<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 November 30, 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 NOVEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) PAGE
a) Condensed Consolidated Balance Sheets
as of May 31, 1998 and November 30, 1998 1
b) Condensed Consolidated Statements of Operations
for the three- and six-months ended November 30, 1997
and 1998. 2
c) Condensed Consolidated Statements of Cash Flow
for the six-months ended November 30, 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 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
Exhibit Index 13
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 1998 and November 30, 1998
All figures $'000, except share data
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30
ASSETS: 1998 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,997 $ 28,331
Accounts receivable 420 293
Inventory 673 1,228
Prepaid expenses and other current assets 677 669
-------- --------
Total current assets 24,767 30,521
-------- --------
Fixed assets, net of accumulated depreciation of $17,664 and
$22,238 at May 31 and November 30, 1998, respectively 54,518 76,985
Intangible assets, net of accumulated amortization of $2,489 and
$5,399 at May 31 and November 30, 1998, respectively 19,923 37,803
Deferred tax asset 7,159 8,281
Deferred membership costs 4,933 6,763
Other assets 677 1,094
-------- --------
Total assets $111,977 $161,447
======== ========
LIABILITIES and STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,036 $ 2,559
Accounts payable 2,451 2,836
Accrued expenses and corporate income taxes payable 7,991 6,753
Deferred revenue 6,391 9,137
-------- --------
Total current liabilities 18,869 21,285
Long-term debt and capital lease obligations 86,253 92,337
Deferred lease liabilities 9,298 10,512
Deferred revenue 1,890 2,368
Other liabilities 774 683
-------- --------
Total liabilities 117,084 127,185
-------- --------
Redeemable senior preferred stock, $1,000 par value; liquidation value
$40,075; authorized 40,000 shares, no shares issued
issued and outstanding at May 31, 1998, 40,000
issued and outstanding at November 30, 1998 - 36,293
-------- --------
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 November 30, 1998 18,736 20,122
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 November 30, 1998, respectively 164 177
Class A voting common stock, $0.001 par value; authorized
1,150,000 shares, 1,015,714 issued and
outstanding at May 31 and November 30, 1998, respectively 1 1
Paid-in capital 3,994 7,762
Unearned compensation (2,546) (2,546)
Accumulated deficit (25,456) (27,547)
-------- --------
Total stockholders' deficit (5,107) (2,031)
-------- --------
Total liabilities and stockholders' deficit $111,977 $161,447
======== ========
</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 six months ended November 30, 1997 and 1998
All figures $'000, except share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Club operations $18,527 $31,131 $35,055 $59,146
Management fees and other 592 824 1,262 1,540
------- ------- ------- -------
19,119 31,955 36,317 60,686
------- ------- ------- -------
Operating expenses:
Payroll and related 7,765 12,255 14,800 23,833
Club operating 6,037 11,042 11,267 20,552
General and administrative 1,175 3,108 2,239 4,944
Depreciation and amortization 1,772 3,807 3,361 7,417
Compensation expense in connection with stock options 179 178 339 352
------- ------- ------- -------
16,928 30,390 32,006 57,098
------- ------- ------- -------
Operating income 2,191 1,565 4,311 3,588
Interest expense 1,795 2,401 2,968 4,849
Interest income (302) (55) (331) (202)
------- ------- ------- -------
Income (loss) before provision (benefit) for corporate income taxes 698 (781) 1,674 (1,059)
Provision (benefit) for corporate income taxes 395 (340) 845 (442)
------- ------- ------- -------
Income before extraordinary item 303 (441) 829 (617)
------- ------- ------- -------
Extraordinary item, net of related income tax of $647 (730) - (730) -
------- ------- ------- -------
Net income (loss) (427) (441) 99 (617)
Accreted dividends on preferred stock (612) (844) (1,150) (1,474)
------- ------- ------- -------
Net loss attributable to common stockholders $(1,039) $(1,285) $(1,051) $(2,091)
======= ======= ======= =======
</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 six months ended November 30, 1997 and 1998
All figures $'000, except share data
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
1997 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 99 $ (617)
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,361 7,417
Compensation expense in connection with stock options 339 352
Noncash rental expense, net of noncash rental income 1,125 1,213
