<PAGE> 1
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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 JUNE 30, 2000
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)
<TABLE>
<CAPTION>
NEW YORK 13-2749906
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 1,005,698.
--------------------------------------------------------------------------------
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<PAGE> 2
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets as of December
31, 1999 and June 30, 2000.......................... 2
b) Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 1999 and
2000................................................ 3
c) Condensed Consolidated Statements of Cash Flow for
the three and six months ended June 30, 1999 and
2000................................................ 4
d) Notes to Condensed Consolidated Financial
Statements.......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 10
Item 2. Changes in Securities............................. 10
Item 3. Defaults upon Senior Securities................... 10
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 10
Item 5. Other Information................................. 10
Item 6. Exhibits and Reports on Form 8-K.................. 10
SIGNATURES.................................................. 11
Exhibit Index............................................... 12
</TABLE>
1
<PAGE> 3
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 27,125 $ 24,522
Accounts receivable....................................... 576 1,244
Inventory................................................. 1,070 802
Prepaid expenses and other current assets................. 1,475 1,133
-------- --------
Total current assets............................... 30,246 27,701
Fixed assets, net of accumulated depreciation of $36,388 and
$44,745 at December 31, 1999 and June 30, 2000,
respectively.............................................. 123,894 144,173
Intangible assets, net of accumulated amortization of
$12,939 and $16,413 at December 31, 1999 and June 30,
2000, respectively........................................ 37,648 38,351
Deferred tax asset.......................................... 11,829 13,521
Deferred membership costs................................... 10,841 12,159
Other assets................................................ 1,220 1,251
-------- --------
Total assets....................................... $215,678 $237,156
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................. $ 2,276 $ 2,833
Accounts payable.......................................... 3,146 2,443
Accrued expenses and Corporate income taxes payable....... 10,116 13,944
Deferred revenue.......................................... 15,723 20,610
-------- --------
Total current liabilities.......................... 31,261 39,830
-------- --------
Long-term debt and capital lease obligations................ 129,926 136,455
Deferred lease liabilities.................................. 13,852 15,685
Deferred revenue............................................ 2,049 2,517
Other liabilities........................................... 2,121 3,913
-------- --------
Total liabilities.................................. 179,209 198,400
-------- --------
Redeemable senior preferred stock, $1.00 par value;
liquidation value $45,478 and $48,207 at December 31,
1999, and June 30, 2000, respectively; authorized 100,000
shares; 40,000 shares issued and outstanding at December
31, 1999 and June 30, 2000................................ 42,066 44,966
-------- --------
Stockholders' deficit:
Series A preferred stock, $1.00 par value; at liquidation
value, authorized 200,000 shares, 153,637 shares issued
and outstanding at December 31, 1999 and June 30,
2000.................................................... 23,216 24,841
Series B preferred stock, $1.00 par value; at liquidation
value authorized 200,000 shares, 3,855 and 3,822 shares
issued and outstanding at December 31, 1999 and
June 30, 2000 respectively.............................. 204 216
Class A voting common stock, $.001 par value; 1,014,086
and 1,005,698 shares issued and outstanding at December
31, 1999 and June 30, 2000, respectively................ 1 1
Paid-in capital........................................... 8,556 8,587
Unearned compensation..................................... (1,240) (1,240)
Accumulated deficit....................................... (36,334) (38,615)
-------- --------
Total stockholders' deficit........................ (5,597) (6,210)
-------- --------
Total liabilities and stockholders' deficit........ $215,678 $237,156
======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE> 4
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
ALL FIGURES $'000
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Club operations............................ $38,049 $52,094 $73,597 $100,818
Fees and other............................. 582 649 1,173 1,194
------- ------- ------- --------
38,631 52,743 74,770 102,012
------- ------- ------- --------
Operating expenses:
Payroll and related........................ 15,402 20,804 29,192 40,615
Club operating............................. 12,780 15,833 25,312 31,165
General and administrative................. 2,569 3,881 4,830 7,103
Depreciation and amortization.............. 5,200 6,130 9,829 12,156
Compensation expense in connection with
stock options........................... 659 210 849 419
------- ------- ------- --------
36,610 46,858 70,012 91,458
------- ------- ------- --------
Operating income........................... 2,021 5,885 4,758 10,554
Interest expense............................. 2,356 3,356 4,524 6,802
Interest income.............................. (150) (353) (400) (741)
------- ------- ------- --------
