<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 200549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JULY 13, 2000
TOWN SPORTS INTERNATIONAL, INC.
<TABLE>
<S> <C> <C>
New York 333-40907 13-2749906
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
888 Seventh Avenue
New York, New York 10106
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (212) 246-6700
(former name or former address, if changed since last report.) Not applicable
ITEM 2. ACQUISITION OF ASSETS
On July 13, 2000 a wholly owned subsidiary of Town Sports
International, Inc. (the "Company") acquired all of the outstanding common stock
of Health Development Corporation ("HDC"), a Massachusetts Corporation. The
stock has been purchased by the Company for $18.9 million cash. Including HDC
estimated cash on hand of $1.0 and a federal income tax refund related to the
exercise of HDC stock options estimated to be $1.3 million, the Company's net
consideration paid was $16.6 million. HDC operates eight health clubs in
Massachusetts and one health club in New Hampshire. HDC also provides
management services at three health club facilities in the greater Boston area.
The related costs of the acquisitions are estimated to be $500,000. The
Company has funded these transactions from available cash-in-bank, and
borrowings under its line of credit.
The acquisition will be accounted for as a purchase. Accordingly, the
Company will include the operations of the acquired clubs in its consolidated
financial statements from the date of acquisition. The Company plans to operate
these clubs under its existing trade name "Boston Sports Clubs."
<PAGE> 2
The locations of the nine acquired clubs are as follows:
<TABLE>
<CAPTION>
CLUB LOCATION
---- --------
<S> <C>
The Andover Athletic Club 307 Lowell Street, Andover, MA 01810
The Colonial Club 425 Walnut Street, Lynnfield, MA 01940
The Ferncroft Club 50 Ferncroft Road, Danvers, MA 01923
The Framingham Club 1657 Worcester Road, Framingham, MA 01701
The Franklin Club 750 Union Street, Franklin, MA 02038
The Lexington Club 475 Bedford Street, Lexington, MA 02420
The Royal Ridge Club 11 Tara Boulevard, Suite #2, Nashua, NH 03062
The Sky Club One Devonshire Place, Boston, MA 02109
The Wellesley Center 140 Great Plain Avenue, Wellesley, MA 02482
</TABLE>
The locations of the clubs under management contracts are as follows:
<TABLE>
<S> <C>
Shad Hall 70 North Harvard Street, Boston, MA 02109
North Point Club 6 Museum Way, Cambridge, MA 02141
Bay Colony Club 1000 Winter Street, Walthham, MA 01810
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) & (b) Financial statements and Pro forma financial information.
The financial statements and pro forma financial information required
are filed herewith in accordance with Rule 3-05 of Regulation S-X.
<PAGE> 3
(c) Exhibits
1. Agreement and Plan of Merger by and among Town Sports
International, Inc., TSI/HDC, Inc. and Health Development
Corporation, dated June 7, 2000.
2. Town Sports International, Inc. July 17, 2000 Press Release.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
TOWN SPORTS INTERNATIONAL, INC.
BY: /S/ RICHARD PYLE
-------------------------------
Richard Pyle
Chief Financial Officer
July 28, 2000
<PAGE> 4
Item 7(a)
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
as of December 31,1999 and 1998
Together with Auditors' Report
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Health Development Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Health
Development Corporation (a Massachusetts corporation) and subsidiaries as of
December 31,1999 and 1998 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Health Development Corporation
and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Boston, Massachusetts /s/ ARTHUR ANDERSEN LLP
March 20, 2000 -------------------------
Arthur Andersen LLP
<PAGE> 6
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 846,300 $ 1,841,509
Accounts receivable, net of allowance for doubtful accounts
of $8,719 and $6,000 at December 31,1999 and 1998, respectively 228,004 150,870
Inventories 19,939 27,652
Refundable and current deferred income taxes 437,038 36,966
Prepaid expenses and other current assets 97,501 56,108
Current portion of deferred acquisition costs 77,694 83,870
----------- -----------
Total current assets 1,706,476 2,196,975
----------- -----------
Property and Equipment:
Land 1,760,963 --
Building and building improvements 8,155,553 --
Leasehold improvements 3,055,431 2,519,583
Machinery and equipment 2,000,376 1,563,181
Furniture and fixtures 916,038 961,606
Capitalized leased equipment 86,446 123,763
Construction-in-progress 113,146 282,418
----------- -----------
16,087,953 5,450,551
Less--Accumulated depreciation and amortization 3,529,551 2,963,856
----------- -----------
Net property and equipment 12,558,402 2,486,695
----------- -----------
Other Assets:
Membership lists, deferred financing costs and lease acquisition costs, net of
accumulated amortization of $371,699 and $305,005 at December 31,1999 and
1998, respectively 640,534 149,666
Deposits 117,056 61,056
Cash surrender value of life insurance 22,367 19,353
Deferred acquisition costs, net of current portion 30,179 24,003
Deferred income taxes 185,206 395,735
----------- -----------
Total other assets 995,342 649,813
----------- -----------
$15,260,220 $ 5,333,483
=========== ===========
</TABLE>
<PAGE> 7
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31,1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 272,960 $ 99,451
Accounts payable 202,195 113,210
Income taxes payable -- 67,992
Accrued expenses 1,126,919 1,108,947
Current portion of unearned income 2,498,411 1,889,456
Current portion of deferred rent 80,382 38,716
----------- -----------
Total current liabilities 4,180,867 3,317,772
----------- -----------
Long-term Liabilities:
Long-term debt, net of current portion 8,124,308 631,221
Subordinated notes payable--Related parties 960,000 --
Unearned income, net of current portion 66,406 89,325
Deferred rent, net of current portion 613,333 682,050
----------- -----------
Total long-term liabilities 9,764,047 1,402,596
----------- -----------
Total liabilities 13,944,914 4,720,368
----------- -----------
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Preferred stock, $100 par value-
Authorized--4,960 shares
Issued and outstanding--0 shares and 2,000 shares at December 31,1999 and 1998,
respectively -- 200,000
Common stock, $0.01 par value-
Authorized--3,000,000 shares
Issued and outstanding--882,096 shares and 870,096 shares at December 31,1999
and 1998, respectively 8,821 8,701
Additional paid-in capital 729,648 717,768
Retained earnings (accumulated deficit) 576,837 (313,354)
----------- -----------
Total stockholders' equity 1,315,306 613,115
----------- -----------
$15,260,220 $ 5,333,483
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
