<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 September 30, 1999
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 (IRS 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. 1,014,023.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<TABLE>
<CAPTION>
PAGE
<S> <C>
a) Condensed Consolidated Balance Sheets
as of December 31, 1998 and September 30, 1999.............................................. 1
b) Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1998 and 1999............................. 2
c) Condensed Consolidated Statements of Cash Flow
for the nine months ended September 30, 1998 and 1999....................................... 3
d) Notes to Condensed Consolidated Financial Statements.......................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 11
Item 2. Changes in Securities...................................................................... 11
Item 3. Defaults upon Senior Securities............................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders........................................ 11
Item 5. Other Information.......................................................................... 11
Item 6. Exhibits and Reports on Form 8-K........................................................... 11
SIGNATURES............................................................................................. 12
Exhibit Index.......................................................................................... 13
</TABLE>
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
ALL FIGURES $'000
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------- --------
1998 1999
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $19,154 $33,621
Accounts receivable 628 1,143
Inventory 1,253 926
Prepaid expenses and other current assets 1,205 1,426
-------- --------
Total current assets 22,240 37,116
Fixed assets, net of accumulated depreciation of $22,656 and
$32,803 at December 31, 1998 and September 30, 1999, respectively 81,426 114,321
Intangible assets, net of accumulated amortization of $6,028 and
$11,121 at December 31, 1998 and September 30, 1999, respectively 37,064 39,541
Deferred tax asset 8,570 10,967
Deferred membership costs 7,005 9,637
Other assets 1,111 1,211
-------- --------
Total assets $157,416 $212,793
-------- --------
-------- --------
LIABILITIES and STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations $2,191 $1,875
Accounts payable 3,711 2,343
Accrued expenses and corporate income taxes payable 6,367 11,687
Deferred revenue 9,493 13,287
-------- --------
Total current liabilities 21,762 29,192
Long-term debt and capital lease obligations 87,333 128,966
Deferred lease liabilities 10,791 13,172
Deferred revenue 2,446 3,432
Other liabilities 682 2,149
-------- --------
Total liabilities 123,014 176,911
-------- --------
Redeemable senior preferred stock, $1.00 par value; liquidation value of $40,488
and $44,248 at December 31, 1998 and September 30, 1999, respectively;
authorized 100,000 shares, 40,000 shares issued and outstanding at December
31, 1998 and September 30, 1999 36,735 40,750
-------- --------
Stockholders' deficit:
Series A preferred stock, $1.00 par value; at liquidation value; authorized
200,000 shares, 153,637 shares issued
and outstanding at December 31, 1998 and September 30, 1999 20,351 22,563
Series B preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares, 3,857 and 3,85.5 issued and
outstanding at December 31, 1998, and September 30, 1999, respectively 179 198
Class A voting common stock, $0.001 par value; authorized
2,500,000 shares; 1,015,714 and 1,014,023 issued and outstanding at
December 31, 1998, and September 30, 1999, respectively 1 1
Paid-in capital 7,844 8,386
Unearned compensation (2,546) (2,076)
Accumulated deficit (28,162) (33,940)
-------- --------
Total stockholders' deficit (2,333) (4,868)
-------- --------
Total liabilities and stockholders' deficit $157,416 $212,793
-------- --------
-------- --------
</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 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
ALL FIGURES $'000
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Club operations $29,033 $41,161 $76,399 $114,758
Management fees and other 783 547 2,155 1,720
----------- ----------- ------------ ------------
29,816 41,708 78,554 116,478
----------- ----------- ------------ ------------
Operating expenses:
Payroll and related 11,815 16,154 31,105 45,346
Club operating 10,000 13,690 25,369 39,002
General and administrative 2,314 2,766 6,103 7,596
Depreciation and amortization 3,821 5,465 8,713 15,294
Compensation expense in connection
with options stock options 178 187 1,279 1,036
----------- ----------- ------------ ------------
28,128 38,262 72,569 108,274
----------- ----------- ------------ ------------
Operating Income 1,688 3,446 5,985 8,204
Interest expense 2,424 3,625 6,611 8,149
Interest income (95) (498) (865) (898)
----------- ----------- ------------ ------------
Income (loss) before provision (benefit) for
corporate income taxes (641) 319 239 953
Provision (benefit) for corporate income taxes (267) 165 134 484
----------- ----------- ------------ ------------
Net income (loss) (374) 154 105 469
Accreted dividends on preferred stock (710) (2,103) (1,959) (5,991)
----------- ----------- ------------ ------------
Net loss attributable to common stockholders ($1,084) ($1,949) ($1,854) ($5,522)
