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 March 31, 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 (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. 1,014,023.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) PAGE
a) Condensed Consolidated Balance Sheets
as of December 31, 1998 and March 31, 1999. 1
b) Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998
and 1999. 2
c) Condensed Consolidated Statements of Cash Flow
for the three months ended March 31, 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 9
Item 2. Changes in Securities 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 9
Exhibit Index 10
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1998 and March 31, 1999
All figures $'000, except share data
<TABLE>
<CAPTION>
December 31 March 31
----------- --------
ASSETS: 1998 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $19,154 16,817
Accounts receivable 628 1,015
Inventory 1,253 1,155
Prepaid expenses and other current assets 1,205 1,441
Total current assets -------- -------
22,240 20,428
-------- -------
Fixed assets, net of accumulated depreciation of $22,656 and
$25,734 at December 31, 1998 and March 31, 1999, respectively 81,426 92,393
Intangible assets, net of accumulated amortization of $6,028 and 37,064 36,816
$7,586 at December 31, 1998 and March 31, 1999, respectively
Deferred tax asset 8,570 9,272
Deferred membership costs 7,005 8,113
Other assets 1,111 1,205
-------- --------
Total assets $157,416 $168,227
======== ========
LIABILITIES and STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations $2,191 $2,324
Accounts payable 3,711 5,292
Accrued expenses and corporate income taxes payable 6,367 10,856
Deferred revenue 9,493 11,579
-------- -------
Total current liabilities 21,762 30,051
Long-term debt and capital lease obligations 87,333 87,505
Deferred lease liabilities 10,791 11,724
Deferred revenue 2,446 3,166
Other liabilities 682 765
-------- -------
Total liabilities 123,014 133,211
-------- -------
Redeemable senior preferred stock, $1.00 par value; liquidation
value of $40,488 and $41,702 at December 31, 1998 and
March 31, 1999 respectively; authorized 100,000 shares,
40,000 shares issued and outstanding at December 31, 1998
and March 31, 1999 36,735 38,034
-------- -------
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 March
31, 1999 20,351 21,064
Series B preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares, 3,857 shares issued and
outstanding at December 31, 1998, and March 31, 1999 179 185
Class A voting common stock, $0.001 par value; authorized
2,500,000 shares, 1,015,714 issued and outstanding at
December 31, 1998, and March 31, 1999 1 1
Paid-in capital 7,844 8,034
Unearned compensation (2,546) (2,546)
Accumulated deficit (28,162) (29,756)
-------- -------
Total stockholders' deficit (2,333) (3,018)
-------- -------
Total liabilities and stockholders' deficit $157,416 168,227
======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1998 and 1999
All figures $'000
Three months ended
------------------
March 31
--------
1998 1999
---- ----
(Unaudited) (Unaudited)
Revenues:
Club operations $21,822 $35,548
Management fees and other 731 591
------- -------
22,553 36,139
------- -------
Operating expenses:
Payroll and related 8,822 13,790
Club operating 6,958 12,532
General and administrative 1,689 2,261
Depreciation and amortization 2,138 4,629
Compensation expense in connection with stock options 184 190
------- -------
19,791 33,402
------- -------
Operating income 2,762 2,737
Interest expense 2,268 2,168
Interest income (499) (250)
------- -------
Income before provision for corporate income taxes 993 819
Provision for corporate income taxes 465 395
------- -------
Net Income 528 424
Accreted dividends on preferred stock (627) (1,933)
------- --------
Net loss attributable to common stockholders ($99) ($1,509)
======= ========
See notes to the condensed consolidated financial statements.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
For the three months ended March 31, 1998 and 1999
All figures $'000, except share data
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
---------
1998 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $528 $424
------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,138 4,629
Compensation expense in connection with stock options 184 190
Noncash rental expense, net of noncash rental income 715 933
Share of net (income) loss in affiliated companies 20 (47)
Amortization of debt issuance costs 157 157
Change in certain working capital components 2,706 6,001
Increase in deferred tax asset (526) (702)
Increase in deferred membership costs (452) (1,108)
Other 5 44
------- --------
Total adjustments 4,947 10,097
------- --------
Net cash provided by operating activities 5,475 10,521
------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired businesses (5,730) (11,371)
Acquisition of businesses (2,975) (1,050)
Intangible and other assets (264) (128)
Landlord contributions - 87
------- --------
Net cash used in investing activities (8,969) (12,462)
------- --------
Cash Flows from Financing Activities:
Repayments of borrowings (712) (396)
------- --------
Net cash used in financing activities (712) (396)
------- --------
Net decrease in cash and cash equivalents (4,206) (2,337)
Cash and cash equivalents at beginning of period 39,660 19,154
------- --------
Cash and cash equivalents at end of period $35,454 ($16,817)
======= ========
Summary of the change in certain working capital components, net
of effects of acquired businesses:
Increase in accounts receivable ($1,062) ($387)
Decrease in inventory 8 98
Increase in prepaid expenses and other current assets (1,611) (189)
Increase in accounts payable and accrued expenses 4,111 3,673
Increase in deferred revenue 1,260 2,806
------- ---------
Net changes in working capital $2,706 $6,001
======= =========
Supplemental disclosures of cash flow information:
Noncash investing activities:
Acquisition of fixed assets included in accounts
payable $482 $2,373
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 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
and 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 quarter ended March 31, 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
December 31, March 31,
1998 1999
---- ----
Series B 9 3/4% Senior Notes,
due 2004 $85,000 $85,000
Notes payable for acquired businesses 3,739 4,199
Capital lease obligations 785 630
------- -------
89,524 89,829
Less, Current portion due within
one year 2,191 2,324
------- -------
Long-term portion $87,333 $87,505
======= =======
The Company has a line of credit, 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% or the bank's prime rate plus 1.50%, as defined. There were no outstanding
borrowings against this line of credit as of March 31, 1999 and outstanding
letters of credit issued totaled $2.0 million. The unutilized portion of the
line of credit as of March 31, 1999, was $23.0 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.
