<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 200549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) APRIL 6, 1998
TOWN SPORTS INTERNATIONAL, INC.
New York 333-40907 13-2749906
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
888 Seventh Avenue
New York, NY 10106
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (212) 246-6700
(Former name or former address, if changed since last report.) Not
applicable
Page 1 of 2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) & (b) Financial Statements and Pro forma financial information.
The financial statements and pro forma financial information
required are filed herewith in accordance with Rule 3-05 of Regulation S-X.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed by the
undersigned hereunto duly authorized.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ Richard Pyle
----------------------------
Richard Pyle
Chief Financial Officer
August 26, 1998
Page 2 of 2
<PAGE>
Item 7(a)
LIFESTYLE FITNESS of
SPRINGFIELD, INC. and AFFILIATES
COMBINED FINANCIAL STATEMENTS
For the year ended December 31, 1997
and unaudited for the six months ended June 30, 1998
<PAGE>
LIFESTYLE FITNESS of SPRINGFIELD, INC. and AFFILIATES
Table of Contents
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants.......................................................................... 1
Combined balance sheets as of December 31, 1997 and unaudited as of June 30, 1998.......................... 2
Combined statements of income for the year ended December 31, 1997 and unaudited for the six months ended
June 30, 1997 and 1998................................................................................... 3
Combined statements of stockholders' deficit for the year ended December 31, 1997 and unaudited for the six
months ended June 30, 1998............................................................................... 4
Combined statements of cash flows for the year ended December 31, 1997 and unaudited for the six months
ended June 30, 1997 and 1998............................................................................. 5
Notes to combined financial statements..................................................................... 6-11
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
New York, New York
August 6, 1998
To the Board of Directors and Stockholders of
Lifestyle Fitness of Springfield, Inc.:
In our opinion, the accompanying combined balance sheet and the related
combined statements of income, stockholders' deficit and cash flows present
fairly, in all material respects, the financial position of LIFESTYLE FITNESS of
SPRINGFIELD, INC. and AFFILIATES (as defined in Note 1 to the financial
statements) (collectively, "Lifestyle") at December 31, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Lifestyle's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit 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
audit provides a reasonable basis for our opinion expressed above.
As disclosed in Note 1, on August 6, 1998, the stockholders of Lifestyle
entered into an agreement with Town Sports International, Inc. to sell the
tangible and intangible assets, as well as the rights and obligations under
certain leases.
PRICEWATERHOUSECOOPERS LLP
1
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 1,257 $ 68,727
Prepaid rent.................................................................... 120,743 --
Other current assets............................................................ 34,115 19,646
-------------- --------------
Total current assets........................................................ 156,115 88,373
Fixed assets, net................................................................. 1,734,445 1,562,150
Deferred membership costs......................................................... 1,047,154 1,124,573
Other assets...................................................................... 149,770 245,403
-------------- --------------
Total assets................................................................ $ 3,087,484 $ 3,020,499
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Book overdraft.................................................................. $ 65,455 $ --
Current portion of long-term debt............................................... 172,495 98,750
Notes payable to a related party................................................ 78,669 35,710
Accounts payable................................................................ 181,732 144,763
Accrued expenses................................................................ 108,078 121,015
Accrued payroll and related payroll taxes....................................... 98,409 102,291
Deferred revenue................................................................ 2,655,967 2,440,102
-------------- --------------
Total current liabilities................................................... 3,360,805 2,942,631
Long-term debt.................................................................... 183,926 140,700
Deferred lease liabilities........................................................ 521,423 373,798
Deferred revenue.................................................................. 290,397 520,945
-------------- --------------
Total liabilities........................................................... 4,356,551 3,978,074
-------------- --------------
Commitments and contingencies
Stockholders' deficit:
Common stock.................................................................... 86,000 86,000
Accumulated deficit............................................................. (1,355,067) (1,043,575)
-------------- --------------
Total stockholders' deficit................................................. (1,269,067) (957,575)
-------------- --------------
Total liabilities and stockholders' deficit................................. $ 3,087,484 $ 3,020,499
-------------- --------------
-------------- --------------
</TABLE>
See notes to combined financial statements.