=========== ============ ============ ============
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
ALL FIGURES $'000
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $105 $469
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,713 15,294
Compensation expense in connection with stock options 1,279 1,036
Noncash rental expense, net of noncash rental income 2,030 2,381
Share of net income in affiliated companies' (116) (240)
Amortization of debt issuance costs 477 776
Change in certain working capital components 6,098 10,404
Increase in deferred tax asset (807) (2,397)
Increase in deferred membership costs (1,971) (2,632)
Other 64 (27)
-------- --------
Total adjustments 15,767 24,595
-------- --------
Net cash provided by operating activities 15,872 25,064
-------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired businesses (20,981) (42,461)
Acquisition of businesses (39,417) (2,732)
Intangible and other assets (706) (112)
Landlord contributions -- 848
-------- --------
Net cash used in investing activities (61,104) (44,457)
-------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings, net of expenses of issuance 10,352 35,581
Repayments of borrowings (1,947) (1,697)
Repurchase of stock -- (24)
-------- --------
Net cash provided by financing activities 8,405 33,860
-------- --------
Net (decrease) increase in cash and cash equivalents (36,827) 14,467
Cash and cash equivalents at beginning of period 39,660 19,154
-------- --------
Cash and cash equivalents at end of period $2,833 $33,621
-------- --------
-------- --------
Summary of the change in certain working capital components, net of effects of
acquired businesses:
(Increase) decrease in accounts receivable ($433) $199
(Increase) decrease in inventory (185) 327
Decrease in prepaid expenses and other current assets 50 19
Increase in accounts payable and accrued expenses 3,018 5,079
Increase in deferred revenue 3,648 4,780
-------- --------
Net changes in working capital $6,098 $10,404
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Noncash investing activities:
Acquisition of fixed assets included in accounts payable $1,394 $769
Acquisition of equipment financed by sellers or lessors $4,287 $3,005
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(UNAUDITED)
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
& Exchange Commission ("SEC"). The condensed consolidated financial statements
should be read in conjunction with the Company's December 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-and nine-month periods ended September 30,
1999 are not necessarily indicative of the results for the entire fiscal year
ending December 31, 1999.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------- --------
<S> <C> <C>
Series B 9 3/4% Senior Notes, due 2004 $85,000 $125,000
Notes payable for acquired businesses 3,739 4,098
Capital lease obligations 785 1,743
-------- --------
89,524 130,841
Less, Current portion due within
one year 2,191 1,875
-------- --------
Long-term portion $87,333 $128,966
-------- --------
-------- --------
</TABLE>
In June 1999, the Company issued $40.0 million of Series B 9 3/4% Senior Notes
at a price of 98.75%, providing $39.5 million of proceeds to the Company before
expenses relating to the issuance. Expenses related to the issuance amounted to
approximately $3.9 million.
The Company has a line of credit, with its principle 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% or the bank's prime rate plus 1.50%, as defined. There were no outstanding
borrowings against this line of credit as of September 30, 1999 and outstanding
letters of credit issued totaled $1.8 million. The unutilized portion of the
line of credit as of September 30, 1999, was $23.2 million. This line of credit
expires on October 15, 2002.
The line of credit contains various covenants including interest coverage (as
defined) and a leverage ratio as well as restrictions on the payment of
dividends.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
We are one of the two leading owners and operators of fitness clubs in
the Northeast and Mid-Atlantic regions of the United States. As of September 30,
1999, we operated 83 clubs that collectively served approximately 209,000
members. We develop clusters of clubs to serve densely populated major
metropolitan regions in which a high percentage of the population commutes to
work. We service such populations by clustering clubs near the highest
concentrations of our target members' areas of both employment and residence.
Our target member is college-educated, typically between the ages of 20 and 44
and earns an annual income of approximately $50,000.
Our goal is to develop the premier health club network in each of the
major metropolitan regions we enter. We believe that clustering clubs allows us
to achieve strategic operating advantages that enhance our ability to achieve
this goal. In entering new regions, we develop these clusters by initially
opening or acquiring clubs located in the more central urban markets of the
region and then branching out from these urban centers to suburbs and ancillary
communities. Capitalizing on this clustering of clubs, as of September 30, 1999,
approximately half of our members participated in a membership plan that allows
unlimited access to all of our clubs for a higher membership fee.
