<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended August 31, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from ________________ to
__________________.
Commission file number 333-40907
TOWN SPORTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-2749906
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(Address, zip code, and telephone number, including
area code, of registrants principal executive office.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 1,015,714.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) PAGE
a) Condensed Consolidated Balance Sheets
as of May 31, 1998 and August 31, 1998 1
b) Condensed Consolidated Statements of Operations
for the three months ended August 31, 1997
and 1998. 2
c) Condensed Consolidated Statements of Cash Flow
for the three months ended August 31, 1997 and 1998 3
d) Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 10
Exhibit Index 11
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 1998 and August 31, 1998
All figures $'000, except share data
<TABLE>
<CAPTION>
May 31, August 31
------- ---------
ASSETS: 1998 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,997 $ 5,874
Accounts receivable 420 429
Inventory 673 887
Prepaid expenses and other current assets 677 805
-------- --------
Total current assets 24,767 7,995
-------- --------
Fixed assets, net of accumulated depreciation of $17,664 and
$19,227 at May 31 and August 31, 1998 54,518 68,409
Intangible assets, net of accumulated amortization of $2,489 and
$3,894 at May 31 and August 31, 1998 19,923 37,524
Deferred tax asset 7,159 7,755
Deferred membership costs 4,933 5,791
Other assets 677 1,028
-------- --------
Total assets $111,977 $128,502
======== ========
LIABILITIES and STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,036 $ 5,112
Accounts payable 2,451 3,180
Accrued expenses 7,869 7,767
Corporate income taxes payable 122 409
Deferred revenue 6,391 7,496
-------- --------
Total current liabilities 18,869 23,964
Long-term debt and capital lease obligations 86,253 97,178
Deferred lease liabilities 9,298 10,014
Deferred revenue 1,890 2,203
Other liabilities 774 677
-------- --------
Total liabilities 117,084 134,036
-------- --------
Stockholders' deficit:
Series A preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares, 153,637 shares
issued and outstanding at May 31 and August 31, 1998 18,736 19,360
Series B preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares, 3,857 shares issued and
outstanding at May 31 and August 31, 1998 164 170
Class A voting common stock, $0.001 par value; authorized
1,150,000 shares, 1,015,714 issued and
outstanding at May 31 and August 31, 1998 1 1
Paid-in capital 3,994 3,743
Unearned compensation (2,546) (2,546)
Accumulated deficit (25,456) (26,262)
-------- --------
Total stockholders' deficit (5,107) (5,534)
-------- --------
Total liabilities and stockholders' deficit $111,977 $128,502
======== ========
</TABLE>
See notes to the condensed consolidated financial statements
1
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of OPERATIONS
For the three months ended August 31, 1997 and 1998
All figures $'000, except share data
<TABLE>
<CAPTION>
Three months ended
------------------
August 31
---------
1997 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Club operations $16,528 $28,015
Management fees and other 670 716
------- -------
17,198 28,731
------- -------
Operating expenses
Payroll and related 7,035 11,578
Club operating 5,230 9,510
General and administrative 1,064 1,836
Depreciation and amortization 1,589 3,610
Compensation expense in connection with stock options 160 174
------- -------
15,078 26,708
------- -------
Operating income 2,120 2,023
Interest expense, net of interest income of $29 in 1997
and $147 in 1998 1,144 2,301
------- -------
Income (loss) before provision (benefit) for corporate income taxes 976 (278)
Provision (benefit) for corporate income taxes 450 (102)
------- -------
Net income (loss) 526 (176)
Accreted dividends on preferred stock (538) (630)
------- -------
Net loss attributable to common stockholders $ (12) $ (806)
======= =======
</TABLE>
See notes to the condensed consolidated financial statements
2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOW
For the three months ended August 31, 1997 and 1998
All figures $'000, except share data
<TABLE>
<CAPTION>
Three months ended
------------------
August 31
---------
1997 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 526 $ (176)
------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,589 3,610
Compensation expense in connection with stock options 160 174
Noncash rental expense, net of noncash rental income 486 708
Share of net income in affiliated companies (65) (73)
Amortization of debt issuance costs 78 153