2
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------------
1997 1997 1998
-------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Membership dues--including initiation fees of $2,051,558,
$993,276 and $1,193,690, respectively.......................... $ 6,748,621 $ 3,135,844 $ 4,249,159
-------------- ------------- -------------
Operating expenses:
Payroll and related.............................................. 2,613,472 1,255,746 1,324,090
Club operating................................................... 1,671,977 745,897 936,238
General and administrative....................................... 1,466,217 764,138 685,475
Depreciation and amortization.................................... 381,401 183,300 210,853
-------------- ------------- -------------
6,133,067 2,949,081 3,156,656
-------------- ------------- -------------
Operating Income............................................. 615,554 186,763 1,092,503
Interest expense................................................... 51,272 21,072 27,047
-------------- ------------- -------------
Income before provision for corporate income taxes............... 564,282 165,691 1,065,456
Provision for corporate income taxes............................... 31,369 4,971 31,964
-------------- ------------- -------------
Net income................................................... $ 532,913 $ 160,720 $ 1,033,492
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See notes to combined financial statements.
3
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997, AND UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
--------- -------------- --------------
<S> <C> <C> <C>
Balance at January 1, 1997............................................ $ 86,000 $ (924,800) $ (838,800)
Net income for the year ended December 31, 1997....................... 532,913 532,913
Distributions to stockholders......................................... (963,180) (963,180)
--------- -------------- --------------
Balance at December 31, 1997........................................ 86,000 (1,355,067) (1,269,067)
Net income for the six months ended June 30, 1998 (unaudited)......... 1,033,492 1,033,492
Distributions to stockholders (unaudited)............................. (722,000) (722,000)
--------- -------------- --------------
Balance at June 30, 1998 (unaudited)................................ $ 86,000 $ (1,043,575) $ (957,575)
--------- -------------- --------------
--------- -------------- --------------
</TABLE>
See notes to combined financial statements.
4
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------
1997 1997 1998
-------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income........................................................ $ 532,913 $ 160,720 $ 1,033,492
-------------- ------------ -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 381,401 183,300 210,853
Increase in deferred lease liability.......................... 97,444 2,878 14,133
Change in certain working capital components.................. 800,947 759,563 (127,646)
Increase in deferred membership costs......................... (136,079) (130,468) (77,419)
-------------- ------------ -------------
Total adjustments........................................... 1,143,713 815,273 19,921
-------------- ------------ -------------
Net cash provided by operating activities................... 1,676,626 975,993 1,053,413
-------------- ------------ -------------
Cash flows from investing activities:
Additions to fixed assets......................................... (504,024) (427,110) (39,258)
-------------- ------------ -------------
Net cash used in investing activities....................... (504,024) (427,110) (39,258)
-------------- ------------ -------------
Cash flows from financing activities:
Increase (decrease) in book overdraft............................. 65,455 -- (65,455)
Repayment of notes payable to a related party..................... (184,175) (84,207) (92,959)
Proceeds from line of credit...................................... 300,000 600,000 --
Proceeds received from landlord in connection with lease
incentive....................................................... -- -- 50,700
Repayment of bank borrowings...................................... (44,794) (8,306) (92,702)
Repayment of capital lease obligations............................ (49,005) (23,955) (24,269)
Repayment of stockholder loans.................................... (365,429) (365,429) --
Distribution to stockholders...................................... (963,180) (408,017) (722,000)
-------------- ------------ -------------
Net cash used in financing activities....................... (1,241,128) (289,914) (946,685)
-------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents........ (68,526) 258,969 67,470
Cash and cash equivalents at beginning of period.................... 69,783 69,783 1,257
-------------- ------------ -------------
Cash and cash equivalents at end of period.................. $ 1,257 $ 328,752 $ 68,727
-------------- ------------ -------------
-------------- ------------ -------------
Summary of the change in certain working capital components:
Decrease (increase) in prepaid rent............................... $ (23,766) $ 96,977 $ 120,743
Decrease (increase) in other current assets....................... (7,871) (2,922) 14,469
Increase in other assets.......................................... (16,758) -- (95,633)
Increase (decrease) in accounts payable and accrued expenses...... 121,518 40,500 (34,761)
Increase (decrease) in deferred revenue........................... 727,824 625,008 (132,464)
-------------- ------------ -------------
Net change in certain working capital components............ $ 800,947 $ 759,563 $ (127,646)
-------------- ------------ -------------
-------------- ------------ -------------
</TABLE>
See notes to combined financial statements.