We have executed this strategy successfully in the New York region
through the network of clubs we operate under our New York Sports Clubs ("NYSC")
brand name. We are the largest fitness club operator in Manhattan with 26
locations and operate a total of 65 clubs under the NYSC name within a defined
radius of New York City. We are in the process of more fully developing clusters
within a smaller radius surrounding Washington, DC under our Washington Sports
Clubs ("WSC") brand name and have begun establishing similar clusters
surrounding Boston and Philadelphia under our Boston Sports Clubs ("BSC") and
Philadelphia Sports Clubs ("PSC") brand names, respectively. We employ localized
brand names for our clubs to create an image and atmosphere consistent with the
local community, and to foster the recognition as a local network of quality
fitness clubs rather than a national chain.
Our operating and selling expenses are comprised of both fixed and
variable costs. The fixed costs include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commissions, advertising and supplies. As clubs mature and increase their
membership base, fixed costs are typically spread over an increasing revenue
base and operating margins tend to improve.
HISTORICAL CLUB GROWTH
The following table sets forth our club growth during each of the
quarters in 1998 and each of the three quarters ended September 30, 1999.
<TABLE>
<CAPTION>
1998 1999
--------------------------------------- ------------------------------------
Q1 Q2(A) Q3 Q4 TOTAL Q1 Q2 Q3 TOTAL
-- ----- -- -- ----- -- -- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Clubs at beginning
of period 40 43 56 66 40 69 74 79 69
Greenfield clubs 0 2 1 2 5 4 4 3 11
Acquired clubs 3 11 9 1 24 2 1 1 4
Relocated clubs 0 0 0 0 0 (1) 0 0 (1)
--- --- --- --- --- ----- --- --- ----
Clubs at end of
period 43 56 66 69 69 74 79 83 83
== == == == == == == == ==
Number of managed
clubs included at
end of period 5 4 4 4 4 4 4 4 4
</TABLE>
(a) In addition, in the second quarter of 1998 we purchased a club we previously
managed.
5
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1998 1999 1998 1999
Revenues:
Club operations 97.4% 98.7% 97.3% 98.5%
Management fees and other 2.6% 1.3% 2.7% 1.5%
---------- ---------- ------------ -----------
100.0% 100.0% 100.0% 100.0%
---------- ---------- ------------ -----------
Operating expenses:
Payroll and related 39.6% 38.8% 39.6% 38.9%
Club operating 33.5% 32.8% 32.3% 33.6%
General and administrative 7.8% 6.6% 7.8% 6.5%
Depreciation and amortization 12.8% 13.1% 11.1% 13.1%
Compensation expense in connection with stock options 0.6% 0.4% 1.6% 0.9%
---------- ---------- ------------ -----------
94.3% 91.7% 92.4% 93.0%
---------- ---------- ------------ -----------
Operating income 5.7% 8.3% 7.6% 7.0%
Interest expense 8.1% 8.7% 8.4% 7.0%
Interest income (0.3%) (1.2%) (1.1%) (0.8%)
---------- ---------- ------------ -----------
Income (loss) before provision (benefit) for corporate
income taxes (2.1%) 0.8% 0.3% 0.8%
Provision (benefit) for corporate income taxes (0.9%) 0.4% 0.2% 0.4%
---------- ---------- ------------ -----------
Net income (loss) (1.2%) 0.4% 0.1% 0.4%
Accreted dividends on preferred stock (2.4%) (5.0%) (2.5%) (5.1%)
---------- ---------- ------------ -----------
Net loss attributable to common stockholders (3.6%) (4.6%) (2.4%) (4.7%)
========== ========== ============ ===========
</TABLE>
6
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Revenues increased approximately $11.9 million, or 39.9%, to
$41.7 million during the quarter ended September 30, 1999 from $29.8 million in
the quarter ended September 30, 1998. This increase resulted primarily from the
continuing maturation of the 30 clubs opened or acquired during calendar 1998
(approximately $5.0 million) and the fifteen clubs opened or acquired in the
first nine months of 1999 (approximately $3.2 million). In addition, revenues
increased 16.8% at the clubs opened or acquired prior to calendar 1998
(approximately $3.7 million).