for the Years Ended December 31,1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Membership revenue $ 12,052,899 $ 10,802,642
Ancillary revenue 3,568,769 3,194,856
Corporate revenue 579,868 498,753
------------ ------------
Total revenues 16,201,536 14,496,251
------------ ------------
Expenses:
Club operating expenses 8,404,085 8,339,080
Selling, general, and administrative 4,863,028 4,432,061
Depreciation and amortization 960,956 628,979
------------ ------------
Total expenses 14,228,069 13,400,120
------------ ------------
Operating income 1,973,467 1,096,131
Interest (Expense) Income, net (433,475) 36,635
------------ ------------
Income before provision for income taxes 1,539,992 1,132,766
Provision for Income Taxes 643,336 465,969
------------ ------------
Net income $ 896,656 $ 666,797
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 9
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31,1999 and 1998
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
NUMBER OF $0.01 PAR NUMBER OF $5 PAR
SHARES VALUE SHARES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 842,554 $ 8,426 100,000 $ 500,000
Preferred stock redemption - - (72,458) (362,290)
Preferred stock dividend - - - -
Conversion of preferred stock to common
stock 27,542 275 (27,542) (137,710)
Issuance of common stock options to a
nonemployee - - - -
Net income - - - -
------------- ------------- ------------- -------------
Balance, December 31, 1998 870,096 8,701 - -
Preferred stock redemption - - - -
Preferred stock dividend - - - -
Stock options exercised 12,000 120 - -
Net income - - - -
------------- ------------- ------------- -------------
Balance, December 31, 1999 882,096 $ 8,821 - $ -
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK ADDITIONAL EARNINGS
NUMBER OF $100 PAR PAID-IN (ACCUMULATED
SHARES VALUE CAPITAL DEFICIT) TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 3,000 $ 300,000 $ 572,370 $ (930,151) $ 450,645
Preferred stock redemption (1,000) (100,000) - - (462,290)
Preferred stock dividend - - - (50,000) (50,000)
Conversion of preferred stock to common
stock - - 137,435 - -
Issuance of common stock options to a
nonemployee - - 7,963 - 7,963
Net income - - - 666,797 666,797
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1998 2,000 200,000 717,768 (313,354) 613,115
Preferred stock redemption (2,000) (200,000) - - (200,000)
Preferred stock dividend - - - (6,465) (6,465)
Stock options exercised - - 11,880 - 12,000
Net income - - - 896,656 896,656
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 - $ - $ 729,648 $ 576,837 $ 1,315,306
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 10
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 896,656 $ 666,797
Adjustments to reconcile net income to net cash provided by operating activities-
Issuance of common stock options to a nonemployee -- 7,963
Depreciation and amortization 960,956 681,784
Gain on sale of equipment (1,157) --
Deferred income taxes (4,551) (190,674)
Change in assets and liabilities, net of acquisition-
Accounts receivable (76,180) 14,460
Inventories 10,451 319
Refundable income taxes (184,992) --
Prepaid expenses and other current assets (41,394) 1,763
Deposits (56,000) (14,756)
Accounts payable 88,985 16,695
Income taxes payable (67,992) (11,517)
Accrued expenses and other current liabilities 17,972 253,530
Other assets (151,562) 29,845
Unearned income 467,431 375,583
Deferred rent (27,052) 3,784
------------ ------------
Net cash provided by operating activities 1,831,571 1,835,576
------------ ------------
Cash Flows from Investing Activities:
Acquisition, net of cash acquired (2,731,395) --
Purchase of property and equipment (8,597,103) (1,156,807)
Proceeds from sale of equipment 42,701 8,757
Increase in cash surrender value of life insurance (3,014) (3,014)
------------ ------------
Net cash used in investing activities (11,288,811) (1,151,064)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from mortgage loans 7,922,400 --
Principal payments on mortgage loans (131,106) --
Proceeds from issuance of subordinated notes payable 960,000 --
Principal payments on notes payable -- (50,000)
Proceeds from term loan -- 700,000
Principal payments on term loan (87,500) (122,882)
Principal payments on capital lease obligations (7,298) (10,853)
Preferred stock dividends (6,465) (50,000)
Preferred stock redemption (200,000) (462,290)
Proceeds from issuance of common stock 12,000 --
------------ ------------
Net cash provided by financing activities 8,462,031 3,975
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents (995,209) 688,487
Cash and Cash Equivalents, beginning of year 1,841,509 1,153,022
------------ ------------
Cash and Cash Equivalents, end of year $ 846,300 $ 1,841,509
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for-
Interest $ 468,788 $ 28,963
============ ============
Income taxes $ 885,350 $ 496,500
============ ============
The Company purchased certain net assets of Silver's for $2,731,395. In
connection with the acquisition, liabilities were assumed as follows-
Fair value of assets acquired $ 2,850,000 $ --
Cash paid for net assets 2,731,395 --
------------ ------------
Liabilities assumed $ 118,605 $ --
============ ============
Supplemental Disclosures of Noncash Investing and Financing Activities:
Conversion of $5 Preferred Stock to common stock $ -- $ 137,435
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 11
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Health Development Corporation and subsidiaries (the Company) is a developer and
operator of health and fitness clubs in New England that extends credit to
individual members and to entities for which it performs contract services in
the New England region. The Company is subject to certain business risks
specific to the industry in which is operates, including competition,
demographic changes, real estate costs, and economic downturns. The Company
considers its business activities to be in a single segment, as defined by
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Health Development Corporation and its wholly owned subsidiaries: The
Lexington Club, Inc., The Colonial Club, Inc., Hotel Clubs, Inc.,
SportsFit, Inc., The Franklin Athletic Club, and The Andover Athletic
Club. All material intercompany accounts and transactions have been
eliminated in consolidation.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with original maturities of three months or less. Cash equivalents
consist primarily of money market funds.
(d) INVENTORIES
Inventories, consisting of merchandise for resale, are stated at the
lower of cost (first-in, first-out method) or market.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and
improvements are capitalized as additions to the property and equipment
accounts, while replacements, maintenance, and repairs that do not
improve or extend the life of the respective assets are expensed as
incurred.