Share of net income in affiliated companies (82) (151)
Amortization of debt issuance costs 190 310
Change in certain working capital components 1,687 656
Increase in deferred tax asset (848) (1,122)
Increase in deferred membership costs (660) (1,830)
Loss from early extinguishment of debt 1,377 -
Other (4) 2
-------- --------
Total adjustments 6,485 6,847
-------- --------
Net cash provided by operating activities 6,584 6,230
-------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired businesses (4,376) (16,711)
Acquisition of businesses (4,258) (25,243)
Intangible and other assets - (354)
-------- --------
Net cash used in investing activities (8,634) (42,308)
-------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings, net of expenses of issuance 85,570 16,900
Repayments of borrowings (43,056) (15,122)
Issuance of stock, net of expenses of issuance 124 39,634
-------- --------
Net cash provided by financing activities 42,638 41,412
-------- --------
Net increase in cash and cash equivalents 40,588 5,334
Cash and cash equivalents at beginning of period 2,468 22,997
-------- --------
Cash and cash equivalents at end of period $ 43,056 $ 28,331
======== ========
Summary of the change in certain working capital components, net
of effects of acquired businesses:
Decrease in accounts receivable $ 25 $ 127
Increase in inventory (126) (555)
Increase in prepaid expenses and other current assets 406 159
Increase (decrease) in accounts payable and accrued expenses 528 (2,299)
Increase in deferred revenue 854 3,224
-------- --------
Net changes in working capital $ 1,687 $ 656
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 3,174 $ 4,713
Taxes 455 1,030
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts
payable 99 1,360
</TABLE>
See notes to the condensed consolidated financial statements
3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998 AND NOVEMBER 30, 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-and six-month periods ended November 30,
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, NOVEMBER 30,
1998 1998
---- ----
<S> <C> <C>
Series B 9 3/4% Senior Notes,
due 2004 $85,000 $85,000
Borrowings under the line of credit 5,000
Notes payable for acquired businesses 1,826 4,027
Capital lease obligations 1,463 869
------- -------
88,289 94,896
Less, Current portion due within
one year 2,036 2,559
------- -------
Long-term portion $86,253 $92,337
======= =======
</TABLE>
As of November 30, 1998, 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% (7.75% as of November 30, 1998) or the
bank's prime rate plus 1.50%, as defined. There were outstanding borrowings
against this line of credit of $5.0 million, as of November 30, 1998 and
outstanding letters of credit issued of $2.0 million. The unutilized portion of
the line of credit as of November 30, 1998, was $18.0 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.
4
<PAGE>
3. ASSET ACQUISITIONS AND COMMITMENTS
During the six months ended November 30, 1998, the Company executed sixteen
purchase agreements thereby acquiring sixteen fitness clubs, including the
acquisition of the Lifestyle Fitness of Springfield, Inc., and its Affiliates,
as discussed below. The aggregate purchase prices totaled $30.0 million which
included $25.2 million payable at closing and the issuance of notes payable
totaling $4.8 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 $108.6 million.
The table below summarizes the purchase price allocation to assets acquired:
Allocation of purchase prices:
Fixed Assets $ 9,232
Membership lists 2,616
Goodwill 17,222
Other net assets acquired 900
-------
Total allocation of purchase prices $29,970
-------
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, 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:
FOR THE SIX MONTHS
ENDED NOVEMBER 30,
1997 1998
---- ----
Revenues $39,994 $62,013
Pro forma net income (loss) before extraordinary item 689 (634)
Pro forma net loss to common stockholders (1,191) (2,108)
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 six months 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.
4. REDEEMABLE PREFERRED STOCK ISSUANCE
In November 1998, the Company issued 40,000 shares of redeemable senior
preferred stock and 143,261 $0.01 Warrants, which are exercisable into an
equal number of shares of Common Stock, in consideration for $40.0 million.
After payment of fees and expenses of approximately $400,000 the Company
received net proceeds of $39.6 million. The senior preferred stock is
redeemable in November 2008, and carries a cumulative 12% annual dividend
which is added to the liquidation value of such preferred shares, if not paid
in cash, at the option of the Company. In the event that certain defined
events occur, the number of Warrants exercisable will be reduced.