Change in certain working capital components (1,387) 265
Increase in deferred tax asset (253) (596)
Increase in deferred membership costs (305) (858)
Other (10) (30)
------- --------
Total adjustments 293 3,353
------- --------
Net cash provided by operating activities 819 3,177
------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired businesses (1,303) (7,437)
Acquisition of businesses (2,170) (22,812)
Intangible and other assets (343)
------- --------
Net cash used in investing activities (3,473) (30,592)
------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings, net of expenses of issuance 1,587 10,900
Repayments of borrowings (699) (433)
Expenses of preparation of stock issuance (175)
------- --------
Net cash provided by financing activities 888 10,292
------- --------
Net increase in cash and cash equivalents (1,766) (17,123)
Cash and cash equivalents at beginning of period 2,468 22,997
------- --------
Cash and cash equivalents at end of period $ 702 $ 5,874
======= ========
Summary of the change in certain working capital components, net
of effects of acquired businesses:
Increase in accounts receivable $ (64) $ (9)
Increase in inventory (76) (214)
Increase in prepaid expenses and other current assets 31 (201)
Decrease in accounts payable (1,494) (665)
Decrease in accrued expenses (704) (351)
Increase in corporate income taxes 603 287
Increase in deferred revenue 317 1,418
------- --------
Net changes in working capital $(1,387) $ 265
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 1,465 $ 155
Taxes 99 187
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts
payable 536 1,394
</TABLE>
See notes to the condensed consolidated financial statements
3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998 AND AUGUST 31, 1998
All figures $'000
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The condensed consolidated financial statements
should be read in conjunction with the Company's May 31, 1998 consolidated
financial statements and notes thereto, included on Form 10-K. The year-end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. Certain information and footnote disclosures which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The Company believes that the disclosures made are adequate to
make the information presented not misleading. The information reflects all
adjustments which, in the opinion of Management, are necessary for a fair
presentation of the financial position and results of operations for the interim
periods set forth herein. All such adjustments are of a normal and recurring
nature. The results for the three-month period ended August 31, 1998, are not
necessarily indicative of the results for the entire fiscal year ending May 31,
1999.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
May 31, August 31,
1998 1998
---- ----
(In Thousands)
<S> <C> <C>
Series B 9 3/4% Senior Notes,
due 2004 $85,000 $ 85,000
Borrowings under the line of credit 11,000
Capital lease obligations 1,463 1,315
Notes payable for acquired businesses 1,826 4,975
------- --------
88,289 102,290
Less, Current portion due within
one year 2,036 5,112
------- --------
Long-term portion $86,253 $ 97,178
======= ========
</TABLE>
4
<PAGE>
As of August 31, 1998, the Company has a line of credit (the "Credit Facility"),
with its principal bank for direct borrowings and letters of credit of up to
$25.0 million. The line of credit carries interest at the Company's option,
based upon the Eurodollar borrowing rate plus 2.50% (8.13% as of August 31,
1998) or the bank's prime rate plus 1.50%, as defined. There were outstanding
borrowings against this line of credit of $11.0 million, as of August 31, 1998
and outstanding letters of credit issued of $2.0 million. The unutilized
portion of the line of credit as of August 31, 1998, was $12.0 million. This
line of credit expires on October 15, 2002.
Certain credit facilities contain various covenants including interest coverage
(as defined) and a leverage ratio as well as restrictions on the payment of
dividends.
3. ASSET ACQUISITIONS AND COMMITMENTS
During the quarter ended August 31, 1998, the Company executed fourteen
purchase agreements thereby acquiring fourteen fitness clubs, including the
acquisition of the Lifestyle Fitness of Springfield, Inc, and its affiliates,
as discussed below. The aggregate purchase prices totaled $26.2 million
which included $22.8 million payable at closing and the issuance of notes
payable totaling $3.4 million. In connection with these fitness clubs as well
as certain future facilities, the Company entered into noncancelable
operating leases expiring on or before May 31, 2014. Future minimum rental
payments required under these leases total approximately $55.0 million.