Depreciation and amortization of property and equipment are computed on a
straight-line basis over the following estimated useful lives:
<PAGE> 12
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Building 35-39.5 years
Building improvements 5-15 years
Machinery and equipment 3-5 years
Furniture and fixtures 5 years
Leasehold Improvements Life of lease or life of
asset, whichever is shorter
Capitalized lease equipment Life of lease or life of
asset, whichever is shorter
</TABLE>
(f) OTHER ASSETS
Other assets consist of membership lists, deferred financing costs,
deferred lease acquisition costs, and goodwill, which are stated at cost
and amortized on a straight-line basis over the following useful lives:
<TABLE>
<CAPTION>
ASSET DESCRIPTION ESTIMATED USEFUL LIFE
----------------- ---------------------
<S> <C>
Membership lists 10 to 15 years
Deferred financing costs Term of related debt
Deferred lease acquisition costs Life of lease
Goodwill 15 years
</TABLE>
(g) LONG-LIVED ASSETS
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, requires the Company to continually
evaluate whether events or circumstances have occurred that indicate that
the estimated remaining useful lives of long-lived assets and certain
identifiable intangibles and goodwill may warrant revision or that the
carrying value of these assets may be impaired. To compute whether assets
have been impaired, the undiscounted future cash are compared to the
asset carrying value. To the extent that the undiscounted future cash
flows are less than the carrying value, the assets are written down to
the estimated fair value of the asset. To date, the Company does not
believe that an impairment of any of its long-lived assets has occurred.
(h) DEFERRED RENT
Leases with escalating rents are expensed on the straight-line basis over
the fixed term of the lease. Deferred rent arises when the expense
recorded exceeds actual payments.
(i) REVENUE RECOGNITION
The Company receives a one-time, nonrefundable initiation fee. Initiation
fees and related direct expenses, primarily salaries and sales
commissions payable to membership consultants, are deferred and
recognized, on a straight-line basis, in operations over an estimated
membership period of 24 months. Membership and other fees are recorded as
revenue ratably over the period to which they relate, with the balance
reported as unearned
<PAGE> 13
income in the accompanying consolidated balance sheets. Ancillary
revenue, which consists of laundry, lockers, merchandise, and guest fees;
and corporate revenue, which consists of management contracts, vending,
and capitation fees, are recognized over the period the related services
are provided.
(j) CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet and credit risk
concentration. The Company has an interest rate swap agreement (see Note
3). Financial instruments that subject the Company to credit risk are
cash and cash equivalents
and accounts receivable.
(k) ACQUISITION FEES
During 1998, the Company unsuccessfully attempted to acquire financing
for the purchase of the Lexington Club facilities. Legal and other
acquisition fees totaling approximately $39,630 have been included in
selling, general, and administrative expenses in the accompanying
consolidated statement of income for the year ended December 31, 1998.
(l) COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and other comprehensive income items. In general,
comprehensive income combines net income and other changes in equity
during the year from nonowner sources. The adoption of this statement had
no impact on total stockholders' equity for the years ended December 31,
1999 and 1998.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature
of these instruments. The fair value of debt approximates carrying value
as the debt bears interest at a variable market rate. Management believes
that estimating the fair value of subordinated notes payable to related
parties is not practicable.
(n) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement established accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts and
for hedging activities) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedging accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133
is effective for fiscal years
<PAGE> 14
beginning after June 15, 2000. SFAS No. 133 cannot be applied
retroactively. The Company does not anticipate that the adoption of this
new standard will have a material impact on the Company's fiscal position
or results of operations.
(o) RESTATEMENT OF PRIOR PERIODS
The Company has restated prior period financial statements to change its
method of accounting for nonrefundable initiation fees and related direct
expenses in accordance with SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements. The impact of the
restatement was to decrease previously reported retained earnings at
December 31, 1999, 1998, and 1997 by $77,040, $77,040, and $27,514,
respectively.
(2) LINE OF CREDIT
At December 31, 1999, the Company has a $250,000 line-of-credit agreement with a
bank. Borrowings bear interest at the bank's prime rate plus 0.25% (8.75% at
December 31, 1999) and were secured by certain machinery and equipment. The line
of credit expires on May 31, 2001. As of December 31, 1999, there were no
outstanding borrowings under the line-of-credit agreement. The agreement
contains restrictive covenants including the maintenance of certain financial
ratios, as defined. The Company was in compliance with its loan covenants at
December 31, 1999.
(3) LONG-TERM DEBT
Long-term debt at December 31,1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Term loan $ 597,917 $ 685,415
Mortgage loan (Lexington) 5,408,202 --
Mortgage loan (Franklin) 1,984,287 --
Mortgage loan (Franklin) 398,805 --
Subordinated notes payable--Related parties 960,000 --
Equipment capital leases, bearing interest at
10%, payable in monthly installments ranging
from $620 to $709 through February 2004,
guaranteed by the related equipment (see
Note 7(b)) 8,057 45,257
---------- ----------
9,357,268 730,672
Less--Current portion 272,960 99,451
---------- ----------
Long-term debt, net of current portion $9,084,308 $ 631,221
========== ==========
</TABLE>
<PAGE> 15
(a) TERM LOAN
During 1998, the Company entered into a $700,000 term loan agreement with
a bank, to be primarily used for the repurchase of preferred stock (see
Note 5) and refinancing of the existing term loan. Borrowings bear
interest at LIBOR plus 250 basis points and are secured by certain
equipment. Under the terms of the agreement, the Company is required to
make monthly payments of $7,292 plus interest, with a final payment due
on October 28, 2006. As of December 31, 1999 and 1998, $597,917 and
$685,415, respectively, was outstanding under the term loan.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its floating rate term loan.
At December 31, 1999, the Company has outstanding one interest rate swap
agreement with a bank, having a total notional principal amount of
$700,000. This agreement effectively changes the Company's interest rate
exposure on an aggregate of $700,000 of borrowings under the term loan
due 2006 to a fixed 7.7%. The interest rate swap agreement matures on
October 23, 2006. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement.
However, the Company does not anticipate nonperformance by the
counterparty.
(b) MORTGAGE LOANS
The Company financed the purchase of the Lexington Club land and building
in 1999, with a mortgage in the amount of $5,525,000. The property serves
as collateral to the loan agreement. The agreement provides for interest
at 30-day, 60-day, 90-day, or 180-day LIBOR, at the option of the
Company. On September 27, 1999, the Company elected a 180-day LIBOR at
8.9425% interest, which is due for renewal on March 25, 2000. The Company
agreed with the bank that it would remit a flat payment of $51,071 per
month. Each month the interest will be calculated first with the
remaining balance being applied to principal through maturity on April
28, 2009. As of December 31, 1999, $5,408,202 was outstanding under the
mortgage note.
The Company financed the purchase of the Franklin Club (see Note 10) with
two mortgage notes. The property serves as collateral to the loan
agreements. One mortgage was in the amount of $1,992,400 and matures on
November 1, 2009. Under the terms of the note, the repayment is amortized
over a 20-year schedule with a 10-year balloon payment due on November 1,
2009. Monthly principal and interest payments prior to the balloon
payment are $18,572. The Company has a variety of interest options with
the bank, and has initially elected a 180-day LIBOR at 8.61125%. This
interest term will be up for renewal on April 29, 2000. The second
mortgage obtained totaled $405,000. This note matures on November 1,
2007. The Company has elected the 180-day LIBOR at 8.61125% on this note
as well. This interest term will be up for renewal on April 29, 2000.