5
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INTERIM DATA IS UNAUDITED)
1. NATURE OF BUSINESS:
The Combined Financial Statements of Lifestyle Fitness of Springfield, Inc.
and Affiliates include the accounts of Lifestyle Fitness of Springfield, Inc.,
Lifestyle Fitness of Parsippany, Inc., Lifestyle Fitness of Franklin, Inc.,
Lifestyle Fitness of Woodbridge, Inc., Lifestyle Fitness of Plainsboro, Inc. and
Lifestyle Fitness of Somerset, Inc., (collectively referred to as "Lifestyle").
Lifestyle owns and operates six fitness clubs in New Jersey. Lifestyle is owned
and operated by a common group of investors.
On August 6, 1998, the stockholders of Lifestyle entered into an agreement
to sell its tangible and intangible assets, as well as the rights and
obligations under certain leases of its clubs to Town Sports International, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. PRINCIPLES OF COMBINATION:
The accompanying combined financial statements include the accounts of
Lifestyle. All significant intercompany accounts and transactions have been
eliminated in combination.
B. REVENUE RECOGNITION:
Lifestyle receives a one-time non-refundable initiation fee and dues from
its members. With the exception of special short-term memberships, substantially
all of Lifestyle's members sign membership contracts for one year after which
the membership is automatically extended for another year unless notice of
cancellation is given 30 days prior to expiration date. Initiation fees and
related expenses (referred to herein as membership costs), including sales
commissions payable to membership consultants, are deferred and recognized, on a
straight-line basis over an estimated membership period of two years. Dues are
recognized on a pro-rata basis over the periods in which services are to be
provided.
C. 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 five years for
equipment and the shorter of their estimated useful lives or the remaining
period of the lease for leasehold improvements. 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.
D. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets, such as fixed assets are reviewed 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 the period presented, no impairment losses were recorded.
E. ADVERTISING COSTS:
Advertising costs are charged to operations during the period in which they
are incurred. Total advertising costs incurred by Lifestyle during the year
ended December 31, 1997 totaled $217,573.
6
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INTERIM DATA IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
F. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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 assets and the estimated membership period.
G. CORPORATE INCOME TAXES:
Lifestyle has filed elections with the federal and state taxing authorities
to be treated as S Corporations for tax purposes. Accordingly, the tax
obligations of Lifestyle flow through to the individual stockholders. Deferred
taxes were not material.
H. STATEMENT OF CASH FLOWS:
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
<S> <C>
Cash paid during the year for:
Interest.................................................................... $ 49,614
--------------
--------------
Taxes....................................................................... $ 32,255
--------------
--------------
Noncash investing activities:
Fixed asset additions....................................................... $ 210,000
--------------
--------------
</TABLE>
I. CASH AND CASH EQUIVALENTS:
Lifestyle considers all highly liquid investments 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. Financial instruments which potentially subject Lifestyle to
concentrations of credit risk are cash and cash equivalents. Such amounts are
held, primarily, in a single commercial bank. Lifestyle holds no collateral for
these financial instruments.
J. DEFERRED LEASE LIABILITIES:
Lifestyle recognizes rental expense from leases with scheduled rent
increases on the straight-line basis.