5. SUBSEQUENT EVENT
In January 1999, the Company acquired the assets of two fitness clubs. The
purchase price totaled $1.7 million which included $1.0 million payable at
closing and issuance of notes of $700,000. In connection with these clubs, the
5
<PAGE>
Company assumed non-cancelable operating leases expiring on or before May 31,
2017. Future minimum rental payments required under these leases total
approximately $7.5 million.
6. CONTINGENCY
A claim had been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was originally brought 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 the New York State Supreme Court in
April 1998 and was dismissed in December 1998.
7. ADOPTION OF SOP 98-1
During the period the Company adopted the provisions of Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires the Company to capitalize certain
costs incurred in connection with developing software to be used internally. The
amounts capitalized during the period were $516,000.
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 November
30, 1998, the Company operated 69 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 55 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating expenses
Payroll and related 40.6 38.4 40.7 39.3
Club operating 31.6 34.6 31.0 33.9
General and administrative 6.1 9.7 6.2 8.2
Depreciation and amortization 9.3 11.9 9.3 12.1
Compensation expense in
connection with stock options 0.9 0.6 0.9 0.6
----- ----- ----- -----
Operating income 11.5 4.8 11.9 5.9
Interest expense 9.4 7.5 8.2 8.0
Interest income (1.6) (0.2) (0.9) (0.3)
----- ----- ----- -----
Income (loss) before provision
(benefit) for income tax 3.7 (2.5) 4.6 (1.8)
Provision (benefit) for income tax 2.1 (1.1) 2.3 (0.8)
----- ----- ----- -----
Net income (loss) before
extraordinary item 1.6 (1.4) 2.3 (1.0)
Extraordinary item (3.8) - (2.0) -
----- ----- ----- -----
Net income (loss) (2.2) (1.4) 0.3 (1.0)
Accreted dividend on preferred
stock 3.2 2.6 3.2 2.4
----- ----- ----- -----
Net loss attributable
to common stockholders (5.4)% (4.0)% (2.9)% (3.4)%
----- ----- ----- -----
</TABLE>
Three Months Ended November 30, 1998 Compared to Three Months Ended November 30,
1997
REVENUES. Revenues increased approximately $12.8 million, or 67.1%, to
$32.0 million during the quarter ended November 30, 1998 from $19.1 million in
the quarter ended November 30, 1997. This increase resulted primarily from
maturation of the 16 clubs opened or acquired during fiscal 1998 (approximately
$5.4 million) and the 20 clubs opened or acquired in the first six months of
fiscal 1999 (approximately $4.1 million). In addition, revenues increased
during the quarter by $3.3 million at the Company's mature clubs resulting from
increased membership.
OPERATING EXPENSES. Operating expenses increased $13.5 million, or 79.5%,
to $30.4 million in the quarter ended November 30, 1998, from $16.9 million in
the quarter ended November 30, 1997. The increase was primarily due to a 95.3%
increase in total club months operated to 188 in the quarter ended November 30,
1998 from 96 in the quarter ended November 30, 1997, in addition to the
following factors:
Payroll and related increased by $4.5 million, or 57.8% to $12.3 million in
the quarter ended November 30, 1998, from $7.8 million in the quarter ended
November 30, 1997. This increase was attributable to the acquisition or opening
of 16 clubs in fiscal 1998 and 20 clubs in the first six months of fiscal 1999.
Club operating increased by $5.0 million or 82.9% to $11.0 million in the
quarter ended November 30, 1998, from $6.0 million in the quarter ended November
30, 1997. This increase is attributable to the acquisition or opening of 16
clubs in fiscal 1998 and 20 clubs in the first six months of fiscal
7
<PAGE>
1999.
General and administrative increased by $1.9 million, or 164.8% to $3.1
million in the quarter ended November 30, 1998, from $1.2 million, in the
quarter ended November 30, 1997. 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 addition the Company wrote-off $169,000 of expenses associated with
the preparation for an initial public offering, which has been postponed due to
market volatility.