OPERATING EXPENSES. Operating expenses increased $10.1 million, or
36.0%, to $38.3 million in the quarter ended September 30, 1999, from $28.1
million in the quarter ended September 30, 1998. The increase was primarily due
to $8.1 million expenses associated with clubs added in calendar 1998 and 1999.
Payroll and related increased by $4.3 million, or 36.7% to $16.2
million in the quarter ended September 30, 1999, from $11.8 million in the
quarter ended September 30, 1998. The increase was primarily due to the 34.9%
increase in total months of club operations to 236 in the quarter ended
September 30, 1999 from 175 in the quarter ended September 30, 1998 and the
related increases in headcount.
Club operating increased by $3.7 million or 36.9% to $13.7 million in
the quarter ended September 30, 1999, from $10.0 million in the quarter ended
September 30, 1998. The increase was primarily due to a 34.9% increase in total
months of club operations to 236 in the quarter ended September 30, 1999 from
175 in the quarter ended September 30, 1998.
General and administrative increased by $452,000, or19.5% to $2.8
million in the quarter ended September 30, 1999, from $2.3 million, in the
quarter ended September 30, 1998. This increase is attributable to expenses
associated with our expansion, including the expansion of our corporate office,
employee recruitment expenses and increases in voice and data communication
expenses. In March 1999 we moved our membership billing processing center to a
purpose-built location separate from our corporate office.
Depreciation and amortization increased by $1.6 million, or 43.0% to
$5.5 million in the quarter ended September 30, 1999, from $3.8 million in the
quarter ended September 30, 1998. This increase is attributable primarily to a
full period of depreciation and amortization for fixed asset additions,
acquisitions or openings during the quarter ended September 30, 1998 and the
increased fixed and intangible assets arising out of new club acquisitions and
openings subsequent to September 30, 1998.
Compensation expense in connection with stock options increased $9,000
or 5.1% to $187,000 for the quarter ended September 30, 1999 from $178,000 in
the quarter ended September 30, 1998.
INTEREST EXPENSE. Interest expense increased $1.2 million to $3.6
million during the quarter ended September 30, 1999, from $2.4 million in the
quarter ended September 30, 1998. This increase was primarily due to the $40
million Senior Note offering which was completed in June 1999.
INTEREST INCOME. Interest income increased $403,000 to $498,000 during
the quarter ended September 30, 1999 from $95,000 in the quarter ended September
30, 1998. The increased level of interest income was primarily due to higher
cash on hand during the quarter.
PROVISION (BENEFIT) FOR CORPORATE INCOME TAXES. The income tax
provision for the quarter ended September 30, 1999 was $165,000 compared to an
income tax benefit of $267,000 for the quarter September 30, 1998.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on preferred
stock increased $1.4 million to $2.1 million during the quarter ended September
30, 1999, from $710,000 in the quarter ended September 30, 1998. This increase
is primarily a result of the accreted dividends on the $40.0 million redeemable
senior preferred stock which was issued in November 1998.
7
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. Revenues increased approximately $37.9 million, or 48.3%, to
$116.5 million during nine months ended September 30, 1999 from $78.6 million
for the nine months ended September 30, 1998. This increase resulted primarily
from the continuing maturation of the 30 clubs opened or acquired during
calendar 1998 (approximately $21.8 million) and the fifteen clubs opened or
acquired in the first nine months of 1999 (approximately $5.0 million). In
addition, revenues increased 17.2% during the quarter at the clubs opened or
acquired prior to calendar 1998 (approximately $11.1 million).
OPERATING EXPENSES. Operating expenses increased $35.7 million, or
49.2%, to $108.3 million in the nine months ended September 30, 1999, from $72.6
million in the nine months ended September 30, 1998. The increase was primarily
due to $30.3 million of expenses associated with clubs added in calendar 1998
and 1999.
Payroll and related increased by $14.2 million, or 45.8% to $45.3
million for the nine months ended September 30, 1999, from $31.1 million for the
nine months ended September 30, 1998. The increase was primarily due to a 52.6%
increase in total months of club operations to 653 for the nine months ended
September 30, 1999 from 428 for the nine months ended September 30, 1998 and the
related increase in headcount.
Club operating increased by $13.6 million or 53.7% to $39.0 million for
the nine months ended September 30, 1999, from $25.4 million for the nine months
ended September 30, 1998. The increase was primarily due to a 52.6% increase in
total months of club operations to 653 for the nine months ended September 30,
1999 from 428 for the nine months ended September 30, 1998.