Monthly principal and interest payments on this note are $6,039. As of
December 31, 1999, $1,984,287 and $398,805 were outstanding under the
mortgage notes.
(c) SUBORDINATED NOTES PAYABLE--RELATED PARTIEs
The Company has subordinated notes payable from related parties of
$960,000 outstanding at December 31, 1999. The notes bear interest, which
is paid quarterly on the unpaid
<PAGE> 16
principal balance at 15%. The notes mature on May 31, 2003. The Company has
the right to prepay the whole or any part of the principal balance
outstanding at any time after the second anniversary of the note or in the
event of the sale of the Company.
Minimum future payments of long-term debt as of December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
AMOUNT
Year Ending December 31,
<S> <C>
2000 $ 272,960
2001 269,292
2002 279,824
2003 1,258,349
2004 318,659
Thereafter 6,958,184
---------------
$ 9,357,268
===============
</TABLE>
(4) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the differences between the consolidated
financial statement and income tax bases of assets and liabilities using
the enacted tax rates. Deferred income tax expense or credits are based on
changes in the asset and liability from period to period. A deferred tax
valuation allowance is required if it is more likely than not that all or a
portion of recorded deferred tax assets will not be realized.
The components of the provision for income taxes for the years ended
December 31,1999 and 1998 are as follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
<S> <C> <C> <C>
1999-
Current $ 497,156 $ 150,731 $ 647,887
Deferred (3,413) (1,138) (4,551)
--------------- --------------- ---------------
$ 493,743 $ 149,593 $ 643,336
=============== =============== ===============
1998-
Current $ 501,736 $ 154,907 $ 656,643
Deferred (145,692) (44,982) (190,674)
--------------- --------------- ---------------
$ 356,044 $ 109,925 $ 465,969
=============== =============== ===============
</TABLE>
As of December 31,1999 and 1998, deferred tax assets and liabilities
resulted primarily from temporary differences between financial reporting
and tax recognition of depreciation, deferred rent, and certain accrued
liabilities.
<PAGE> 17
The components of the net deferred tax assets as of December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Deferred Tax Assets-
Depreciation of property and equipment $ 155,896 $ 233,125
Deferred rent 219,053 169,635
Deferred revenue 108,814 106,712
Accrued expenses 42,364 -
Other 23,664 10,223
--------------- ---------------
549,791 519,695
Deferred Tax Liabilities-
Deferred costs (43,440) (43,440)
Other (69,099) (43,554)
---------------- ----------------
(112,539) (86,994)
---------------- ----------------
Net deferred tax assets $ 437,252 $ 432,701
=============== ===============
</TABLE>
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory United States
federal income tax rate of 34% to the income before provision for income
taxes:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Federal statutory tax rate $ 523,597 $ 385,140
State income taxes, net of federal benefit 91,476 67,286
Other 28,263 13,543
--------------- ---------------
$ 643,336 $ 465,969
=============== ===============
</TABLE>
(5) PREFERRED STOCK
(a) $5 PREFERRED STOCK
During 1998, certain $5 preferred stockholders exercised their
conversion right on 27,542 shares. These preferred shares converted
into an equal number of shares of common stock. Differences in par
value have been reflected in additional paid-in capital. All remaining
shares were redeemed at $5 per share. Therefore, at December 31, 1998,
no shares of $5 Preferred Stock were outstanding. Annual dividends
totaling $20,000 were declared and paid in 1998.
<PAGE> 18
(b) $100 PREFERRED STOCK
The Lexington Club, Inc. has authorized 4,960 shares of its $100 par
value cumulative preferred stock. This stock is redeemable in whole or
in part at its par value plus unpaid cumulative dividends at any time
at the option of the Board of Directors, upon not less than 60 days'
prior written notice. During 1998, the Company redeemed 1,000 shares
at $100 per share. Annual dividends totaling $30,000 were declared and
paid in 1998.
On April 28, 1999, in conjunction with the purchase of The Lexington
Club's land and building, Lexington Club, Inc. redeemed the remaining
outstanding shares of the $100 preferred stock. At the time of
repurchase, outstanding dividends of $6,465 were paid.
(6) STOCK OPTION PLANS
The Health Development Corporation stock option plan (the 1994 Plan)
authorized the grant of options (both incentive and nonqualified stock
options) to employees and directors of the Company to purchase up to
175,000 shares of common stock, $0.01 par value, at a price determined by
the Board of Directors (not less than 100% fair market value of the stock).
Options become exercisable as determined by the Board of Directors, but in
no instance shall such period exceed 10 years from the date of grant of the
options.
Options may be granted under the 1994 Plan until its termination on June
15, 2004. The rights under outstanding options granted are to be adjusted
as a result of certain events, as defined in the 1994 Plan.
Upon written request of an optionee, the Company may, but is not required
to, redeem all or any part of an option for an amount equal to the excess
of the fair market value of each share on the date of receipt of request
for redemption over the option price.
Effective May 29, 1998, the Company established the Health Development
Corporation 1998 stock option plan (the 1998 Plan) and authorized the grant
of options (both incentive and nonqualified stock options) to employees and
directors of the Company to purchase up to 300,000 shares of common stock,
$0.01 par value, at a price determined by the Board of Directors (not less
than 100% fair market value of the stock for optionees that possess less
than 10% of the total combined voting power of all classes of stock voting
power stock and not less than 110% fair market value of the stock for
optionees possessing greater than 10% of voting power stock). Options
become exercisable as determined by the Board of Directors, but in no
instance shall such period exceed 10 years from the date of grant of the
options.
Pursuant to an option holder's employment agreement, in the event of a
termination without cause, as defined, a sale, merger, or other similar
transaction (Business Transaction), all unvested options will be declared
fully vested immediately prior to the date of the effective date of the
Business Transaction.
Options may be granted under the 1998 Plan until its termination on
September 26, 2008. The rights under outstanding options granted are to be
adjusted as a result of certain events, as defined in the 1998 Plan.
<PAGE> 19
During 1998, the Company issued 10,000 options to a nonemployee as part of
his or her compensation for services. The Company has recorded this
transaction at fair value, which was $7,963, as compensation expense.