<PAGE>
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
March 31, 1999, the Company operated 74 clubs that collectively served
approximately 184,000 members. The Company develops clusters of clubs to serve
densely populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income of
approximately $50,000.
The Company's goal is to develop the premier health club network in each
of the major metropolitan regions it enters. Management believes that clustering
clubs allows the Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. In entering new regions, the Company develops
these clusters by initially opening or acquiring clubs located in the more
central urban markets of the region and then branching out from these urban
centers to suburbs and ancillary communities. Capitalizing on this clustering of
clubs, as of March 31, 1999, approximately half of the Company's members
participated in a membership plan that allows unlimited access to all of the
Company's clubs for a higher membership fee.
The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its NYSC brand name. The Company
is the largest fitness club operator in Manhattan with 22 locations and operates
a total of 59 clubs under the NYSC name within a defined radius of New York
City. The Company is in the process of more fully developing clusters within a
smaller radius surrounding Washington, DC under its WSC brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its BSC
and PSC brand names, respectively. The Company employs localized brand names for
its clubs to create an image and atmosphere consistent with the local community,
and to foster the recognition as a local network of quality fitness clubs rather
than a national chain.
The Company's operating and selling expenses are comprised of both fixed
and variable costs. The fixed costs include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commissions, advertising and supplies. As clubs mature and increase their
membership base, fixed costs are typically spread over an increasing revenue
base and operating margins tend to improve.
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
Three Months Ended
March 31,
1998 1999
---- ----
Revenue 100.0% 100.0%
------ ------
Operating expenses
Payroll and related 39.1 38.2
Club operating 30.9 34.6
General and administrative 7.5 6.3
Depreciation and amortization 9.5 12.8
Compensation expense in
connection with stock options 0.8 0.5
------ ------
Operating income 12.2 7.6
Interest expense 10.0 6.0
Interest income (2.2) (0.7)
------ ------
Income before provision
for income tax 4.4 2.3
Provision for income tax 2.1 1.1
------ ------
Net income 2.3 1.2
Accreted dividend on preferred
stock (2.8) (5.4)
------ ------
Net loss attributable
to common stockholders (0.5)% (4.2)%
------ ------
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Revenues. Revenues increased approximately $13.6 million, or 60.2%, to
$36.1 million during the quarter ended March 31, 1999 from $22.6 million in the
quarter ended March 31, 1998. This increase resulted primarily from the
continuing maturation of the 30 clubs opened or acquired during fiscal 1998
(approximately $9.7 million) and the six clubs opened or acquired in the first
quarter of 1999 (approximately $700,000). In addition, revenues increased during
the quarter by $3.2 million at the Company's mature clubs resulting from
increased membership.
Operating Expenses. Operating expenses increased $13.6 million, or 68.8%,
to $33.4 million in the quarter ended March 31, 1999, from $19.8 million in the
quarter ended March 31, 1998. The increase was primarily due to a 75.0% increase
in total months of club operations (the aggregate number of full months of
operation during a given period for the clubs open at the end of such period) to
200 in the quarter ended March 31, 1999 from 114 in the quarter ended March 31,
1998, in addition to the following factors:
Payroll and related increased by $5.0 million, or 56.3% to $13.8 million
in the quarter ended March 31, 1999, from $8.8 million in the quarter ended
March 31, 1998. This increase was attributable to the acquisition or opening of
30 clubs in 1998 and six clubs in the first quarter of 1999.
Club operating increased by $5.6 million or 80.1% to $12.5 million in the
quarter ended March 31, 1999, from $7.0 million in the quarter ended March 31,
1998. This increase is attributable to the acquisition or opening of 30 clubs in
1998 and six clubs in the first quarter of 1999.
General and administrative increased by $600,000, or 33.9% to $2.3 million
in the quarter ended March 31, 1999, from $1.7 million, in the quarter ended
March 31, 1998. This increase is attributable to expenses associated with the
Company's expansion, including the expansion of the Company's corporate office
and upgrade of the Company's management information systems. In March 1999 the
Company moved its membership billing processing center to a purpose-built
location separated from its corporate office.
