Base Rate Loan, as the case may be," in lieu thereof and (ii)
deleting each reference to "Eurodollar Loan" and inserting "Eurodollar Loan or
Eurofranc Loan, as the case may be," in lieu thereof.
6. Section 1.09 of the Credit Agreement is hereby amended by (i)
deleting each reference to "Base Rate Loan" and inserting "Base Rate Loan or
Swiss Franc Base Rate Loan, as the case may be," in lieu thereof and (ii)
deleting each reference to "Eurodollar Loan" and inserting "Eurodollar Loan or
Eurofranc Loan, as the case may be," in lieu thereof.
7. Section 1.10 (a) of the Credit Agreement is hereby amended by
(i) deleting clause (x) contained in the first sentence of such Section and
inserting "(x) in the case of clauses (i) and (iv) below, the Administrative
Agent or" in lieu thereof and (ii) deleting the paragraph immediately following
Section 1.10(a) (iii) appearing therein and inserting the following new Section
(iv) and additional text in lieu thereof:
-3-
<PAGE> 4
"(iv) at any time that Swiss Francs are not available in
sufficient amounts, as determined in good faith by the Administrative Agent,
to fund any Borrowing of Swiss Franc Revolving Loans requested pursuant to
Section 1.01;
then, and in any such event, such Bank (or the Administrative Agent, in the case
of clauses (i) or (iv) above) shall (x) on such date and (y) as promptly as
practicable (and in any event within ten Business Days) after the date on which
such event no longer exists give notice (by telephone confirmed in writing) to
the Borrower and to the Administrative Agent of such determination (which notice
the Administrative Agent shall promptly transmit to each of the other Banks).
Thereafter (w) in the case of clause (i) above, in the event Eurodollar Loans
are so affected, Eurodollar Loans shall no longer be available until such time
as the Administrative Agent notifies the Borrower and the Banks that the
circumstances giving rise to such notice by the Administrative Agent no longer
exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower
with respect to Eurodollar Loans which have not yet been incurred (including by
way of conversion) shall be deemed rescinded by the Borrower, (x) in the case of
clause (ii) above, the Borrower shall pay to such Bank, upon written demand
therefor, such additional amounts (in the form of an increased rate of, or a
different method of calculating, interest or otherwise as such Bank shall
reasonably determine) as shall be required to compensate such Bank for such
increased costs or reductions in amounts received or receivable hereunder (a
written notice as to the additional amounts owed to such Bank, showing the basis
for the calculation thereof, submitted to the Borrower by such Bank in good
faith shall, absent demonstrable error, be final and conclusive and binding on
all the parties hereto, although the failure to give any such notice shall not
release or diminish any of the Borrower's obligations to pay additional amounts
pursuant to this Section 1.10(a) upon the subsequent receipt of such notice),
(y) in the case of clause (iii) above, the Borrower shall take one of the
actions specified in Section 1.10(b) as promptly as possible and, in any event,
within the time period required by law and (z) in the case of clause (iv) above,
Swiss Franc Revolving Loans (exclusive of any such Swiss Franc Revolving Loans
which have theretofore been funded) shall no longer be available until such time
as the Administrative Agent notifies the Borrower and the Banks that the
circumstances giving rise to such notice by the Administrative Agent no longer
exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower
with respect to such Swiss Franc Revolving Loans which have not been incurred
(including by way of conversion) shall be deemed rescinded by the Borrower. Each
of the Administrative Agent and each Bank agrees that if it gives notice to the
Borrower of any of the events described in clause (i), (ii), (iii) or (iv)
above, it shall promptly notify the Borrower and, in the case of any such Bank,
the Administrative Agent, if such event ceases to exist. If any such event
described in clause (iii) above ceases to exist as to a Bank, the obligations of
such Bank to make Eurodollar Loans and/or Eurofranc Loans and to convert Base
Rate Loans into Eurodollar Loans or Swiss Franc Base Rate Loans into Eurofranc
Loans, as the case may be, on the terms and conditions contained herein shall be
reinstated immediately upon such cessation."