Income (loss) before provision (benefit)
for corporate income tax................ (185) 2,882 634 4,493
Provision (benefit) for corporate income
tax........................................ (76) 1,451 319 2,235
------- ------- ------- --------
Net Income (loss).......................... (109) 1,431 315 2,258
Accreted dividends on preferred stock........ (1,955) (2,195) (3,888) (4,368)
------- ------- ------- --------
Net loss attributable to common
stockholders............................ $(2,064) $ (764) $(3,573) $ (2,110)
======= ======= ======= ========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE> 5
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
ALL FIGURES $'000
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 315 $ 2,258
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 9,829 12,156
Compensation expense in connection with stock options..... 849 419
Noncash rental expense, net of noncash rental income...... 1,698 1,743
Share of net income in affiliated companies............... (168) (230)
Amortization of debt issuance costs....................... 350 731
Change in certain working capital components.............. 8,749 8,953
Increase in deferred tax asset............................ (1,698) (1,790)
Increase in deferred membership costs..................... (1,835) (1,318)
Other..................................................... 44 59
-------- --------
Total adjustments....................................... 17,818 20,723
-------- --------
Net cash provided by operating activities............... 18,133 22,981
-------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired
businesses.............................................. (29,565) (27,516)
Acquisition of businesses................................. (2,025) (5,152)
Intangible and other assets............................... (145) (41)
Landlord contributions.................................... 586 1,568
-------- --------
Net cash used in investing activities................... (31,149) (31,141)
-------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings, net of effects of acquired
businesses.............................................. 35,778 7,380
Repayments of borrowings.................................. (1,064) (1,432)
Repurchase of stock and other............................. (24) (391)
-------- --------
Net cash provided by financing activities............... 34,690 5,557
-------- --------
Net (decrease) increase in cash and cash equivalents.... 21,674 (2,603)
Cash and cash equivalents at beginning of period............ 19,154 27,125
-------- --------
Cash and cash equivalents at end of period.............. $ 40,828 $ 24,522
======== ========
Summary of change in certain working capital components, net
of effects of acquired businesses:
(Increase) decrease in accounts receivable................ $ 207 (384)
Decrease in inventory..................................... 94 284
Decrease in prepaid expenses and other current assets..... 43 602
Increase in accounts payable and accrued expenses......... 4,215 3,159
Increase in deferred revenue.............................. 4,190 5,292
-------- --------
Net changes in working capital.......................... $ 8,749 $ 8,953
======== ========
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
</TABLE>
The Company assumed $1,138 of long term debt in connection with club
acquisitions during the six month period ended June 30, 2000.
See notes to the condensed consolidated financial statements.
4
<PAGE> 6
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JUNE 30, 2000
ALL FIGURES $'000 (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The condensed consolidated financial statements
should be read in conjunction with the Company's December 31, 1999 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 accounting principles generally
accepted in the United States. Certain information and footnote disclosures
which are normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to SEC rules and regulations. The Company believes that the disclosures made are
adequate to make the information presented not misleading. The information
reflects all adjustments which, in the opinion of Management, are necessary for
a fair presentation of the financial position and results of operations for the
interim periods set forth herein. All such adjustments are of a normal and
recurring nature. The results for the quarter and the six months ended June 30,
2000 are not necessarily indicative of the results for the entire fiscal year
ending December 31, 2000.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ---------
<S> <C> <C>
Series B 9 3/4% Senior Notes, due 2004...................... $125,000 $125,000
Line of credit.............................................. -- 6,000
Notes payable for acquired businesses....................... 3,777 4,093
Capital lease obligations................................... 3,425 4,195
-------- --------
132,202 139,288
Less, Current portion due within one year................... 2,276 2,833
-------- --------
Long-term portion........................................... $129,926 $136,455
======== ========
</TABLE>
As of June 30, 2000, the Company has a line of credit, with its principal
banks for direct borrowings and letters of credit of up to $25.0 million. The
line of credit carries interest at the Company's option, based upon the
Eurodollar borrowing rate plus 2.50% or the bank's prime rate plus 1.50%, as
defined. Borrowings against this line of credit as of June 30, 2000 amounted to
$6.0 million at an interest rate of 9.25%, and outstanding letters of credit
issued totaled $1.7 million. The unutilized portion of the line of credit as of
June 30, 2000, was $17.3 million. This line of credit expires on October 15,
2002.