General and administrative increased by $1.5 million, or 24.5% to $7.6
million for the nine months ended September 30, 1999, from $6.1 million, for the
nine months ended September 30, 1998. This increase is attributable to expenses
associated with our expansion, including the expansion of our corporate office,
employee recruitment expenses and increases in voice and data communication
expenses. In March 1999 we moved our membership billing processing center to a
purpose-built location separate from our corporate office.
Depreciation and amortization increased by $6.6 million, or 75.5% to
$15.3 million for the nine months ended September 30, 1999, from $8.7 million
for the nine months ended September 30, 1998. This increase is attributable
primarily to a full period of depreciation and amortization for fixed asset
additions, acquisitions or openings during the nine months ended September 30,
1998 and the increased fixed and intangible assets arising out of new club
acquisitions and openings subsequent to September 30, 1998.
Compensation expense in connection with stock options decreased
$243,000 or 19.0% to $1.0 million for the nine months ended September 30, 1999
from $1.3 million for the nine months ended September 30, 1998. This decrease is
principally due to less options vesting in the nine months ended September 30,
1998 compared to the same period in 1998.
INTEREST EXPENSE. Interest expense increased $1.5 million to $8.1
million for the nine months ended September 30, 1999, from $6.6 million for the
nine months ended September 30, 1998. This increase was primarily due to the $40
million Senior Note offering which was completed in June of 1999.
INTEREST INCOME. Interest income increased $33,000 to $898,000
for the nine months ended September 30, 1999 from $865,000 for the nine months
ended September 30, 1998.
PROVISION FOR CORPORATE INCOME TAXES. The income tax provision for the
nine months ended September 30, 1999 was $484,000 compared to a tax provision of
$134,000 for the nine months ended September 30, 1998.
8
<PAGE>
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on preferred
stock increased $4.0 million to $6.0 million for the nine months ended September
30, 1999, from $2.0 million for the nine months ended September 30, 1998. This
increase is primarily a result of the accreted dividends on the $40.0 million
redeemable senior preferred stock which was issued in November 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity needs through cash from
operations and various borrowing arrangements. Principal liquidity needs have
included the acquisition and development of new clubs, debt service requirements
and other capital expenditures necessary to maintain existing clubs.
OPERATING ACTIVITIES. Net cash provided by operating activities for the
nine months ended September 30, 1999 was $25.1 million compared to $15.9 million
for the nine months ended September 30, 1998, an increase of $9.2 million.
Excluding cash and cash equivalents, we normally operate with a working capital
deficit because we receive dues or fee revenue either (i) during the month
services are rendered, or (ii) when paid-in-full, 12 months in advance. As a
result, we have no material accounts receivable. In addition, because initiation
fees are received at enrollment and are recognized over the estimated average
term of membership, we record a deferred revenue liability. The increase in
working capital deficit improved net cash provided by operating activities by
$4.3 million for the nine months ended 1999 compared to that of the prior year.
We believe that our working capital deficit is an important source of cash flow
from operating activities that we believe will continue to grow as our
membership revenues increase.
INVESTING ACTIVITIES. We invested $42.5 million and $2.7 million in
capital expenditures and business acquisitions, respectively, during the nine
months ended September 30, 1999. We currently estimate total capital expenditure
and asset acquisition requirements for the remaining quarter of 1999 to
approximate $15.0 million.
FINANCING ACTIVITIES. In June 1999 we completed a placement of an
additional $40.0 million of Senior Notes issued at a price of 98.75% providing
$39.5 million of cash proceeds before expenses related to the issuance. Expenses
related to the issuance amounted to approximately $3.9 million.
We have a line of credit with our principal bank for direct borrowings
and letters of credit of up to $25.0 million. The line of credit contains
restrictive covenants, including a leverage ratio and interest coverage ratio
and dividend payment restrictions and is collateralized by all the assets of the
Company. As of September 30, 1999, we have approximately $23.2 million available
under the line of credit, which matures in October 2002, and has no scheduled
amortization requirements.
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. In response to
the concern, TSI has assessed our readiness for the Year 2000 by focusing on
three key areas:
INTERNAL HARDWARE AND SOFTWARE - Networking equipment, server hardware
and network operating systems, desktop computers, internal proprietary
applications, and non-technology related systems.