8. Section 1.10 of the Credit Agreement is hereby further amended
by inserting the following new Section 1.10 (d) immediately following Section
1.10 (c):
"(d) In the event that any Bank shall in good faith determine (which
determination shall, absent manifest error, be final and conclusive and binding
on all parties hereto) at any time
-4-
<PAGE> 5
that such Bank is required to maintain reserves (including, without limitation,
any marginal, emergency, supplemental, special or other reserves required by
applicable law) which have been established by any federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body with jurisdiction over such Bank (including any branch, Affiliate or
funding office thereof) in respect of any Swiss Franc Revolving Loans or any
category of liabilities which includes deposits by reference to which the
interest rate on any Swiss Franc Revolving Loan is determined or any category of
extensions of credit or other assets which includes loans by a non-United States
office of any Bank to non-United States residents, then, unless such reserves
are included in the calculation of the interest rate applicable to such Swiss
Franc Revolving Loans or in Section 1.10(a)(ii), such Bank shall promptly notify
the Borrower and the Administrative Agent in writing specifying the additional
amounts required to indemnify such Bank against the cost of maintaining such
reserves (such written notice to provide in reasonable detail a computation of
such additional amounts) and the Borrower shall pay to such Bank such specified
amounts as additional interest at the time that the Borrower is otherwise
required to pay interest in respect of such Swiss Franc Revolving Loan or, if
later, on written demand therefor by such Bank."
9. Section 4.01 of the Credit Agreement is hereby amended by
inserting the following parenthetical immediately following (i) the number
$500,000, and (ii) the number $50,000 appearing therein:
"(or the Swiss Franc Equivalent thereof in the case of the Eurofranc
Loans)"
10. Section 4.03 of the Credit Agreement is hereby amended by
deleting such section in its entirety and inserting the following new section
4.03 as follows:
"4.03 Method and Place of Payment. (a) Except as otherwise
specifically provided herein, all payments under this Agreement or any Note
shall be made to the Administrative Agent for the account of the Bank or Banks
entitled thereto not later than 1:00 P.M. (local time in the city in which the
Payment Office for the respective payments is located) on the date when due and
shall be made in (x) Dollars in immediately available funds at the appropriate
Payment Office of the Administrative Agent in respect of any obligation of the
Borrower under this Agreement except as otherwise provided in the immediately
following clause (y) and (y) Swiss Francs in immediately available funds at the
appropriate Payment Office of the Administrative Agent, if such payment is made
in respect of (i) principal of or interest on Swiss Franc Revolving Loans, or
(ii) any increased costs, indemnities or other amounts owing with respect to
Swiss Franc Revolving Loans (or Commitments relating thereto). The
Administrative Agent will thereafter cause to be distributed on the same day (if
payment was actually received by the Administrative Agent prior to 1:00 P.M.
(local time in the city in which such payments are to be made) like funds
relating to the payment of principal, interest or Fees ratably to the Banks
entitled thereto. Any payments under this Agreement which are made later than
1:00 P.M. (local time in the city in which such payments are to be made) shall
be deemed to have been made on the next succeeding Business Day. Whenever any
payment to be made hereunder or under any Note shall be stated to be due on a
day which is not a Business Day, the due date thereof shall be extended to the
next succeeding Business Day and, with respect to payments of principal,
interest shall be payable at the applicable rate during such extension."
-5-
<PAGE> 6
11. Section 10 of the Credit Agreement is hereby amended to insert
the following new definitions in appropriate alphabetical order:
"Applicable Currency" shall mean with respect to any Loan, the
currency in which such Loan was incurred.
"Eurofranc Loan" shall mean each Swiss Franc Revolving Loan bearing
interest at the rates provided in Section 1.08(b).
"Fourth Amendment" shall mean the Fourth Amendment, dated as of
February __, 2000, to this Agreement.
"Fourth Amendment Effective Date" shall have the meaning provided in
the Fourth Amendment.
"Judgment Currency Conversion Date" shall have the meaning provided in
Section 12.17(a).
"Judgment Currency Conversion Date" shall have the meaning provided in
Section 12.17(a).
"Obligation Currency" shall have the meaning provided in Section
12.17(a).