The following table summarizes option activity under the 1994 and 1998
Plans for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS OPTION PRICE OPTION PRICE
<S> <C> <C> <C>
INCENTIVE STOCK OPTIONS
Outstanding, December 31, 1997 95,000 $ 1.00-$2.58 $ 1.18
Granted 96,500 2.81 2.81
Exercised - - -
Expired - - -
------------- -------------- --------------
Outstanding, December 31, 1998 191,500 1.00-2.81 1.88
Granted - - -
Exercised - - -
Expired - - -
------------- -------------- --------------
Outstanding, December 31, 1999 191,500 $ 1.00-$2.81 $ 1.88
============= ============== ==============
Exercisable, December 31, 1999 140,000 $ 1.00-$2.81 $ 1.71
============= ============== ==============
Available for future grant,
December 31, 1999 12,000 $ - $ -
============= ============== ==============
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS OPTION PRICE OPTION PRICE
<S> <C> <C> <C>
NONQUALIFIED STOCK OPTIONS
Outstanding, December 31, 1997 54,000 $ 1.00-$2.58 $ 1.26
Granted 75,000 2.81 2.81
Exercised - - -
Expired - - -
------------- -------------- --------------
Outstanding, December 31, 1998 129,000 1.00-2.81 2.16
Granted - - -
Exercised (12,000) 1.00 1.00
Expired - - -
------------- -------------- --------------
Outstanding, December 31, 1999 117,000 $ 1.00-$2.81 2.28
============= ============== ==============
Exercisable, December 31, 1999 107,000 $ 1.00-$2.81 $ 2.03
============= ============== ==============
Available for future grant,
December 31, 1999 - $ - $ -
============= ============== ==============
</TABLE>
In October 1995, the Financing Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement
of the fair value of stock options or warrants to be included in the
consolidated statement of operations or disclosed in the notes to consolidated
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25 and has elected the disclosure-only alternative under SFAS
No. 123.
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted in 1999 and 1998 using the Black-Scholes option pricing
model prescribed by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Average risk-free interest rate 4.72% 4.72%
Expected dividend yield - -
Expected lives 6.37 years 6.25 years
Expected volatility - -
Weighed average fair value of grants $0.73 $0.72
Weighted average remaining contractual
life of options outstanding 7 years 8 years
</TABLE>
<PAGE> 21
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, the pro forma net income would have been as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net income as reported $896,656 $666,797
Pro forma 873,761 628,326
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASE OBLIGATIONS
The Company leases facilities under various operating leases.
In addition to minimum rental payments, many of the club
locations include provisions for real estate taxes and additional
rents based on percentage of club revenue above designated
levels. One lease agreement is guaranteed by two officers of the
Company up to a maximum amount of $37,500.
Total rent expense, including real estate taxes, included in the
accompanying consolidated statements of income was approximately
$2,171,000 and $2,704,000 for the years ended December 31,1999
and 1998, respectively.
FIXED RENTS
The approximate future minimum annual rents due under
noncancelable operating lease agreements as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
TOTAL
Year ending December 31,
<S> <C>
2000 $ 1,784,000
2001 1,446,000
2002 1,458,000
2003 1,491,000
2004 1,290,000
Thereafter 1,791,000
---------------
$ 9,260,000
===============
</TABLE>
PERCENTAGE RENTS
Hotel Clubs, Inc. signed three operating leases for its
facilities in 1993. Each lease is for an initial term of 10 years
and contains two five-year renewal options. The Company pays
annual rent equal to 15% of gross sales in monthly installments.
The Colonial Club, Inc. leases its facility under its initial
10-year operating lease. Aside from its base rent payment, the
Colonial Club, Inc. pays a percentage rent equal to 15% of
revenue, minus guest fees, in excess of $1,500,000.
<PAGE> 22
The Sky Club's lease was renewed on September 30, 1998 for an
additional five-year term. Aside from its base rent payment, the
lease requires the club to remit 15% percentage rent on a monthly
basis once the base revenue of $1,250,000 is reached.
(b) CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under a capital lease
obligation, which expires in fiscal year 2000. The future minimum
payments under this lease as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Year ending December 31, 2000 $ 8,500
Less--Amount representing interest 443
---------------
Present value of minimum lease payments $ 8,057
===============
</TABLE>
(8) RELATED PARTY TRANSACTIONS
During 1999 and 1998, $78,120 and $69,780, respectively, of consulting fees
were paid to a stockholder.
Pursuant to his employee agreement, the Company will loan a key employee up
to $200,000 to assist with purchase of common shares from exercised common
stock options; the loan will have a term of three years. Interest is due on
the unpaid balance of 6% per annum. Principal on this note will be due at
the end of three years. As of December 31, 1999, no loan has been granted.
As discussed in Note 3, the Company issued subordinated notes payable of
$960,000 to various related parties during 1999.
(9) EMPLOYEE BENEFITS
The Company sponsors the Health Development Corporation 401(k) plan (the
Plan). All employees who have completed 12 months of service, as defined,
are eligible to participate in the Plan. The Plan allows eligible employees
to make salary-deferred contributions of up to 20% and 15% during 1999 and
1998, respectively, of their annual compensation, as defined, subject to
IRS limitations. The Company may contribute to the Plan at its discretion.
For the years ended December 31,1999 and 1998, $25,081 and $8,000,
respectively, were made in employer contributions.
On January 1, 1999, the Company entered into agreements with several
members of management. The agreements provide for specified compensation in
the event an outside entity acquires 51% or more of the Company, as
defined.
(10) ACQUISITION
On November 1, 1999, pursuant to a purchase and sale agreement with
Silver's Health and Fitness Center, Inc. (Silver's) the Company acquired
certain assets and assumed certain liabilities
<PAGE> 23
for consideration of $2,731,395 in cash. The acquisition has been accounted
for by the purchase method of accounting and, accordingly, the purchase
price has been allocated to the assets acquired based on the estimated fair
values at the date of acquisition. The excess of purchase price over the
estimated fair values of the net assets acquired has been recorded as
goodwill, which is being amortized over 15 years. The results of Silver's
operations since November 1, 1999 have been included in the accompanying
consolidated statement of income. The purchase price was allocated to the
acquired net assets as follows:
<TABLE>
<S> <C>
Land $ 629,000
Building 1,715,000
Furniture, fixtures, and equipment 96,308
Accounts receivable 954
Inventory 2,738
Membership list 396,000
Deferred membership and other liabilities (118,605)
Goodwill 10,000
-----------
$ 2,731,395
===========
</TABLE>
The following unaudited pro forma information has been prepared assuming
the Silver's acquisition had taken place on January 1, 1998. The pro forma
adjustments give effect to depreciation and amortization of assets, lease
payments, interest expense on acquisition debt and related income tax
effects:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
Revenues $17,630,000 $16,012,000
Pro forma net income 1,022,000 668,000
</TABLE>
(11) SUBSEQUENT EVENT
On March 3, 2000, the Company signed a letter of intent with Town Sports
International Inc. that calls for the acquisition of the common stock of
the Company for an estimated price of $19.2 million by the agreed date of
May 15, 2000.