The table below summarizes the purchase price allocation to assets acquired:
<TABLE>
Allocation of purchase prices: (In Thousands)
<S> <C>
Fixed Assets $ 7,435
Membership lists 2,494
Goodwill 15,632
Other net assets acquired 685
-------
Total allocation of purchase prices $26,246
-------
</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 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.
On August 6, 1998 the Company acquired Lifestyle Fitness of Springfield, Inc.
and its Affiliates (collectively referred to herein as "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 $10.6
million, which included $10.0 million of cash and notes payable of $300,000.
Transaction costs amounted to $300,000. 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 Three Months
Ended August 31
1997 1998
---- ----
(In Thousands)
<S> <C> <C>
Revenues $18,890 $30,058
Pro forma net loss to common stockholders (160) (821)
</TABLE>
This unaudited pro forma 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 Lifestyle had been a single entity during the
first quarter of fiscal 1998 or 1999, nor is it indicative of the results of
operations which may occur in the future. Anticipated efficiencies from the
consolidation of Lifestyle and the Company have been excluded from the amounts
included in the pro forma summary presented above.
5
<PAGE>
4. SUBSEQUENT EVENTS
In September 1998, the Company acquired the assets of a fitness club. The
purchase price totaled $1.6 million which included $1.5 million payable at
closing and issuance of a note of $100,000. In connection with this club and
future club facilities, the Company entered into noncancelable operating leases
expiring on or before May 31, 2014. Future minimum rental payments required
under these leases total approximately $14.2 million.
5. CONTINGENCIES
A claim has been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. A further claim was filed in New York State Supreme Court in April
1998. The Company has filed a motion to dismiss the state lawsuit, which is
presently pending. The plaintiffs seek an unspecified amount of damages,
including the Company's profits attributable to the use of the photographs.
Based on the advice of outside counsel, management believes that it is unlikely
that the outcome of this matter will have a materially adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company. Management is vigorously contesting this claim.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 August 31,
1998, the Company operated 65 clubs that collectively served over 175,000
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 serves. 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, in fiscal 1998, 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 New York Sports Club ("NYSC")
brand name. The Company is the largest fitness club operator in Manhattan with
23 locations and operates a total of 52 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
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 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.
6
<PAGE>
Results of Operations
The following table sets forth certain operating data as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
August 31
---------------------
1997 1998
Revenue 100.0% 100.0%
------ ------
<S> <C> <C>
Operating expenses
Payroll and related 40.9 40.3
Club operating 30.4 33.1
General and administrative 6.2 6.4
Depreciation and amortization 9.2 12.6
Compensation expense in
connection with stock options 0.9 0.6
---- ----
Operating income 12.4 7.0
Interest expense, net 6.7 8.0
---- ----
Income (loss) before provision
(benefit) for income tax 5.7 (1.0)
Provision (benefit) for income tax 2.6 (0.4)
---- ----
Net income (loss) 3.1 (0.6)
Accreted dividend on preferred
Stock 3.1 2.2
Net loss attributable
to common stockholders 0.0% (2.8)%
==== ====
</TABLE>
Three Months Ended August 31, 1998 Compared to Three Months Ended August 31,
1997
REVENUES. Revenues increased approximately $11.5 million, or 67.1%, to
$28.7 million during the quarter ended August 31, 1998 from $17.2 million in the
quarter ended August 31, 1997. This increase resulted primarily from maturation
of the 14 clubs opened or acquired during fiscal 1998 (approximately $6.0
million) and the 16 clubs opened or acquired in the first quarter of fiscal 1999
(approximately $3.2 million). In addition, revenues increased during the
quarter by $2.3 million at the Company's mature clubs resulting from
increased membership.