"Swiss Franc Base Rate Loan" shall mean each Swiss Franc Revolving
Loan bearing interest at the rates provided in Section 1.08(a).
"Swiss Franc Equivalent" shall mean, at any time for the determination
thereof, the amount of Swiss Francs which could be purchased with the amount of
Dollars involved in such computation at the spot rate of exchange therefor as
quoted by the Administrative Agent as of 11:00 A.M. (Zurich time) on the date
two Business Days prior to the date of any determination thereof for purchase on
such date.
"Swiss Franc Revolving Loans" shall have the meaning provided in
Section 1.01(a).
"Swiss Francs" shall mean shall each mean the freely transferable
lawful money of the Swiss Confederation.
"U.S. Dollar Equivalent" shall mean, at any time for the computation
thereof, the amount of U.S. Dollars which could be purchased with the amount of
Swiss Francs involved in such computation at the spot exchange rate therefor as
quoted by the Administrative Agent as of 12:00 P.M. (New York time) on the date
one Business Day prior to the date of any determination thereof for purchase on
such date. If for any reason the U.S. Dollar Equivalent cannot be calculated as
provided above, the Administrative Agent shall calculate the U.S. Dollar
Equivalent on such basis as it deems fair and equitable.
"U.S. Dollar Revolving Loan" shall have the meaning provided in
Section 1.01.
-6-
<PAGE> 7
12. Section 10 of the Credit Agreement is hereby further amended by
deleting the definitions of "Base Rate Loan", "Eurodollar Loan", "Interest
Period" and "Minimum Borrowing Amount" contained therein and inserting the
following new definitions of "Base Rate Loan", "Eurodollar Loan", "Interest
Period" and "Minimum Borrowing Amount" in lieu thereof:
"Base Rate Loan" shall mean each U.S. Dollar Revolving Loan bearing
interest at the rates provided in Section 1.08(a).
"Eurodollar Loan" shall mean each U.S. Dollar Revolving Loan bearing
interest at the rates provided in Section 1.08(b).
"Interest Period" with respect to any Eurodollar Loan or Eurofranc
Loan shall mean the interest period applicable thereto, as determined pursuant
to Section 1.09.
"Minimum Borrowing Amount" shall mean (i) for U.S. Dollar Revolving
Loans maintained as Base Rate Loans, $250,000, (ii) for U.S. Dollar Revolving
Loans maintained as Eurodollar Loans, $500,000, (iii) for Swiss Franc Revolving
Loans maintained as Swiss Franc Base Rate Loans, the Swiss Franc Equivalent of
$250,000 and (iv) for Swiss Franc Revolving Loans maintained as Eurofranc Loans,
the Swiss Franc Equivalent of $500,000.
13. Section 12 of the Credit Agreement is hereby amended by
inserting the following new Section 12.17 immediately following Section 12.16
appearing therein:
12.17 Judgment Currency. (a) The Borrower's obligations hereunder and
under the other Credit Documents to make payments in the respective Applicable
Currency (the "Obligation Currency") shall not be discharged or satisfied by any
tender or recovery pursuant to any judgment expressed in or converted into any
currency other than the Obligation Currency, except to the extent that such
tender or recovery results in the effective receipt by the Administrative Agent,
the Collateral Agent or the respective Lender of the full amount of the
Obligation Currency expressed to be payable to the Administrative Agent, the
Collateral Agent or such Lender under this Agreement or the other Credit
Documents. If for the purpose of obtaining or enforcing judgment against any
Credit Party in any court or in any jurisdiction, it becomes necessary to
convert into or from any currency other than the Obligation Currency (such other
currency being hereinafter referred to as the "Judgment Currency") an amount due
in the Obligation Currency, the conversion shall be made, at the U.S. Dollar
Equivalent thereof, as the case may be, and, in the case of other currencies,
the rate of exchange (as quoted by the Administrative Agent or if the
Administrative Agent does not quote a rate of exchange on such currency, by a
known dealer in such currency designated by the Administrative Agent)
determined, in each case, as of the day on which the judgment is given (such
Business Day being hereinafter referred to as the "Judgment Currency Conversion
Date").