<PAGE> 24
Item 7(a)
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES (Continued)
Condensed Consolidated Financial Statements
March 31, 2000 and 1999
(Unaudited)
<PAGE> 25
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,346,753
Accounts receivable, net of allowance for doubtful accounts of $8,784
at March 31, 2000 315,972
Inventories 20,703
Current portion of deferred acquisition costs 83,870
Refundable and current deferred income taxes 487,825
Prepaid expenses and other current assets 412,676
------------
Total current assets 2,667,799
------------
PROPERTY AND EQUIPMENT:
Land 1,760,963
Building and building improvements 8,167,886
Leasehold improvements 3,132,516
Machinery and equipment 2,069,124
Furniture and fixtures 871,942
Capitalized leased equipment 38,598
Construction-in-progress 121,136
------------
16,162,165
Less--Accumulated depreciation and amortization (3,642,826)
------------
Net property and equipment 12,519,339
------------
OTHER ASSETS:
Membership lists, deferred financing costs and lease-acquisition costs,
net of accumulated amortization of $398,871 at March 31, 2000 621,304
Deposits 76,938
Cash surrender value of life insurance 23,120
Deferred acquisition costs, net of current portion 24,003
Deferred income taxes 185,206
------------
Total other assets 930,571
------------
$ 16,117,709
============
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 266,854
Accounts payable 268,864
Accrued expenses 855,066
Current portion of unearned income 3,556,342
Current portion of deferred rent 79,870
------------
Total current liabilities 5,026,996
------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 9,013,325
Unearned income, net of current portion 64,702
Deferred rent, net of current portion 600,417
------------
Total long-term liabilities 9,678,444
------------
Total liabilities 14,705,440
============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value
Authorized -- 3,000,000 shares
Issued and outstanding--882,096 shares at
March 31, 2000 8,821
Additional paid-in capital 729,648
Retained earnings 673,800
------------
1,412,269
------------
Total stockholders' equity $ 16,117,709
============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
<PAGE> 27
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month Period Ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenues:
Membership revenue $ 3,386,136 $ 2,744,811
Ancillary revenue 983,188 895,530
Corporate revenue 120,483 140,357
----------- -----------
Total revenues 4,489,807 3,780,698
----------- -----------
Expenses:
Club operating expenses 2,378,670 2,091,366
Selling, general and administrative 1,433,320 1,139,895
Depreciation and amortization 291,987 220,676
----------- -----------
Total expenses 4,103,977 3,451,937
Operating income 385,830 328,761
INTEREST INCOME (EXPENSE), NET (216,900) 5,442
----------- -----------
Income before provision for income taxes 168,930 334,203
PROVISION FOR INCOME TAXES 71,967 147,469
----------- -----------
Net income $ 96,963 $ 186,734
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE> 28
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three month period ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 96,963 $ 186,734
Adj to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 265,459 192,686
Loss on sale of equipment 8,406
Change in assets and liabilities, net of acquisition--
Accounts receivable (87,968) 28,811
Inventories (764) 5,216
Prepaid expenses and other current assets (365,962) (205,428)
Deposits 40,118 (6,250)
Accounts payable 66,669 73,814
Accrued expenses and other current liabilities (271,853) (56,093)
Other assets 19,230 13,201
Unearned income 1,056,227 714,431
Deferred rent (13,428)
----------- -----------
Net cash provided by operating activities 813,097 947,122
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (234,802) (371,021)
Increase in cash surrender value of life insurance (753)
----------- -----------
Net cash used in investing activities (235,555) (371,021)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage loans (53,272) 0
Principal payments on term loan (21,875) (24,749)
Principal payments on capital lease obligations (1,942)
----------- -----------
Net cash used in financing activities (77,089) (24,749)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 500,453 551,352
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 846,300 1,841,509
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,346,753 $ 2,392,861
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest $ 215,244 $ 5,442
Income taxes $ 341,191 $ 220,500
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE> 29
HEALTH DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(Unaudited)
(1) PRESENTATION
The unaudited condensed consolidated financial statements presented 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, 1999 consolidated financial statements and notes thereto,
presented elsewhere herein. The unaudited condensed consolidated financial
statements do not include all of the footnote disclosures required by
accounting principles generally accepted in the United States for complete
financial statements pursuant to SEC rules and regulations. In the opinion
of management, all adjustments consisting of normal recurring adjustments
considered necessary to present fairly the consolidated financial position,
results of operations, and cash flows of the Company for the three-month
period presented have been made. The consolidated results of operations for
the three-month period ended March 31, 2000 are not necessarily indicative
of those that may be expected for the entire fiscal year ended December
31, 2000.
(2) LONG-TERM DEBT
Long-term debt at March 31, 2000 consists of the following:
<TABLE>
<CAPTION>
2000
-----------
<S> <C>
Term loan $ 576,043
Mortgage loan (Lexington) 5,377,069
Mortgage loan (Franklin) 1,971,655
Mortgage loan (Franklin) 389,296
Subordinated notes payable--Related parties 960,000
Equipment capital leases, bearing interest at
10%, payable in monthly installments
ranging from $620 to $708 through
December, 2000, guaranteed by the related
equipment 6,116
-----------
9,280,179
Less--Current portion 266,854
-----------
Long-term debt, net of current
portion $9,013,325
===========
</TABLE>
(3) LINE OF CREDIT
At March 31, 2000, the Company has a $250,000 line-of-credit agreement with
a bank. Borrowings bear interest at the bank's prime rate plus 0.25% (9.50%
at March 31, 2000) and were secured by certain machinery and equipment. The
line of credit expires on May 31, 2001. As of March 31, 2000, there were no
outstanding borrowings under the line-of-credit agreement. The agreement
contains restrictive covenants including the maintenance of certain
financial ratios, as defined. The Company was in compliance with its loan
covenants at March 31, 2000.
(4) SUBSEQUENT EVENT
On July 13, 2000, the Company was purchased by Town Sports International,
Inc. for $18.9 million.
<PAGE> 30
Item 7 (b)
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data gives effect
to the acquisition of Health Development Corporation and subsidiaries
(collectively, "HDC") which occurred on July 13, 2000.
The unaudited pro forma combined condensed balance sheet reflects the
historical financial position of Town Sports International, Inc. and
Subsidiaries (the "Company") pro forma for the effects of the HDC Acquisition as
if it had occurred March 31, 2000.