The line of credit contains various covenants including interest coverage
and a leverage ratio as well as restrictions on the payment of dividends.
3. SUBSEQUENT EVENT
On July 13, 2000, the Company acquired Health Development Corporation,
("HDC") a Massachusetts Corporation. HDC was purchased for $18.9 million in
cash. Including $500,000 of estimated transaction costs the aggregate purchase
price amounts to $19.4 million. The acquisition was financed with $6.0 million
of line of credit borrowings and cash on hand.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are one of the two leading owners and operators of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States. As of June 30, 2000, we
operated 91 clubs that collectively served approximately 241,000 members. We
develop clusters of clubs to serve densely populated major metropolitan regions
in which a high percentage of the population commutes to work. We service such
populations by clustering clubs near the highest concentrations of its target
customers' areas of both employment and residence. Our target customer is
college-educated, typically between the ages of 20 and 44 and earns an annual
income of approximately $50,000.
Our goal is to develop the premier health club network in each of the major
metropolitan regions we enter. We believe that clustering clubs allows us to
achieve strategic operating advantages that enhance our ability to achieve this
goal. In entering new regions, we develop these clusters by initially opening or
acquiring clubs located in the more central urban markets of the region and then
branching out from these urban centers to suburbs and ancillary communities.
Capitalizing on this clustering of clubs, as of June 30, 2000, approximately
half of our members participated in a membership plan that allows unlimited
access to all of our clubs for a higher membership fee.
We have executed this strategy successfully in the New York region through
the network of clubs we operate under our New York Sports Club "NYSC" brand
name. We are the largest fitness club operator in Manhattan with 28 locations
and operate a total of 68 clubs under the NYSC name within a defined radius of
New York City. We operate eleven clubs in the Washington, DC market, six clubs
in the Boston, MA, market four clubs in the Philadelphia, PA market under our
Washington Sports Club, Boston Sports Club and Philadelphia Sports Club brand
names, respectively. In addition we operate two clubs in Switzerland. 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.
On July 13, 2000 we purchased Health Development Corporation "HDC",
significantly, increasingly our presence in the greater Boston market. HDC
operated nine health clubs and provided management services at three health
clubs in the greater Boston market.
Our operating and selling expenses are comprised of both fixed and variable
costs. The fixed costs include salary expense, rent, utilities, janitorial
expenses and depreciation. Variable costs are primarily related to sales
commissions, advertising and supplies. As clubs mature and increase their
membership base, fixed costs are typically spread over an increasing revenue
base and operating margins tend to improve.
HISTORICAL CLUB GROWTH
The following table sets for our club growth during each of the quarters in
1999 and each of the quarters ended June 30, 2000.
<TABLE>
<CAPTION>
1999 2000
--------------------------------- -----------
Q1 Q2 Q3 Q4 TOTAL Q1 Q2
--- --- --- --- ----- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Clubs operated at beginning of period......... 69 74 79 83 69 86 86
Greenfield clubs.............................. 4 4 3 3 14 0 5
Acquired clubs................................ 2 1 1 0 4 1 0
Relocated clubs............................... (1) 0 0 0 (1) (1) 0
--- --- --- --- -- ---- --
Clubs operated at end of period............... 74 79 83 86 86 86 91
Number of managed clubs included at end of
period...................................... 4 4 4 4 4 2(a) 2
</TABLE>
---------------
(a) In March 2000, we purchased two clubs previously managed by the Company.