(b) If there is a change in the rate of exchange prevailing between
the Judgment Currency Conversion Date and the date of actual payment of the
amount due, the Borrower covenants and agrees to pay, or cause to be paid, such
additional amounts, if any (but in any event not a lesser amount), as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the rate of exchange prevailing on the date of payment, will
produce
-7-
<PAGE> 8
the amount of the Obligation Currency which could have been purchased with the
amount of Judgment Currency stipulated in the judgment or judicial award at the
rate or exchange prevailing on the Judgment Currency Conversion Date.
(c) For purposes of determining the U.S. Dollar Equivalent or any
other rate of exchange for this Section, such amounts shall include any premium
and costs payable in connection with the purchase of the Obligation Currency.
14. Notwithstanding anything to the contrary contained in this
Amendment or in the Credit Agreement, the parties hereto hereby agree that
wherever the context requires (such determination to be made by the
Administrative Agent in its reasonable judgment), (i) references to "Eurodollar
Loan" in the Credit Agreement shall be interpreted to mean "Eurodollar Loan or
Eurofranc Loan, as the case may be" and (ii) references to "Base Rate Loan" in
the Credit Agreement shall be interpreted to mean "Base Rate Loan or Swiss Franc
Base Rate Loan, as the case may be".
15. In order to induce the Banks to enter into this Amendment, the
Borrower hereby represents and warrants that on the Fourth Amendment Effective
Date, both before and after giving effect to this Amendment, (i) no Default or
Event of Default shall exist and (ii) all of the representations and warranties
contained in the Credit Documents shall be true and correct in all material
respects, with the same effect as though such representations and warranties had
been made on and as of the Fourth Amendment Effective Date (it being understood
that any representation or warranty made as of a specific date shall be true and
correct in all material respects as of such specific date).
16. This Amendment is limited as specified and shall not constitute
a modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
17. This Amendment may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Administrative Agent.
18. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
19. This Amendment shall become effective as of the date hereof
(the "Fourth Amendment Effective Date") when the Borrower, the Required Banks
(including each Bank whose Commitment is increased pursuant hereto) and the
Administrative Agent shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of telecopier) the
same to the Administrative Agent.
-8-
<PAGE> 9
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
TOWN SPORTS INTERNATIONAL, INC.
By: /S/ R. G. Pyle
--------------------------------
Name: R. G. Pyle
Title: CFO
BANKERS TRUST COMPANY, Individually
and as Administrative Agent
By: /S/ Gregory Schefrin
--------------------------------
Name: Gregory Schefrin
Title: Vice President
BANK OF SCOTLAND
By: /S/ Adrian Knowles
--------------------------------
Name: Adrian Knowles
Title: Vice President
<PAGE> 1
SUBSIDIARIES EXHIBIT 21.1
<TABLE>
<CAPTION>
SUBSIDIARY FORM OWNER
- ---------- ---- -----
<S> <C> <C>
TSI 217 Broadway, Inc. Corporation Town Sports International, Inc.
TSI Alexandria, LLC Corporation TSI Holdings, (VA), Inc.
TSI Allston, Inc. Corporation Town Sports International, Inc.
TSI Arthro Fitness Services, Inc. Corporation Town Sports International, Inc.
TSI Battery Park, Inc. Corporation Town Sports International, Inc.
TSI Bethesda, Inc. Corporation Town Sports International, Inc.
TSI Broadway, Inc. Corporation Town Sports International, Inc.
TSI Brooklyn Belt, Inc. Corporation Town Sports International, Inc.
TSI Brunswick, Inc. Corporation Town Sports International, Inc.
TSI Bulfinch, Inc. Corporation Town Sports International, Inc.
TSI Cash Management, Inc. Corporation Town Sports International, Inc.
TSI Centreville, Inc. Corporation TSI Holdings (VA), Inc.
TSI Cherry Hill, LLC Corporation TSI Holdings (NJ), Inc.
TSI Cobble Hill, Inc. Corporation Town Sports International, Inc.
TSI Colonia, LLC Corporation TSI Holdings (NJ), Inc.
TSI Commack, Inc. Corporation Town Sports International, Inc.
TSI Connecticut Ave., Inc. Corporation TSI Holdings (DC), Inc.