<PAGE>
Depreciation and amortization increased by $2.5 million, or 116.5% to $4.6
million in the quarter ended March 31, 1999, from $2.1 million in the quarter
ended March 31, 1998. This increase is attributable primarily to a full period
of depreciation and amortization for fixed asset additions, acquisitions or
openings since the quarter ended March 31, 1998 and the increased fixed and
intangible assets arising out of new club acquisitions and openings during the
first quarter of 1999.
Compensation expense in connection with stock options increased $6,000 or
3.3% to $190,000 for the quarter ended March 31, 1999 from $184,000 in the
quarter ended March 31, 1998 and relates to preferred stock options.
Interest Expense. Interest expense decreased $100,000 to $2.2 million
during the quarter ended March 31, 1999, from $2.3 million in the quarter ended
March 31, 1998. This decrease was primarily due to reduced borrowings
attributable to operations as the Company capitalized interest in connection
with various construction projects.
Interest Income. Interest income decreased $249,000 to $250,000 during the
quarter ended March 31, 1999 from $499,000 in the quarter ended March 31, 1998.
The decreased level of interest income was primarily due to lower cash on hand
as the Company invested in acquisitions and new club construction.
Provision for Income Tax. The income tax provision for the quarter ended
March 31, 1999 was $395,000 compared to a tax provision of $465,000 for the
quarter ended March 31, 1998.
Accreted Dividends on Preferred Stock. Accreted dividends on the preferred
stock increased $1.3 million to $1.9 million during the quarter ended March 31,
1999, from $600,000 in the quarter ended March 31, 1998. This increase is
primarily a result of the accreted dividends on the redeemable senior preferred
stock which was issued in November 1998.
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 March 31, 1999 was $10.5 million compared to $5.5 million for the
quarter ended March 31, 1998, an increase of $5.0 million. Clubs opened prior to
1998 contributed an increase in cash flow contribution of approximately $2.6
million. The balance of the increase is principally due to an increase in the
working capital deficit of the Company. Excluding cash and cash equivalents, the
Company normally operates with a working capital deficit because it receives
dues or fee revenue either (I) during the month services are rendered, or (ii)
when paid-in-full, 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 $11.4 million and $1.1 million
in capital expenditures and business acquisitions, respectively during the
quarter ended March 31, 1999. The Company currently estimates total capital
expenditure and asset acquisition requirements for the remaining three quarters
of 1999 to approximate $37 million, which includes $8.4 million that management
intends to renovate and expand certain existing clubs, $4.1 million to maintain
certain existing clubs and $1.5 million to further upgrade its management
information systems.
Financing Activities. The Company has a line of credit with its principal
bank for direct borrowings and letters of credit of up to $25 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 March 31, 1999, the Company has
approximately $23.0 million available under the line of credit,
<PAGE>
which matures in October 2002, and has no scheduled amortization requirements.
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 and
has been completed. In phase two of the program, the Company is modifying, or
replacing, and testing all non-Y2K compliant hardware systems. Completion of
Phase two is expected by August 1999. Phase three of the program involves
upgrades, or replacement, and testing all non-Y2K compliant software and is also
expected to be completed by August 1999.
As of March 31, 1999 the Company has spent approximately $300,000 in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $350,000 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 March 31, 1999, the Company received
confirmations from approximately 75% 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 adverse impact on the Company's financial results depending on the
length and severity of the disruption.
The Company 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.
The estimates and conclusions herein contain forward-looking statements
and are based on management's 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 period ended March 31, 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 the control of the
Company, including the level of market demand for the Company's services,
competitive pressures, the ability to achieve reductions in operating costs and
to continue to integrate acquisitions, the application of Federal and state tax
laws and regulations, and other specific factors discussed herein and in other
Securities and Exchange Commission filings by the Company. The information
contained herein represents management's best judgement as of the date hereof
based on information currently available; however, the Company does not intend
to update this information to reflect development or information obtained after
the date hereof and disclaims any legal obligation to the contrary.
<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.
Not applicable
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: May 10, 1999 BY: /S/ RICHARD PYLE
----------------------
Richard Pyle
Chief Financial Officer
(principal financial and accounting officer)
DATE: May 10, 1999 BY: /S/ MARK SMITH
-----------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(27) Financial Data Schedule (to be filed electronically).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at March 31, 1999 and the consolidated
statement of operations for the three months ended March 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,817
<SECURITIES> 0
<RECEIVABLES> 1,015
<ALLOWANCES> 0
<INVENTORY> 1,155
<CURRENT-ASSETS> 20,428
<PP&E> 118,127
<DEPRECIATION> (25,734)
<TOTAL-ASSETS> 168,227
<CURRENT-LIABILITIES> 30,051
<BONDS> 0
38,034
21,249
<COMMON> 1
<OTHER-SE> (24,268)
<TOTAL-LIABILITY-AND-EQUITY> 168,227
<SALES> 0
<TOTAL-REVENUES> 36,139
<CGS> 0
<TOTAL-COSTS> 33,402
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,918
<INCOME-PRETAX> 819
<INCOME-TAX> 395
<INCOME-CONTINUING> 424
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