Depreciation and amortization increased by $2.0 million, or 114.8% to $3.8
million in the quarter ended November 30, 1998, from $1.8 million in the quarter
ended November 30, 1997. This increase is attributable primarily to the
increased fixed and intangible assets arising out of new club acquisitions and
openings during the six months ended November 30, 1998, and a full period of
depreciation and amortization for fixed asset additions, acquisitions or
openings since the quarter ended November 30, 1997. Fixed and intangible assets
acquired during the six months ended May 31, 1998 totaled $16.6 million and
$13.8 million, respectively. Fixed and intangible assets acquired in the first
six months ended November 30, 1998 totaled $27.0 million and $20.8 million,
respectively.
Compensation expense in connection with stock options was unchanged for the
quarter ended November 30, 1998 compared to 1997.
INTEREST EXPENSE. Interest expense increased $600,000 to $2.4 million
during the quarter ended November 30, 1998, from $1.8 million in the quarter
ended November 30, 1997. The increased level of interest expense was
primarily due to a full quarter of interest related to the Senior Notes
(drawn down in October 1997), as well as drawings under the line of credit to
fund certain acquisitions during the quarter.
INTEREST INCOME. Interest income decreased $247,000 to $55,000 during
the quarter ended November 30, 1998, from $302,000 in the quarter ended
November 30, 1997. 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 (BENEFIT) FOR INCOME TAX. The income tax benefit for the quarter
ended November 30, 1998 was $340,000 compared to a tax expense of $395,000 for
the quarter ended November 30, 1997. During the quarter ended November 30, 1998,
the Company's effective tax rate was negatively impacted by net operating losses
incurred by certain clubs located in states where such losses could not
currently be utilized.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $232,000 to $844,000 during the quarter ended November 30, 1998,
from $612,000 in the quarter ended November 30, 1997. This increase is as a
result of a compounding feature in the calculation of the accretion of dividends
on the Series A and B preferred stock, as well as dividends subsequent to the
issuance of the senior preferred stock.
Six Months Ended November 30, 1998 Compared to Six Months Ended November 30,
1997
REVENUES. Revenues increased approximately $24.4 million, or 67.1%, to
$60.7 million during the six months ended November 30, 1998 from $36.3 million
in the six months ended November 30, 1997. This increase resulted primarily
from maturation of the 16 clubs opened or acquired during fiscal 1998
(approximately $11.4 million) and the 20 clubs opened or acquired in the first
six months of fiscal 1999 (approximately $6.4 million). In addition, revenues
increased during the period by $6.6 million at the Company's mature clubs
resulting from increased membership.
OPERATING EXPENSES. Operating expenses increased $25.1 million, or 78.4%,
to $57.1 million in the six months ended November 30, 1998, from $32.0 million
in the six months ended November 30, 1997. The increase was primarily due to an
88.0% increase in total club months operated to 352 in the six months ended
November 30, 1998 from 187 in the six months ended November 30, 1997, in
addition to the following factors:
8
<PAGE>
Payroll and related increased by $9.0 million, or 61.0% to $23.8 million in
the six months ended November 30, 1998, from $14.8 million in the six months
ended November 30, 1997. This increase was attributable to the acquisition or
opening of 16 clubs in fiscal 1998 and 20 clubs in the first six months of
fiscal 1999.
Club operating increased by $9.3 million, or 82.4% to $20.6 million in the
six months ended November 30, 1998, from $11.3 million in the six months ended
November 30, 1997. This increase is attributable to the acquisition or opening
of 16 clubs in fiscal 1998 and 20 clubs in the first six months of fiscal 1999.
General and administrative increased by $2.7 million, or 120.9% to $4.9
million in the six months ended November 30, 1998, from $2.2 million, in the six
months ended November 30, 1997. 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 addition the Company wrote-off $169,000 of expenses associated with
the preparation for an initial public offering, which has been postponed due to
market volatility.
Depreciation and amortization increased by $4.1 million, or 120.7% to $7.4
million in the six months ended November 30, 1998, from $3.4 million in the six
months ended November 30, 1997. This increase is attributable primarily to the
increased fixed and intangible assets arising out of new club acquisitions and
openings during the six months ended November 30, 1998, and a full period of
depreciation and amortization for fixed asset additions, acquisitions or
openings since November 30, 1997. Fixed and intangible assets acquired during
the six months ended May 31, 1998 totaled $16.6 million and $13.8 million,
respectively. Fixed and intangible assets acquired in the first six months ended
November 30, 1998 totaled $27.0 million and $20.8 million respectively.