TSI Copley, Inc. Corporation Town Sports International, Inc.
TSI Croton, Inc. Corporation Town Sports International, Inc.
TSI Danbury, Inc. Corporation Town Sports International, Inc.
TSI Dupont Circle, Inc. Corporation TSI Holdings (DC), Inc.
TSI Dupont II, Inc. Corporation TSI Holdings (DC), Inc.
TSI East 23, Inc. Corporation Town Sports International, Inc.
TSI East 34, Inc. Corporation Town Sports International, Inc.
TSI East 36, Inc. Corporation Town Sports International, Inc.
TSI East 41, Inc. Corporation Town Sports International, Inc.
TSI East 51, Inc. Corporation Town Sports International, Inc.
TSI East 59, Inc. Corporation Town Sports International, Inc.
TSI East 76, Inc. Corporation Town Sports International, Inc.
TSI East 86, Inc. Corporation Town Sports International, Inc.
TSI East 91, Inc. Corporation Town Sports International, Inc.
TSI East Meadow, Inc Corporation Town Sports International, Inc.
TSI Fairfax, LLC Corporation TSI Holdings (VA), Inc.
TSI Fenway, Inc. Corporation Town Sports International, Inc.
TSI Fifth Avenue, Inc. Corporation Town Sports International, Inc.
TSI First Avenue, Inc. Corporation Town Sports International, Inc.
TSI Forest Hills, Inc. Corporation Town Sports International, Inc.
TSI Fort Lee, LLC Corporation TSI Holdings (NJ), Inc.
TSI Framingham, Inc. Corporation Town Sports International, Inc.
TSI Franklin Park, LLC Corporation TSI Holdings (NJ), Inc.
TSI Freehold, LLC Corporation TSI Holdings (NJ), Inc.
TSI Garden City, Inc. Corporation Town Sports International, Inc.
TSI Germantown, LLC Corporation TSI Holdings (MD), Inc.
TSI Glover, Inc. Corporation TSI Holdings (DC), Inc.
</TABLE>
1
<PAGE> 2
SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARY FORM OWNER
- ---------- ---- -----
<S> <C> <C>
TSI Great Neck, Inc. Corporation Town Sports International, Inc.
TSI Greenwich, Inc. Corporation Town Sports International, Inc.
TSI Reade Street, Inc. Corporation Town Sports International, Inc.
TSI Herald, Inc. Corporation Town Sports International, Inc.
TSI Highpoint, LLC Corporation TSI Holdings, (PA), Inc.
TSI Hoboken, Inc. Corporation Town Sports International, Inc.
TSI Holdings (CIP), Inc. Corporation Town Sports International, Inc.
TSI Holdings (DC), Inc. Corporation Town Sports International, Inc.
TSI Holdings (IP), Inc. Corporation Town Sports International, Inc.
TSI Holdings (MD), Inc. Corporation Town Sports International, Inc.
TSI Holdings (NJ), Inc. Corporation Town Sports International, Inc.
TSI Holdings (PA), Inc. Corporation Town Sports International, Inc.
TSI Holdings (VA), Inc. Corporation Town Sports International, Inc.
TSI Huntington, Inc. Corporation Town Sports International, Inc.
TSI International, Inc. Corporation Town Sports International, Inc.
TSI Larchmont, Inc. Corporation Town Sports International, Inc.
TSI Lexington, Inc. Corporation Town Sports International, Inc.
TSI Lincoln, Inc. Corporation Town Sports International, Inc.
TSI Long Beach, Inc. Corporation Town Sports International, Inc.
TSI M Street, Inc. Corporation TSI Holdings (DC), Inc.
TSI Madison, Inc. Corporation Town Sports International, Inc.
TSI Mahwah, LLC Corporation TSI Holdings (NJ), Inc.
TSI Mamaroneck, Inc. Corporation Town Sports International, Inc.
TSI Market Street, LLC Corporation TSI Holdings (PA), Inc.
TSI Marlboro, LLC Corporation TSI Holdings (NJ), Inc.
TSI Matawan, LLC Corporation TSI Holdings (NJ), Inc.