The unaudited pro forma combined condensed statements of operations
combine the historical operating results of the Company and HDC for the year
ended December 31, 1999 and the three months ended March 31, 2000 as if the HDC
Acquisition had occurred on January 1, 1999.
The unaudited pro forma combined condensed financial data does not
reflect cost savings, synergies or other financial benefits which may be
achieved from the acquisition of HDC, nor do they purport to be indicative of
the operating results or the financial position that would have been realized
had the HDC Acquisition been consummated as of the date or for the period for
which the pro forma data is presented. The unaudited pro forma adjustments
described in the notes are based upon current preliminary estimates and contain
assumptions that the Company's management believes are reasonable in such
circumstances. Final estimates could be different and the differences could be
material.
The unaudited pro forma combined condensed financial data is based on
and should be read in conjunction with, the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, and Quarterly Report on Form 10-Q for the
three months ended March 31, 2000, previously filed with the Securities and
Exchange Commission, and the financial statements of HDC included in this
report.
The following pro forma financial data is provided:
1. Unaudited pro forma combined condensed balance sheet as of March 31, 2000.
2. Unaudited pro forma combined condensed statement of operations for the year
ended December 31, 1999 and the three months ended March 31, 2000.
3. Unaudited notes to pro forma combined condensed financial data.
<PAGE> 31
Town Sports International, Inc. and Subsidiaries
Unaudited Pro Forma Combined Condensed Balance Sheet
At March 31, 2000
All figures $000
(Unaudited)
<TABLE>
<CAPTION>
The
Company HDC Pro Forma The Company
Historical Historical Adjustments Note Pro Forma
--------- ---------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,854 $ 1,347 $(13,400) (3) $ 12,801
Accounts receivable 848 316 - 1,164
Inventory 968 21 - 989
Current portion of deferred membership costs - 84 (84) (4) -
Refundable and current deferred income taxes - 488 1,300 (5) 1,788
Prepaid expenses and other current assets 1,494 412 1,906
--------- ------- -------- ---------
Total current assets $ 28,164 $ 2,668 $(12,184) $ 18,648
Fixed assets, net 133,154 12,519 (8,686) (4) 136,987
Intangible assets, net 39,902 621 15,430 (6) 55,953
Deferred tax asset 12,511 185 (211) (5) 12,485
Deferred membership costs 11,713 24 (24) (4) 11,713
Other assets 1,326 101 (23) (4) 1,404
--------- ------- -------- ---------
Total assets $ 226,770 $16,118 $ (5,698) $ 237,190
========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long term debt and capital
lease obligations $ 2,617 $ 267 $ (267) (4) $ 2,617
Credit Facility - - 6,000 (3) 6,000
Accounts payable 2,419 269 - 2,688
Accrued expenses 15,751 855 - 16,606
Corporate income taxes payable - - - -
Current portion of lease liabilities - 80 (80) (4) -
Deferred revenue 19,478 3,556 (330) (4) 22,704
--------- ------- -------- ---------
Total Current Liabilities 40,265 5,027 5,323 50,615
Long-term debt and capital lease obligations 130,005 9,013 (9,013) (4) 130,005
Deferred lease liabilities 14,878 600 (600) (4) 14,878
Deferred revenue 2,418 65 5 (4) 2,488
Other liabilities 2,090 - 2,090
--------- ------- -------- ---------
Total liabilities 189,656 14,705 (4,285) 200,076
--------- ------- -------- ---------
Redeemable senior preferred stock 43,503 - - 43,503
--------- ------- -------- ---------
Preferred stock 24,238 - 24,238
Common 1 9 (9) (4) 1
Paid-in capital 8,377 730 (730) (4) 8,377
Unearned compensation (1,240) - - (1,240)
Accumulated deficit (37,765) 674 (674) (4) (37,765)
--------- ------- -------- ---------
Total stockholders' deficit (6,389) 1,413 (1,413) (6,389)
--------- ------- -------- ---------
Total liabilities & stockholders' deficit $ 226,770 $16,118 $ (5,698) $ 237,190
========= ======= ======== =========
</TABLE>
See unaudited notes to pro forma combined condensed financial data
<PAGE> 32
Town Sports International, Inc. and Subsidiaries
Unaudited Pro Forma Combined Condensed Income Statement
For the year ended December 31, 1999
All figures $'000
(Unaudited)
<TABLE>
<CAPTION>
The
Company HDC Pro Forma The Company
Historical Historical Adjustments Note Pro Forma
---------- ---------- ----------- ---- -----------
Revenues:
<S> <C> <C> <C> <C> <C>
Club operations $ 157,440 $ 15,622 $ 173,062
Fees & other 2,339 580 2,919
--------- --------- --------- --------
159,779 16,202 175,981
Operating expenses:
Payroll & related 62,412 0 $ 6,952 (7) 69,364
Club operating 52,619 8,405 (5,028) (8) 55,996
General & administrative 10,908 4,863 (1,608) (7) 14,163
Depreciation & amortization 20,935 961 2,023 (9) 23,919
Compensation expense incurred in connection
with stock options 2,042 - - 2,042
--------- --------- --------- --------
148,916 14,229 2,339 165,484
--------- --------- --------- --------
Operating income 10,863 1,973 (2,339) 10,497
Interest expense 11,527 473 82 (10) 12,082
Interest income (1,284) (40) 581 (10) (743)
--------- --------- --------- --------
Income (loss) before corporate income taxes 620 1,540 (3,002) (842)
Provision (benefit) for corporate income taxes 571 643 (799) 415
--------- --------- --------- --------
Net income (loss) 49 897 (2,203) (1,257)
Accreted dividends on preferred stock (7,880) - - (7,880)
--------- --------- --------- --------
Net (loss) income attributable to common
stockholders $ (7,831) $ 897 $ (2,203) $ (9,137)
========= ========= ========= ========
</TABLE>
See unaudited notes to pro forma combined condensed financial data
<PAGE> 33
Town Sports International, Inc. and Subsidiaries
Unaudited Pro Forma Combined Condensed Income Statement
For the three months ended March 31, 2000
All figures $'000
(Unaudited)
<TABLE>
<CAPTION>
The
Company HDC Pro Forma The Company
Historical Historical Adjustments Note Pro Forma
---------- ---------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Club operations $ 48,724 $ 4,369 $ 53,093
Fees & other 545 121 $ 666
-------- -------- --------
49,269 4,490 53,759
Operating expenses:
Payroll & related 19,811 - $ 2,029 (7) $ 21,840
Club operating 15,332 2,379 (1,461) (8) $ 16,250
General & administrative 3,222 1,433 (382) (7) $ 4,273
Depreciation & amortization 6,026 292 474 (9) $ 6,792
Compensation expense incurred in
connection with stock options 209 - - $ 209
-------- -------- -------- --------
44,600 4,104 660 49,364
-------- -------- -------- --------
Operating income 4,669 386 (660) 4,395
Interest expense 3,614 221 (82) (10) $ 3,753
Interest income (556) (4) 145 (10) $ (415)
-------- -------- -------- --------
Income (loss) before corporate income taxes 1,611 169 (723) 1,057
Provision (benefit) for taxes 784 72 (188) (11) $ 668
-------- -------- -------- --------
Net income 827 97 (535) 389
Accreted dividends on preferred stock (2,170) - - $(2,170)
-------- -------- -------- --------
Net (loss) income attributable to common
stockholders $ (1,343) $ 97 $ (535) $(1,781)
======== ======== ======== ========
</TABLE>
See unaudited notes to pro forma combined condensed financial data
<PAGE> 34
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(1) The historical balance sheet of HDC as of March 31, 2000 and the historical
income statement for the three months ending March 31, 2000 have been
derived from unaudited financial information. The HDC historical income
statement for the year ended December 31, 1999, has been derived from the
audited financial statements included herein.