OPERATING EXPENSES. Operating expenses increased $11.6 million, or 77.1%,
to $26.7 million in the quarter ended August 31, 1998, from $15.1 million in the
quarter ended August 31, 1997. The increase was primarily due to an 80.2%
increase in total club months operated to 164 in the quarter ended August 31,
1998 from 91 in the quarter ended August 31, 1997, in addition to the following
factors:
Payroll and related increased by $4.5 million, or 64.6% to $11.6 million in
the quarter ended August 31, 1998, from $7.0 million in the quarter ended August
31, 1997. This increase was attributable to the acquisition or opening of 14
clubs in fiscal 1998 and 16 clubs in the first quarter of fiscal 1999.
Club operating increased by $4.3 million or 81.8% to $9.5 million in the
quarter ended August 31, 1998, from $5.2 million in the quarter ended August 31,
1997. This increase is attributable to the acquisition or opening of 14 clubs in
fiscal 1998 and 16 clubs in the first quarter of fiscal 1999.
General and administrative increased by $772,000, or 72.6% to $1.8 million
in the quarter ended August 31, 1998, from $1.1 million, in the quarter ended
August 31, 1997. This increase is attributable to associated expenses as a
result of the Company's expansion, including the expansion of the Company's
corporate office and upgrade of the Company's management information systems.
7
<PAGE>
Depreciation and amortization increased by $2.0 million, or 127.2% to $3.6
million in the quarter ended August 31, 1998, from $1.6 million in the quarter
ended August 31, 1997. This increase is attributable primarily to the increased
fixed assets and intangible assets arising out of new club acquisitions and
openings during the quarter ended August 31, 1998, and a full period of
depreciation and amortization for fixed asset additions, acquisitions or
openings since the quarter ended August 31, 1997. Intangible assets acquired in
the last three quarters of fiscal 1998 and the quarter ended August 31, 1998
totaled $14.0 million and $18.5 million respectively.
Compensation expense in connection with stock options increased $14,000, or
8.8% to $174,000 in the quarter ended August 31, 1998, from $160,000 in the
quarter ended August 31, 1997.
INTEREST EXPENSE, NET. Interest expense increased $1.2 million to $2.3
million during quarter ended August 31, 1998, from $1.1 million in the quarter
ended August 31, 1997. The increased level of interest expense was primarily
due to the issuance of Senior Notes. (See Note 2 to the Condensed Consolidated
Financial Statements.)
PROVISION (BENEFIT)FOR INCOME TAX. The income tax benefit for the quarter
ended August 31, 1998 was $102,000 compared to a tax expense of $450,000 for the
quarter ended August 31, 1997.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $92,000 to $630,000 during the quarter ended August 31, 1998,
from $538,000 in the quarter ended August 31, 1997. This increase is the result
of a compounding feature in the calculation of the accretion of dividends on the
Preferred Stock.
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 existing
clubs.
OPERATING ACTIVITIES. Net cash provided by operating activities for the
quarter ended August 31, 1998 was $3.2 million compared to $819,000 during the
quarter ended August 31, 1997. This increase was primarily due to the maturation
of recently opened or acquired clubs, as well as improved performance in the
Company's mature clubs. Excluding cash and cash equivalents, the Company
normally operates with a working capital deficit because it receives revenue
either (i) during the month services are rendered, or (ii) when paid-in-full 12
months in advance. As a result, the Company has no material accounts
receivable. In addition, because initiation fees are received at enrollment and
are recognized over the estimated average term of membership, the Company
records a deferred revenue liability. 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 $30.6 million and $3.5 million
in capital expenditures and asset acquisitions during the quarters ended August
31, 1998 and 1997, respectively, primarily as a result of the Company's
expansion efforts. The Company estimates that, through May 31, 1999, it will
invest a total of approximately $30.0 million in capital expenditures and asset
acquisitions, which includes $5.0 million that management intends to invest to
maintain and expand certain existing clubs and $1.5 million to further upgrade
its management information systems. This expenditure will be funded by cash flow
generated from operations, available cash and credit facilities.
