Item 1.03 Bankruptcy or Receivership.
On September 14, 2020 (the "Petition Date"), Town Sports International, LLC
("TSI LLC"), TSI Holdings II, LLC ("Holdings II") and certain subsidiaries of
TSI LLC (TSI LLC, Holdings II, and such subsidiaries collectively, the
"Debtors") each filed voluntary petitions for relief (the "Petitions") under
chapter 11, title 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code", and such cases, the "Chapter 11 Cases") in the United States
Bankruptcy Court for the District of Delaware (the "Court").
The Debtors continue to operate their business as "debtors-in-possession"
subject to the jurisdiction of the Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Court. The Debtors are
seeking approval of a variety of "first day" motions containing customary relief
intended to permit the Debtors to continue their ordinary course operations,
including by rejecting certain leases for club locations leased by the Debtors
and by providing authority for the Debtors to use cash collateral to operate
their business.
The Debtors have received two separate proposals from certain of their
pre-petition lenders for the provision of debtor-in-possession financing, which
the Debtors expect will be necessary to support the restructuring of the
existing debt, existing equity interests in and certain other obligations of the
Debtors, including the fees and costs incurred by the Debtors in connection with
the Chapter 11 Cases.
The first such proposal is from Kennedy Lewis Investment Management, LLC
("KLIM") and would provide the Debtors with an $80.0 million multi-draw senior
secured super-priority debtor-in-possession credit facility ("KLIM DIP
Facility"). KLIM would commit to provide the full amount of the KLIM DIP
Facility, provided that each other lender under the Credit Agreement (as defined
below) would have the opportunity to provide its pro rata share of $39.0 million
of such DIP Facility. The KLIM DIP Facility would mature upon the earliest to
occur of (i) the four month anniversary of the closing on such KLIM DIP
Facility, (ii) the date that is 30 days after the Petition Date if a final order
satisfactory to KLIM regarding the KLIM DIP Facility has not been entered by the
Court on or before such date, (iii) the date of consummation of any sale of all
or substantially all of the assets of any of the Debtors pursuant to section 363
of the Bankruptcy Code, (iv) the date on which the Court orders a conversion of
any of the Chapter 11 Cases to a liquidation under chapter 7, title 11 of the
Bankruptcy Code or the dismissal of any of the Chapter 11 Cases and (v) the
effective date of any plan of reorganization of the Debtors subject to
confirmation under section 1129(b)(2)(A)(iii) of the Bankruptcy Code. KLIM holds
over forty-five percent of the total amount of debt owed by Debtors under the
Credit Agreement, dated November 15, 2013, as amended (the "Credit Agreement"),
by and among Holdings II, TSI LLC, as Borrower (as defined in the Credit
Agreement), the Lenders party thereto and Deutsche Bank AG New York Branch as
administrative agent. However the KLIM DIP Facility is conditioned on a
consensual priming of the Debtors' pre-petition secured debt which requires
consent from a majority of the holders (the "Required Lenders") of debt owed by
Debtors under the Credit Agreement. The KLIM DIP Facility does not currently
have the support of the Required Lenders and, as a result, is not yet
actionable.
The second proposal is from Tacit Capital, LLC ("Tacit") and an ad hoc group of
certain lenders to the Debtors that have indicated that they own a majority of
the total amount of debt owed by the Debtors under the Credit Agreement, and
therefore would constitute the Required Lenders. The Tacit proposal is for a
$17.5 million priming, super-priority, senior secured debtor-in-possession
delayed-draw term loan facility (the "Tacit DIP Facility"), tied to a credit bid
that provides for an additional $47.5 million of financing for the business
following the Debtors' exit from bankruptcy proceedings. The Tacit DIP Facility
is also premised on a priming of the Debtors' pre-petition lenders as well as a
commitment by the Required Lenders to credit bid their debt.
The Debtors believe that the lenders under the Credit Agreement will consent to
provide debtor-in-possession financing, whether in substantially the form laid
out in the KLIM proposal, the Tacit proposal or otherwise. However, given the
financial pressures on the Debtors' operations, the Debtors determined it
necessary to initiate the Chapter 11 Cases while discussions with its lenders to
secure financing are ongoing. The Debtors intend to use cash on hand and cash
from the results of operations to fund the working capital needs of the business
prior to the entry of any order of the Court approving any debtor-in-possession
financing facility.
Though Town Sports International Holdings, Inc. (the "Registrant") is not a
Debtor and has not filed a petition with the Court, as the parent of the
Debtors, the Registrant will be subject to the risks and uncertainties
associated with the bankruptcy process insofar as the assets of the Debtors
constitute a substantial and material portion of the assets of the Registrant
and its subsidiaries taken as a whole.
The filing of the Petitions constituted an event of default that accelerated the
obligations of the Debtors under certain debt instruments and triggered defaults
as described in greater detail in Item 2.04 herein.
Item 2.04. Triggering Events that Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement.
The commencement of the Chapter 11 Cases constitutes an event of default under
the following debt instruments and agreements (the "Debt Instruments"):
· The Credit Agreement, and the $14.164 million outstanding under the Revolving
Credit Facility (as defined in the Credit Agreement) (with letters of credit
totaling approximately $325,000), and the $152.999 million outstanding under
the Term Loan (as defined in the Credit Agreement);
· The Business Loan Agreement and Promissory Note, dated April 20, 2020, by and
between TSI LLC and BankUnited, N.A., and the $2.742 million outstanding
thereunder.