(2) On July 13, 2000, the Company acquired all of the outstanding common stock
of Health Development Corporation ("HDC"). HDC operated eight health clubs
in Massachusetts and one in New Hampshire. HDC also provided management
services at three health club facilities in the greater Boston area. For
purposes of preparing the unaudited pro forma combined condensed balance
sheet, the HDC acquisition has been accounted for in accordance with the
purchase method whereby the aggregate purchase price of $19.4 million has
been allocated to the tangible net assets acquired on the basis of their
respective estimated fair values. The excess of the purchase price over the
tangible assets has been allocated to the acquired membership lists and
goodwill, on a club-by-club basis. The acquired membership lists are
amortized over their estimated usefulness, two years, while goodwill is
amortized over the lives of the respective club leases. The table below
summarizes the purchase price and the estimated allocation thereof.
<TABLE>
<CAPTION>
Computation of the purchase price: (in thousands)
--------------
<S> <C>
Cash and cash equivalents $12,900
Borrowings under the Credit Facility 6,000
Transaction costs 500
-------
$19,400
=======
Estimated allocation of the purchase price:
Tangible net assets acquired, including cash of $1,347 3,343
Membership lists 2,300
Goodwill 13,757
-------
$19,400
=======
</TABLE>
(3) The Cash and cash equivalents adjustment reflects the $12.9 million of
purchase price paid from cash as well as estimated transaction costs of
$500,000. The credit facility adjustment reflects the $6.0 million drawn on
the Company's credit line preceding the transaction.
(4) Adjustments to eliminate HDC's assets not acquired and liabilities and
stockholders' equity not assumed in the HDC acquisition, as follows:
- Deferred membership costs
- The land and buildings of the Lexington and Franklin clubs.
- An officer's life insurance policy included in other long-term assets.
- Deferred lease liabilities.
- All long-term debt and capital lease obligations
- All deferred revenue associated with membership initiation fees.
<PAGE> 35
(5) The total $1.1 million tax adjustment reflects:
- Current and deferred tax assets of $1.8 million generated in connection
with events taking place immediately before the consummation of the HDC
acquisition. A majority of the assets generated relate to the exercise
of stock options and change-in-control payments made to certain HDC
employees. The current tax portion relates to federal net operating
loss carrybacks that will generate a tax refund estimated to be $1.3
million.
- Deferred tax liabilities of $940,000 generated in connection with the
recording of the membership list asset.
- Deferred tax liabilities of $250,000 related to HDC
deferred rent also not assumed.
<TABLE>
<CAPTION>
Summary of Tax Adjustments:
---------------------------
<S> <C>
i) Tax assets generated by the transaction $1,779
ii) Tax liabilities related to the membership list
intangible asset recorded (940)
iii) Tax liability related to deferred lease liabilities
not assumed 250
------
Total tax adjustment 1,089
Tax assets in i) above expected to generate a tax refund 1,300
------
Net adjustment to long term deferred tax asset $ (211)
======
</TABLE>
(6) Represents an increase in intangible assets resulting from the acquired
membership lists of $2.3 million and goodwill of $13.8 million, offset by
$621,000 of HDC intangible assets not acquired.
(7) Represents payroll & related expenses included in HDC's historical
general & administrative and club operating results. These amounts have
been reclassified to payroll & related for consistent presentation with
the Company.
(8) Immediately prior to the HDC acquisition, HDC sold the land and buildings
that housed the Lexington and Franklin health clubs to a partnership
owned by the shareholders of HDC. The Company has entered into long-term
leases for these two club facilities from this partnership. Pro forma
rent amounts to $316,000 for the year ended December 31, 1999 and
$186,000 for the three months ended March 31, 2000. These locations have
been purchased by HDC during 1999 and therefore the rent expense
adjustment included in the year ended December 31, 1999 pro forma does
not represent twelve months of rent. For the year ended December 31, 1999
and the three months ended March 31, 2000, $5.3 million and $1.6 million
of payroll & related costs were reclassified from club operating to
payroll & related.
<PAGE> 36
(9) Represents $2.2 million and $550,000 of amortization for the year ended
December 31, 1999 and the three months ended March 31, 2000 respectively,
recorded in connection with the goodwill and membership lists acquired,
less amortization of $109,000 and $49,000 respectively related to HDC
buildings not acquired together with $67,000 and $27,000 respectively,
of intangible asset amortization related to intangible assets not
assumed.
(10) HDC's debt will not be assumed by the Company. Accordingly, interest
expense related to HDC's debt has been reversed. Interest expense has
been recorded based on the $6.0 million borrowed by TSI at an assumed
rate of 9.25%. To the extent interest rates change by 0.125%, the impact
on the year ended December 31, 1999 and the three months ended March 31,
2000 are $44,000 and $11,000 net of corporate income taxes respectively.
Interest income recorded by TSI has been decreased by the total purchase
price funded by cash, $12.9 million at the 1999 average earnings rate of
4.5%.
(11) For the year ended December 31, 1999, the adjustment reflects total
pre-tax pro forma charges of $3.0 million less the non-deductible
permanent goodwill amortization adjustment of $1.0 million at the
Company's statutory rate; 41%. For the three months ended March 31, 2000,
the adjustment reflects total pre-tax pro forma charges of $723,000 less
the non-deductible permanent goodwill amortization adjustment of $263,000
at the Company's statutory rate.