7
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INTERIM DATA IS UNAUDITED)
3. FIXED ASSETS:
Fixed assets as of December 31, 1997 are shown at cost, less accumulated
depreciation and amortization, and are summarized below:
<TABLE>
<S> <C>
Leasehold improvements......................................... $1,408,144
Club equipment................................................. 1,932,566
Office equipment............................................... 31,912
----------
3,372,622
Less, Accumulated depreciation and amortization.............. 1,638,177
----------
$1,734,445
----------
----------
</TABLE>
4. LONG-TERM DEBT:
Long-term debt as of December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Line of credit with a bank--The line of credit bears interest at
the bank's prime plus 1/2% (9% at December 31, 1997), payable
monthly. Repayment of the line of credit is guaranteed by the
stockholders of Lifestyle. (see Note 9(a))..................... $ 279,132
Note payable to a bank--bearing interest at the bank's prime plus
2.75% (11.25% at December 31, 1997), payable in 120 monthly
installments of $1,040 including interest through June 25,
2003. Repayment of the note is guaranteed by the stockholders
and collateralized by all club equipment, inventories and
accounts receivable. On May 8, 1998 this note was repaid....... 27,470
Capital lease obligations........................................ 49,819
---------
356,421
Less, Current portion due within one year.................... 172,495
---------
Long-term portion.......................................... $ 183,926
---------
---------
</TABLE>
Lifestyle's line of credit provides for borrowings of up to $300,000. As of
December 31, 1997, the unused line of credit amounted to $20,868.
The carrying value of long-term debt approximates fair market value as of
December 31, 1997 as the interest rate charged on the debt is variable.
Lifestyle leases equipment under noncancelable capital leases. Lease terms
range up to three years, after which Lifestyle may purchase the equipment at
amounts defined by the agreements.
8
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INTERIM DATA IS UNAUDITED)
4. LONG-TERM DEBT: (CONTINUED)
As of December 31, 1997, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM
DECEMBER 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 46,465
1999.......................................................................... 6,725
--------------
53,190
Less, Amounts representing interest......................................... 3,371
--------------
Present value of minimum capital lease payments........................... $ 49,819
--------------
--------------
</TABLE>
The cost of club equipment under capital leases is approximately $149,500 at
December 31, 1997; related accumulated amortization is approximately $54,700.
The aggregate maturity of long term debt during the next four years is as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT DUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 172,495
1999........................................................................... 79,826
2000........................................................................... 73,200
2001........................................................................... 30,900
-------------
$ 356,421
-------------
-------------
</TABLE>
5. RELATED PARTY TRANSACTIONS:
(a) During the year ended December 31, 1997, Lifestyle repaid $365,429 of
non-interest bearing loans to its stockholders which were previously payable
on demand.
(b) Lifestyle entered into a consulting agreement with a corporation which is
solely owned by a Consultant (the "Consultant") who performs services for
Lifestyle. The Consultant advises Lifestyle with respect to its club
operations, sales operations and promotions. For such services, the
Consultant receives a monthly fee of $2,000 plus one-third of the profits,
as defined, for each health club. In the event of a sale or transfer of the
ownership of any of Lifestyle's health clubs, the Consultant is entitled to
share up to 33% of the profit from the sale of a health club, as defined.
The consulting agreement for each health club expires on January 31, 2007.
For the year ended December 31, 1997, Lifestyle incurred consulting fees to
the Consultant amounting to $491,169.
(c) Lifestyle entered into eight notes payable to a corporation owned by the
Consultant. Each note bears interest at either 12% or 15% per annum and is
payable in varying monthly principal and interest installments over a period
of one year. As of December 31, 1997, the notes payable amounted to $78,669.
9
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INTERIM DATA IS UNAUDITED)
6. LEASES:
Lifestyle leases office and multi-recreational facilities 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. One lease provides for additional rent based upon a percentage
of the facility's gross revenue per annum. Certain leases are guaranteed by
stockholders of Lifestyle.