TSI Merrifield, Inc. Corporation Town Sports International, Inc.
TSI Nanuet, Inc. Corporation Town Sports International, Inc.
TSI Norwalk, Inc. Corporation Town Sports International, Inc.
TSI Oceanside, Inc. Corporation Town Sports International, Inc.
TSI Old Bridge, LLC Corporation TSI Holdings (NJ), Inc.
TSI Parsippany, LLC Corporation TSI Holdings (NJ), Inc.
TSI Plainsboro, LLC Corporation TSI Holdings (NJ), Inc.
TSI Princeton, LLC Corporation TSI Brunswick, Inc.
TSI Ramsey, LLC Corporation TSI Holdings (NJ), Inc.
TSI Rittenhouse, LLC Corporation TSI Holdings (PA), Inc.
TSI Rockville, LLC Corporation TSI Holdings (MD), Inc.
TSI Rodin Place, LLC Corporation TSI Holdings (PA), Inc.
TSI Scarsdale, Inc. Corporation Town Sports International, Inc.
TSI Seaport, Inc. Corporation Town Sports International, Inc.
TSI Sheridan, Inc. Corporation Town Sports International, Inc.
TSI Society Hill, LLC Corporation TSI Holdings (PA), Inc.
TSI Soho, Inc. Corporation Town Sports International, Inc.
TSI Somerset, LLC Corporation TSI Holdings (NJ), Inc.
</TABLE>
2
<PAGE> 3
SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARY FORM OWNER
- ---------- ---- -----
<S> <C> <C>
TSI Springfield, LLC Corporation TSI Holdings (NJ), Inc.
TSI Springfield Virginia, LLC Corporation TSI Holdings (VA), Inc.
TSI Stamford Downtown, Inc. Corporation Town Sports International, Inc.
TSI Stamford Post, Inc. Corporation Town Sports International, Inc.
TSI Stamford Rinks, Inc. Corporation Town Sports International, Inc.
TSI Staten Island, Inc. Corporation Town Sports International, Inc.
TSI Sterling, LLC Corporation TSI Holdings (VA), Inc.
TSI Supplements, Inc. Corporation Town Sports International, Inc.
TSI Syosset, Inc. Corporation Town Sports International, Inc.
TSI Wall Street, Inc. Corporation Town Sports International, Inc.
TSI Washington, Inc. Corporation TSI Holdings (DC), Inc.
TSI West 125, Inc. Corporation Town Sports International, Inc.
TSI West 14, Inc. Corporation Town Sports International, Inc.
TSI West 23, Inc. Corporation Town Sports International, Inc.
TSI West 38, Inc. Corporation Town Sports International, Inc.
TSI West 44, Inc. Corporation Town Sports International, Inc.
TSI West 52, Inc. Corporation Town Sports International, Inc.
TSI West 73, Inc. Corporation Town Sports International, Inc.
TSI West 76, Inc. Corporation Town Sports International, Inc.
TSI West 80, Inc. Corporation Town Sports International, Inc.
TSI West Caldwell, LLC Corporation TSI Holdings (NJ), Inc.
TSI Weymouth, Inc. Corporation Town Sports International, Inc.
TSI White Plains, Inc. Corporation Town Sports International, Inc.
TSI Whitestone, Inc. Corporation Town Sports International, Inc.
</TABLE>
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL BALANCE SHEET AT DECEMBER 31, 1999, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 27,125
<SECURITIES> 0
<RECEIVABLES> 576
<ALLOWANCES> 0
<INVENTORY> 1,070
<CURRENT-ASSETS> 30,246
<PP&E> 160,282
<DEPRECIATION> 36,388
<TOTAL-ASSETS> 215,678
<CURRENT-LIABILITIES> 31,261
<BONDS> 129,926
42,066
23,420
<COMMON> 1
<OTHER-SE> (29,018)
<TOTAL-LIABILITY-AND-EQUITY> 215,678
<SALES> 0
<TOTAL-REVENUES> 159,779
<CGS> 0
<TOTAL-COSTS> 148,916
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,243
<INCOME-PRETAX> 620
<INCOME-TAX> 571
<INCOME-CONTINUING> 49
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