The Debt Instruments provide that as a result of the Chapter 11 Cases, the
principal and interest thereunder shall be immediately due and payable. The
Debtors believe that any efforts to enforce the financial obligations under the
Debt Instruments are stayed as a result of the filing of the Chapter 11 Cases in
the Court.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
Key Employee Retention Agreements
On September 8, 2020, TSI LLC entered into Retention Award Agreements (the
"Retention Agreements") with each of the Chief Executive Officer and Chief
Financial Officer for the award of certain one-time lump sum cash retention
bonuses. In recognition of the importance to the Registrant and its stakeholders
of retaining highly qualified executives to manage the operations and finances
of the Registrant and its subsidiaries during a time of great uncertainty for
the business, and in order to incentivize the continued service of Mr. Walsh,
our Chief Executive Officer, and Mr. Juhan, our Chief Financial Officer,
one-time cash payments were made to these executives pursuant to the Retention
Agreements in the amount of $1.5 million to Mr. Walsh, and $750,000 to Mr. Juhan
(the "Retention Bonuses"). Each Retention Bonus is subject to repayment of 100%
of such award if prior to the date that is six months following the date of the
applicable Retention Agreement (i) the employment of the applicable executive
with TSI LLC is terminated by TSI LLC for Cause (as defined in the applicable
Retention Agreement) or by the executive without Good Reason (as defined in the
applicable Retention Agreement) or (ii) the case of TSI LLC before the Court is
converted to a liquidation pursuant to chapter 7, title 11 of the Bankruptcy
Code (except in the event that such conversion occurs after Court approval and
closing on a sale of all or substantially all of TSI LLC's assets as a going
concern).
The foregoing description of the Retention Agreements does not purport to be
complete and is qualified in its entirety by reference to the terms and
conditions of the Retention Agreements attached hereto as Exhibits 10.1 and
10.2.
Resignation of General Counsel
On September 10, 2020, Stuart Steinberg notified the Registrant of his
resignation as the Registrant's General Counsel. Mr. Steinberg's resignation is
effective immediately, and was not due to any disagreement with the Registrant
on any matter relating to the operations, policies or practices of the
Registrant or any of its subsidiaries.
In connection with Mr. Steinberg's resignation, on September 10, 2020, the
Registrant entered into a letter agreement (the "Letter Agreement") with Mr.
Steinberg's firm, Stuart M. Steinberg, P.C. ("Steinberg P.C."), amending the
Amended Engagement Letter Agreement (the "Engagement Letter"), dated May 1,
2017, by and between the Registrant and Steinberg P.C. Pursuant to the Letter
Agreement, the Registrant will pay Steinberg P.C. a fee of $200,000 to provide
transition services for a period of sixty days to facilitate the transition of
the firm's former duties. The Letter Agreement also terminated the engagement of
Steinberg P.C. as counsel to the Registrant. The foregoing description of the
Letter Agreement and the Engagement Letter does not purport to be complete and
is qualified in its entirety by reference to the terms and conditions of the
Letter Agreement and the Engagement Letter, each as attached hereto as Exhibits
10.3 and 10.4 respectively.
Forward-Looking Statements
Certain statements in this Current Report regarding the Registrant's future
intentions contain "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. You can identify these
forward-looking statements by the use of words such as "outlook," "believes,"
"expects," "potential," "continues," "may," "will," "should," "seeks,"
"approximately," "predicts," "intends," "plans," "estimates," "anticipates,"
"target," "could," or the negative version of these words or other comparable
words. Such statements are subject to various risks and uncertainties, many of
which are outside our control, including, among others, the impact of and risks
and uncertainties related to the Chapter 11 Cases, the Debtors' ability to
obtain timely approval by the Court of the motions filed in the Chapter 11
Cases, the Debtors' ability to obtain debtor-in-possession financing, objections
to any such debtor-in-possession financing facility or other pleadings that
could protract the Chapter 11 Cases, employee attrition and the Registrant's
ability to retain senior management and other key personnel, the Registrant's
ability to comply with the continued listing criteria of NASDAQ and risks
arising from the potential delisting of the Registrant's common stock from
NASDAQ, the duration and severity of the COVID-19 pandemic, actions that may be
taken by governmental authorities to contain the COVID-19 outbreak or treat its
impact, the potential negative impacts of COVID-19 on the economy in the United
States and the impact of COVID-19 on our financial condition and business
operations, and other specific risk factors disclosed in our prior SEC filings.
We believe that all forward-looking statements are based on reasonable
assumptions when made; however, we caution that it is impossible to predict
actual results or outcomes or the effects of risks, uncertainties or other
factors on anticipated results or outcomes and that, accordingly, one should not
place undue reliance on these statements. Forward-looking statements speak only
as of the date when made, and we undertake no obligation to update these
statements in light of subsequent events or developments. Actual results may
differ materially from anticipated results or outcomes discussed in any
forward-looking statement.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
10.1 Retention Award Agreement, dated September 8, 2020 by and between TSI
LLC and Patrick Walsh.
10.2 Retention Award Agreement, dated September 8, 2020 by and between TSI
LLC and Phillip Juhan.
10.3 Letter Agreement, dated September 10, 2020 by and between the
Registrant and Steinberg P.C.
10.4 Amended Engagement Letter Agreement, dated May 1, 2017 by and between
the Registrant and Steinberg P.C. (incorporated by reference to Exhibit
10.2 of the Registrant's Current Report on Form 8-K filed April 28,
2017).
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