The leases expire at various times through October, 2007, and some may be
extended at Lifestyle's option for periods ranging from 5 to 10 years.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM
DECEMBER 31, ANNUAL RENTAL
- ------------ --------------
<S> <C>
1998.......................................................................... $ 870,665
1999.......................................................................... 916,874
2000.......................................................................... 969,375
2001.......................................................................... 965,291
2002.......................................................................... 649,869
Thereafter.................................................................... 1,626,748
--------------
$ 5,998,822
--------------
--------------
</TABLE>
Rent expense for the year ended December 31, 1997 was $1,330,881, including
other additional rent of $288,292.
7. COMMON STOCK:
Common Stock issued has no par value. Common Stock at December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER SHARES
OF SHARES ISSUED AND COMMON
AUTHORIZED OUTSTANDING STOCK
------------- --------------- ---------
<S> <C> <C> <C>
Lifestyle Fitness of Springfield, Inc................. 1,000 100 $ 8,000
Lifestyle Fitness of Parsippany, Inc.................. 100 100 8,000
Lifestyle Fitness of Franklin, Inc.................... 2,500 100 46,000
Lifestyle Fitness of Woodbridge, Inc.................. 2,500 100 8,000
Lifestyle Fitness of Plainsboro, Inc.................. 2,500 100 8,000
Lifestyle Fitness of Somerset, Inc.................... 100 100 8,000
----- --- ---------
8,700 600 $ 86,000
----- --- ---------
----- --- ---------
</TABLE>
8. CONTINGENCIES:
As of December 31, 1997, Lifestyle was party to a number of claims arising
in the ordinary course of business. Management believes that these claims are
covered by Lifestyle's insurance policies and that the ultimate outcome of these
matters will not have a material effect on Lifestyle's combined financial
position, results of operations and cash flows in the future.
10
<PAGE>
LIFESTYLE FITNESS OF SPRINGFIELD, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INTERIM DATA IS UNAUDITED)
9. SUBSEQUENT EVENTS:
(a) On May 1, 1998, Lifestyle refinanced its line of credit by converting it
into a term loan with the same bank. The term loan bears interest at the
bank's prime rate plus 1/2% per annum (9% at May 1, 1998), payable in 35
monthly principal installments of $6,100 plus interest commencing on May 30,
1998 with a final payment on April 30, 2001. Repayment of the term loan is
guaranteed by the stockholders of Lifestyle.
(b) During January 1998, Lifestyle entered into a note payable for $50,000 with
the Consultant. The note bears interest at 15% per annum, payable in twelve
equal monthly installments of principal and interest amounting to $4,513.
(c) On April 29, 1998, Lifestyle Fitness of West Caldwell, Inc. was formed by
the same stockholders of Lifestyle for the purpose of developing a new club.
On July 1, 1998, Lifestyle entered into a fifteen year non-cancelable
operating lease for its club in West Caldwell, New Jersey. The lease
includes escalating rentals plus escalation charges and a two year renewal
option. The future minimum annual rentals will be $249,698 for years one
through five, $291,068 for years six through ten, and $336,870 for years
eleven through fifteen.
10. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED):
BASIS OF PRESENTATION
The interim financial statements are unaudited and reflect adjustments,
consisting of only normal recurring accruals, which are, in the opinion of
Lifestyle's management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating results
for any interim period are not necessarily indicative of the results for the
full year.
STATEMENT OF CASH FLOWS
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------
JUNE 30, 1998
-------------------------
<S> <C>
Cash paid during the period for:
Interest......................................................... $ 28,694
--------
--------
Taxes............................................................ $ 31,989
--------
--------
Noncash investing activities:
Fixed assets additions........................................... $ 50,000
--------
--------
</TABLE>
11
<PAGE>
Item 7(b)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial data gives
effect to the acquisition of Lifestyle Fitness of Springfield, Inc. and
Affiliates (collectively, "Lifestyle"), which occurred on August 6, 1998
pursuant to various Asset Purchase Agreements (collectively the "Lifestyle
Acquisition").
The unaudited pro forma condensed combined balance sheet reflects the
historic financial position of the Company pro forma for the effects of the
Lifestyle Acquisition, as if it had occurred on May 31, 1998.