EXTERNAL VENDOR READINESS - Readiness of key vendors relative to key
TSI business applications.
OPERATIONAL CONTINGENCY PLANNING - Eventuality planning in event of
system unavailability due to both internal and external influences such as
utilities failure or telecommunication loss.
We have implemented a multi-phase program to identify and resolve Year
2000 ("Y2K") issues related to the 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.
9
<PAGE>
Regarding internal hardware and software, we have developed a four (4)
phase program to identify and resolve Y2K issues. Phase one of our program
involved an assessment of Y2K compliance and has been completed. In phase two of
the program, we are modifying, or replacing, and testing all non-Y2K compliant
hardware systems. Phase two focused on all hardware, with emphasis on the
desktop computers, servers and networking equipment. We currently anticipate the
completion of phase two by November 30, 1999. Phase three of the program
includes the replacement or upgrade of all non-compliant software. This process
is 90% complete, and is expected to be entirely complete by mid-December, 1999.
The only applications remaining to be tested are external productivity-based
applications. In acquisitions of new systems, we purchased hardware and software
that are certified to be Year 2000 compliant. Subsequent documentation and
testing of the new systems have confirmed Year 2000 compliance and readiness.
Phase four of the program includes final documentation and validation of all
systems for Y2000 compliance. Included in this phase are key standard operating
procedure and policies and procedures for support systems during the period of
December 30, 1999 through January 15, 2000. Program completion is scheduled for
the end of November 1999.
External vendor readiness has been addressed via requested
documentation regarding Y2K compliance from all of our suppliers and service
providers. As of October 31, 1999, we received confirmations from approximately
95% indicating that they are, or will be, Y2K compliant. We expect to have
further communications with those who have not responded or have indicated
further work was required to achieve Y2K compliance.
Among other things, our 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 adverse impact on our financial results depending on the length
and severity of the disruption. We have completed contingency plans for
approximately 80% of our principal operations and expect to complete the
remainder of the contingency plans by the end of November 1999. The purpose of
these contingency plans is to identify possible alternatives which could be used
in the event of a disruption in the delivery of essential services and to
minimize the effect of such a disruption.
As of September 30 1999 we have spent approximately $400,000 in
addition to our normal internal information technology costs in connection with
our Y2K program. We expect to incur additional costs of $250,000 to complete the
remaining phases of the project.
The estimates and conclusions herein contain forward-looking statements
and are based on our best estimates of future events. Risks to completing the
plan include the availability of resources, our ability to discover and correct
the potential Y2K sensitive problems which could have a serious impact on
specific facilities, and the ability of suppliers to bring their systems into
Y2K compliance.
FORWARD-LOOKING STATEMENTS
Certain statements in this report on Form 10-Q of the Company for the
three month and nine month periods ended September 30, 1999 are forward-looking
statements, including, without limitation, statements regarding future financial
results and performance, and potential sales revenue. These statements are
subject to various risks and uncertainties, many of which are outside our
control, including the level of market demand for our services, competitive
pressures, the ability to continue to integrate acquisitions, 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, we do not
intend to update this information to reflect development or information obtained
after the date hereof and disclaim any legal obligation to the contrary.
10
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.
Financial Data Schedule.
11
<PAGE>
SIGNATURES
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: November 9, 1999 BY: /S/ RICHARD PYLE
--------------------
Richard Pyle
Chief Financial Officer
(principal financial and accounting officer)
DATE: November 9, 1999 BY: /S/ MARK SMITH
--------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
12
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(27.1) Financial Data Schedule (to be filed electronically).
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at September 30, 1999 and the consolidated statement
of operations for the nine months ended September 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,621
<SECURITIES> 0
<RECEIVABLES> 1,248
<ALLOWANCES> (105)
<INVENTORY> 926
<CURRENT-ASSETS> 37,116
<PP&E> 147,124
<DEPRECIATION> (32,803)
<TOTAL-ASSETS> 212,793
<CURRENT-LIABILITIES> 29,192
<BONDS> 0
40,750
22,761
<COMMON> 1
<OTHER-SE> (27,630)
<TOTAL-LIABILITY-AND-EQUITY> 212,793
<SALES> 0
<TOTAL-REVENUES> 116,478
<CGS> 0
<TOTAL-COSTS> 108,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,251
<INCOME-PRETAX> 953
<INCOME-TAX> 484
<INCOME-CONTINUING> 469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