FINANCING ACTIVITIES. In October 1997, the Company issued the 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 certain restrictive covenants and restrict the payment of
8
<PAGE>
dividends. The Credit Facility notes contain restrictive covenants, including a
leverage ratio and interest coverage ratio and dividend payment restrictions and
is collateralized by all the assets of the Company. As of August 31, 1998,the
Company has approximately $12.0 million available under the current Credit
Facility, which matures in October 2002, and has no scheduled amortization
requirements. The Credit Facility was recently amended to allow for maximum
borrowings of $25.0 million.
Year 2000 Compliance
The Company has implemented a three phase program to identify and resolve
Year 2000 ("Y2K") issues related to the integrity and reliability of its
computerized information systems, computer systems embedded in the machinery
and equipment used in its operations, as well as third party or in-house
developed software. Phase one of the Company's program involved an assessment
of Y2K compliance has been completed. In phase two of the program, the
Company is modifying or replacing all non-compliant hardware systems.
Completion of Phase two is expected by June 1999. Phase three of the program
involves upgrades or replacement of all non-Y2K compliant software and is
also expected to be completed by June 1999.
As of June 30, 1998, the Company has spent approximately $100,000 in addition to
its normal internal information technology costs in connection with its Y2K
program. The Company expects to incur additional costs of $500,000 to complete
phases two and three of the program.
The Company requested documentation regarding Y2K compliance from all of its
suppliers and service providers. As of August 31, 1998, the Company received
confirmations from approximately 70% indicating that they are or will be Y2K
compliant. The Company expects to have further communications with those who
have not responded or have indicated further work was required to achieve Y2K
compliance.
Among other things, the Company's operations depend on the availability of
utility services, principally electricity and reliable performance by
telecommunication services. A substantial disruption in any of these services
due to providers of these services failing to achieve Y2K compliance could have
a significant impact on the Company's financial results depending on the length
and severity of the disruption.
The Company is currently identifying alternatives and will complete a
contingency plan for each of its principal operations by June 1999. The purpose
of the contingency plan is to identify possible alternatives which could be used
in the event of a disruption in the delivery of essential goods or services and
to minimize the effect of such a disruption.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These factors include, among others, the following: general economic
and business conditions; competition; success of operating initiatives,
advertising and promotional efforts; existence of adverse publicity or
litigation; acceptance of new service offerings; changes in business strategy or
plans; quality of management; availability and terms of capital; business
abilities and judgment of personnel; changes in, or the failure to comply with
government regulations; and other factors described in filings of the Company
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
(27) Financial Data Schedule (to be filed electronically).
(b) REPORTS ON FORM 8-K
Date Items
---- -----
August 11, 1998 2
August 26, 1998 7 (a) and (b)
SIGNATURE
Pursuant to requirements 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.
TOWN SPORTS INTERNATIONAL, INC.
(Registrant)
DATE: October 14, 1998 BY: /S/ RICHARD PYLE
----------------------
Richard Pyle
Chief Financial Officer
(principal financial and accounting officer)
DATE: October 14, 1998 BY: /S/ MARK SMITH
-----------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
10
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(27) Financial Data Schedule (to be filed electronically).
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MAY 31, 1998 AND AUGUST 31, 1998, THE
CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF
STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED MAY 31, 1998 AND FOR THE THREE MONTHS
ENDED AUGUST 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 5,874
<SECURITIES> 0
<RECEIVABLES> 429
<ALLOWANCES> 0
<INVENTORY> 887
<CURRENT-ASSETS> 7,995
<PP&E> 87,636
<DEPRECIATION> (19,227)
<TOTAL-ASSETS> 128,502
<CURRENT-LIABILITIES> 23,964
<BONDS> 97,178
0
19,530
<COMMON> 1
<OTHER-SE> (25,065)
<TOTAL-LIABILITY-AND-EQUITY> 128,502
<SALES> 0
<TOTAL-REVENUES> 28,731
<CGS> 0
<TOTAL-COSTS> 26,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,301
<INCOME-PRETAX> (278)
<INCOME-TAX> (102)
<INCOME-CONTINUING> (176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (176)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