The unaudited pro forma condensed combined statement of operations
combine the historical operating results of Town Sports International, Inc.
and Subsidiaries (the "Company") and Lifestyle for the year ended May 31,
1998 as if the Lifestyle Acquisition had occured on June 1, 1997.
The unaudited pro forma condensed combined financial data does not
reflect cost savings, synergies or other financial benefits which may be
achieved from the acquisition of Lifestyle except for the net effect of the
cancellation of a consulting contract, nor do they purport to be indicative
of the operating results or the financial position that would have been
realized had the Lifestyle Acquisition been consummated as of the date or for
the period for which the pro forma data is presented. The unaudited pro forma
adjustments described in the notes are based upon current preliminary
estimates and contain assumptions that the Company's management believe are
reasonable in such circumstances.
The unaudited pro forma condensed combined financial data is based on and
should be read in conjunction with the Company's Annual Report on Form 10-K
for the year ended May 31, 1998, previously filed with the Securities and
Exchange Commission, and the combined financial statements of Lifestyle
included in this report.
The following pro forma financial data is provided:
1. Unaudited pro forma condensed combined balance sheet as of May 31, 1998.
2. Unaudited pro forma condensed combined statement of operations for the
year ended May 31, 1998.
3. Unaudited notes to pro forma condensed combined financial data.
12
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT MAY 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THE THE
COMPANY LIFESTYLE PRO FORMA COMPANY
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) NOTE PRO FORMA
------------ ------------- -------------- ---- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............ $ 22,997 $ 102 $ (4,352) (3) $ 18,747
Accounts receivable and other current
assets............................. 1,770 26 (26) (4) 1,770
------------ ------------- -------------- --------------
Total current assets............. 24,767 128 (4,378) 20,517
Fixed assets, net...................... 54,518 1,577 263 (5) 56,358
Intangible assets, net................. 19,923 8,710 (6) 28,633
Deferred tax asset..................... 7,159 7,159
Deferred membership costs.............. 4,933 1,150 (1,150) (4) 4,933
Other assets........................... 677 180 (180) (4) 677
------------ ------------- -------------- --------------
Total assets..................... $111,977 $ 3,035 $ 3,265 $118,277
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities:
Current portion of long-term debt and
capital lease obligations.......... $ 2,036 $ 102 $ (102) (4) $ 2,036
Accounts payable and accrued
expenses........................... 10,442 449 (449) (4) 10,442
Deferred revenue..................... 6,391 2,473 (2,473) (4) 6,391
------------ ------------- -------------- --------------
Total current liabilities........ 18,869 3,024 (3,024) 18,869
Long term debt and capital lease
obligations.......................... 86,253 147 153 (7) 86,553
Credit Facility........................ 6,000 (8) 6,000
Deferred lease liabilities............. 9,298 522 (522) (4) 9,298
Deferred revenue and other
liabilities.......................... 2,664 446 (446) (4) 2,664
------------ ------------- -------------- --------------
Total liabilities................ 117,084 4,139 2,161 123,384
------------ ------------- -------------- --------------
Stockholders' deficit:
Preferred Stock...................... 18,900 18,900
Common Stock......................... 1 86 (86) (4) 1
Paid-in capital...................... 3,994 3,994
Unearned compensation................ (2,546) (2,546)
Accumulated deficit ................. (25,456) (1,190) 1,190 (4) (25,456)
------------ ------------- -------------- --------------
Total stockholders' deficit..... (5,107) (1,104) 1,104 (5,107)
------------ ------------- -------------- --------------
Total liabilities and
stockholders' deficit.......... $111,977 $ 3,035 $ 3,265 $118,277
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
</TABLE>
See unaudited notes to pro forma condensed combined financial data
13
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
LIFESTYLE
THE --------------------------- THE
COMPANY HISTORICAL PRO FORMA COMPANY
HISTORICAL 6/1-5/31(9) ADJUSTMENTS NOTE PRO FORMA
---------- ----------- ----------- ---- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Club operations.................... $79,719 $ 7,687 $87,406
Other.............................. 2,631 2,631
---------- ----------- ----------