Compensation expense in connection with stock options increased $13,000, or
3.8% to $352,000 in the six months ended November 30, 1998, from $339,000 in the
six months ended November 30, 1997.
INTEREST EXPENSE. Interest expense increased $1.9 million to $4.8
million during the six months ended November 30, 1998, from $3.0 million in
the six months ended November 30, 1997. The increased level of interest
expense was primarily due to a full period of interest related to the Senior
Notes (drawn down in October 1997), as well as drawings under the line of
credit to fund certain acquisitions during the period.
INTEREST INCOME. Interest income decreased $129,000 to $202,000 during
the quarter ended November 30, 1998, from $331,000 in the quarter ended
November 30, 1997. 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 (BENEFIT) FOR INCOME TAX. The income tax benefit for the six
months ended November 30, 1998 was $442,000 compared to a tax expense of
$845,000 for the six months ended November 30, 1997. During the six months ended
November 30, 1998, the Company's effective tax rate was negatively impacted by
net operating losses incurred by certain clubs located in states where such
losses could not currently be utilized.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $324,000 to $1.5 million during the six months ended November
30, 1998, from $1.2 million in the six months ended November 30, 1997. This
increase is as a result of a compounding feature in the calculation of the
accretion of dividends on the Series A and B preferred stock, as well as
dividends subsequent to the issuance of senior 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.
9
<PAGE>
OPERATING ACTIVITIES. Net cash provided by operating activities for the
six months ended November 30, 1998 was $6.2 million compared to $6.6 million
during the six months ended November 30, 1997. This slight decrease was
primarily due to the number of immature recently opened or acquired clubs which
are not yet operating at normal operating margins, offsetting 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
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 $42.3 million and $8.6
million in capital expenditures and asset acquisitions during the six months
ended November 30, 1998 and 1997, respectively, primarily as a result of the
Company's expansion efforts. The Company estimates that, for the period from
December 1, 1998 until May 31, 1999, it will invest an additional amount of
approximately $30.0 million in capital expenditures and asset acquisitions,
which includes $3.0 million that management intends to invest to maintain and
expand certain existing clubs and $1.0 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 $85.0 million
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
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 November 30, 1998,the
Company has approximately $18.0 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.
In November 1998, the Company completed a $40.0 million redeemable senior
preferred stock equity infusion. After payment of fees and expenses of
approximately $400,000 the Company received net proceeds of $39.6 million. The
senior preferred stock is redeemable in November 2008, and carries a cumulative
12% annual dividend which is added to the liquidation value of such preferred
shares, if not paid in cash, at the option of the Company. Warrants (initially
totaling 143,261) to buy Common stock were issued to the holders of the Senior
Preferred shares.
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 June 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 June 1999.
As of November 30, 1998, the Company has spent approximately $200,000 in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $400,000 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 November 30, 1998, the Company received
10
<PAGE>
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 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.
11
<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: January 8, 1999 BY: /S/ RICHARD PYLE
----------------------
Richard Pyle
Chief Financial Officer
(principal financial and accounting officer)
DATE: January 8, 1999 BY: /S/ MARK SMITH
-----------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
12
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(27) 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 NOVEMBER 30, 1998, THE CONSOLIDATED STATEMENT OF
OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE SIX
MONTHS ENDED NOVEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 28,331
<SECURITIES> 0
<RECEIVABLES> 293
<ALLOWANCES> 0
<INVENTORY> 1,228
<CURRENT-ASSETS> 30,521
<PP&E> 99,223
<DEPRECIATION> 22,238
<TOTAL-ASSETS> 161,447
<CURRENT-LIABILITIES> 21,285
<BONDS> 92,337
36,293
20,299
<COMMON> 1
<OTHER-SE> (22,331)
<TOTAL-LIABILITY-AND-EQUITY> 161,447
<SALES> 0
<TOTAL-REVENUES> 60,686
<CGS> 0
<TOTAL-COSTS> 57,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,647
<INCOME-PRETAX> (1,059)
<INCOME-TAX> (442)
<INCOME-CONTINUING> (617)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (617)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