82,350 7,687 90,037
---------- ----------- ----------
Operating expenses:
Payroll and related................ 33,309 2,657 $ 213 (10) 36,179
Club operating..................... 25,858 1,835 27,693
General and administrative......... 5,825 1,444 (490) (10) 6,779
Depreciation and amortization...... 7,736 409 977 (11) 9,122
Compensation expense in
connection with stock
options.......................... 1,442 1,442
---------- ----------- ------------ ----------
74,170 6,345 700 81,215
---------- ----------- ------------ ----------
Operating income............... 8,180 1,342 (700) 8,822
Interest expense, net of interest
income............................. 5,902 63 614 (12) 6,579
---------- ----------- ------------ ----------
Income (loss) before
provision (benefit) for
corporate income taxes....... 2,278 1,279 (1,314) 2,243
Provision (benefit) for corporate
income taxes....................... 1,131 54 (72) (13) 1,113
---------- ----------- ------------ ----------
Net income (loss) before
extraordinary item and
cumulative effect of
change in accounting
policy....................... 1,147 1,225 (1,242) 1,130
Extraordinary loss from early
extinguishment of debt, net of
income taxes....................... (782) (782)
---------- ----------- ------------ ----------
Income (loss) before cumulative
effect of change in accounting
policy............................. 365 1,225 (1,242) 348
Cumulative effect on prior years
of a change in accounting
policy, net of income taxes........ (88) (88)
---------- ----------- ------------ ----------
Net income (loss).................... $ 277 $ 1,225 $(1,242) $ 260
---------- ----------- ------------ ----------
---------- ----------- ------------ ----------
</TABLE>
See unaudited notes to pro forma condensed combined financial data
14
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(1) The historical balance sheet of Lifestyle as of May 31, 1998 has been
derived from unaudited financial information not included herein.
(2) On August 6, 1998, the Company acquired certain assets of Lifestyle.
Lifestyle operated six fitness clubs in New Jersey and is currently
developing a seventh club. For the purpose of preparing the unaudited pro
forma condensed combined balance sheet, the Lifestyle Acquisition has been
accounted for in accordance with the purchase method whereby the purchase
price of $10.6 million has been allocated to the tangible assets acquired on
the basis of their respective estimated fair values. The excess of the
purchase price over the tangible assets acquired has been allocated to the
acquired membership lists and goodwill, on a club-by-club basis. The
acquired membership lists are amortized over two years while goodwill is
amortized over the lives of the respective leases. The table below
summarizes the purchase price and the estimated allocation thereof.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Computation of the purchase price:
Cash and cash equivalents............................................................ $ 4,000
Borrowings under the Credit Facility................................................. 6,000
Notes payable to seller.............................................................. 300
Transaction costs.................................................................... 250
---------------
Total purchase price............................................................. $ 10,550
---------------
---------------
Estimated allocation of the purchase price:
Tangible assets acquired............................................................. $ 1,840
Membership lists..................................................................... 825
Goodwill............................................................................. 7,885
---------------
$ 10,550
---------------
---------------
</TABLE>
(3) Reflects the $4.0 million of purchase price paid from cash and cash
equivalents, as well as transaction costs of $250,000 and $102,000 of cash
and cash equivalents on Lifestyle's balance sheet, which was not acquired by
the Company.
15
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)
(4) Adjustments to eliminate Lifestyle's assets not acquired and liabilities and
stockholders' deficit not assumed in the Lifestyle Acquisition.
(5) Represents the allocation of the purchase price to the fair values of the
fixed assets acquired.
(6) Represents an increase in intangible assets resulting from acquired
membership lists of $825,000 and goodwill of $7.9 million.
(7) Includes the notes payable to seller of $300,000 reduced by $147,000 of long
term debt not assumed in the Lifestyle Acquisition.
(8) Reflects borrowings under the Credit Facility to finance the purchase price.
16
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)
(9) The information presented as "Lifestyle Historical" reflects results for
the year ended May 31, 1998. To reflect Lifestyle's results on a fiscal year
ended May 31, 1998, consistent with the Company's fiscal year, the following
adjustments were made:
<TABLE>
<CAPTION>
LIFESTYLE LESS, FIVE PLUS, FIVE
FISCAL YEAR MONTHS MONTHS LIFESTYLE
ENDED ENDED ENDED HISTORICAL
12/31/97(a) 5/31/97(b) 5/31/98(b) 6/1/97-5/31/98
----------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Club operations..................................... $ 6,749 $ 2,563 $ 3,501 $ 7,687
----------- ----------- ----------- -------
Operating expenses:
Payroll and related................................ 2,614 1,014 1,057 2,657
Club operating..................................... 1,672 618 781 1,835
General and administrative......................... 1,466 645 623 1,444
Depreciation and amortization...................... 381 148 176 409
----------- ----------- ----------- -------
6,133 2,425 2,637 6,345
----------- ----------- ----------- -------
Operating income............................... 616 138 864 1,342
----------- ----------- ----------- -------
Interest expense..................................... 51 12 24 63
----------- ----------- ----------- -------
Income before provision for corporate
income taxes................................. 565 126 840 1,279
Provision for corporate income taxes........... 32 3 25 54
----------- ----------- ----------- -------
Net income..................................... $ 533 $ 123 $ 815 $ 1,225
----------- ----------- ----------- -------
----------- ----------- ----------- -------
</TABLE>
- ------------------------
(a) Derived from the audited combined financial statements of Lifestyle
for the year ended December 31, 1997 (which are included elsewhere
herein).
(b) Derived from unaudited financial information not provided herein.
(10) The increase in payroll and related and the decrease in general and
administrative reflect the cancellation of a consulting contract between
Lifestyle and a related party of Lifestyle net of the estimated cost of
area operations and sales managers.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fees paid to consultant..................................... $ 490
Estimated cost, including benefits, of the managers......... (213)
</TABLE>
17
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)
(11) The increase in depreciation and amortization expense represents (i)
depreciation of the fair value adjustment to fixed assets, and (ii) the
amortization of acquired membership lists and goodwill of $825,000 and $7.8
million, respectively. Fixed assets are amortized over their respective
useful lives which range from five to 15 years, and acquired membership
lists are amortized over a two year period while goodwill is amortized over
the lives of the acquired clubs' leases of 15 years.
<TABLE>
<CAPTION>
FIXED MEMBERSHIP
ASSETS LISTS GOODWILL TOTAL
--------- ------------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost.......................................... $ 263 $ 825 $ 7,885
Weighted average life......................... 7 years 2 years 15 years
--------- ------------- ----------
Depreciation and amortization expense......... $ 38 $ 413 $ 526 $ 977
--------- ------------- ---------- ---------
--------- ------------- ---------- ---------
</TABLE>
(12) The increase in net interest expense represents the financing of the
purchase of $10.6 million, which includes:
(i) $6.0 million financed by borrowings under the Company's Credit Facility
assuming an annual interest rate of 8.0%,
(ii) $4.3 million financed by cash and cash equivalents assuming reduced
interest income at 4.0%,
(iii) $300,000 financed by the seller at an annual interest rate of 9.0% and
(iv) Elimination of Lifestyle's interest expense.
The components of the interest expense adjustment are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Credit Facility.............................................................. $ 480
Reduction in cash and cash equivalents....................................... 170
Seller finance............................................................... 27
Elimination of Lifestyle's interest expense.................................. (63)
-----
$ 614
-----
-----
</TABLE>
18
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL DATA (CONTINUED)
(13) Income taxes have been provided for based on the Company's effective tax
rate of 50.0%.
<TABLE>
<CAPTION>
LIFESTYLE
-------------
<S> <C>
(IN THOUSANDS)
Income before taxes................................................ $ 1,279
Pre tax adjustments................................................ (1,314)
-------------
(35)
Effective tax rate................................................. 50.0%
-------------
(18)
Taxes included in historical operating results..................... (54)
-------------
Adjustment for taxes............................................... $ (72)
-------------
-------------
</TABLE>
19