6
<PAGE> 8
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses
Payroll and related....................................... 39.9 39.4 39.0 39.8
Club operating............................................ 33.0 30.0 33.9 30.6
General and administrative................................ 6.7 7.4 6.5 7.0
Depreciation and amortization............................. 13.5 11.6 13.1 11.9
Compensation expense in connection with stock options..... 1.7 0.4 1.1 0.4
----- ----- ----- -----
Operating income.......................................... 5.2 11.2 6.4 10.3
Interest expense............................................ 6.1 6.4 6.1 6.6
Interest income............................................. (0.4) (0.7) (0.5) (0.7)
----- ----- ----- -----
Income (loss) before provision (benefit) for corporate
income tax.............................................. (0.5) 5.5 0.8 4.4
Provision (benefit) for corporate income tax................ (0.2) 2.8 0.4 2.2
----- ----- ----- -----
Net income (loss)......................................... (0.3) 2.7 0.4 2.2
Accreted dividends on preferred stock....................... (5.1) (4.2) (5.2) (4.3)
----- ----- ----- -----
Net loss attributable to common stockholders.............. (5.4)% (1.5)% (4.8)% (2.1)%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues. Revenues increased approximately $14.1 million, or 36.5%, to
$52.7 million during the quarter ended June 30, 2000 from $38.6 million in the
quarter ended June 30, 1999. This increase resulted from the 13 clubs opened or
acquired the last two quarters of 1998 (approximately $1.6 million), 18 opened
or acquired during 1999 (approximately $5.2 million) and the eight clubs opened
or acquired in the first six months of 2000 (approximately $2.3 million). In
addition, revenues increased during the quarter by approximately $5.4 million or
16.7%, at the Company's mature clubs (clubs owned and operated for at least 24
months) resulting from increased membership dues and ancilliary revenue. The
increase was offset by a $400,000 decrease in revenue associated with a club
relocated in the first quarter of 2000.
Operating Expenses. Operating expenses increased $10.2 million, or 28.0%,
to $46.9 million in the quarter ended June 30, 2000, from $36.6 million in the
quarter ended June 30, 1999. The increase was primarily due to a 18.9% increase
in total months of club operations (the aggregate number of full months of
operation during a given period for the clubs open at the end of such period) to
258 in the quarter ended June 30, 2000 from 218 in the quarter ended June 30,
1999, in addition to the following factors:
Payroll and related increased by $5.4 million, or 35.1% to $20.8
million in the quarter ended June 30, 2000, from $15.4 million in the
quarter ended June 30, 1999. This increase was attributable to the
acquisition or opening of 18 clubs in 1999 and the eight opened or acquired
clubs in the first six months of 2000. The increase was also attiributable
to an increase in personal training payroll.
Club operating increased by $3.1 million or 23.9% to $15.8 million in
the quarter ended June 30, 2000, from $12.8 million in the quarter ended
June 30, 1999. This increase is attributable to the acquisition or opening
of 18 clubs in 1999 and eight opened or acquired clubs in the first six
months of 2000.
General and administrative increased by $1.3 million, or 51.1% to $3.9
million in the quarter ended June 30, 2000, from $2.6 million, in the
quarter ended June 30, 1999. This increase is attributable to
7
<PAGE> 9
expenses associated with the Company's expansion, including the enhancement
of the Company's management information systems.
Depreciation and amortization increased by $930,000, or 17.9% to $6.1
million in the quarter ended June 30, 2000, from $5.2 million in the
quarter ended June 30, 1999. This increase is attributable primarily to a
full period of depreciation and amortization for fixed asset additions,
acquisitions and club openings since the quarter ended June 30, 1999 and
the increased fixed and intangible assets arising from the eight clubs
opened or acquired during the first six months of 2000.
Compensation expense in connection with stock options decreased
$449,000 or 68.1% to $210,000 in the quarter ended June 30, 2000 from
$659,000 in the quarter ended June 30 and relates to preferred stock
options. This decrease is due to certain stock options vesting in the
quarter ended June 30, 1999 while no such vesting occurred in the quarter
ended June 30, 2000.
Interest Expense. Interest expense increased $1.0 million to $3.4 million
during the quarter ended June 30, 2000, from $2.4 million in the quarter ended
June 30, 1999. This increase was primarily due to increased borrowings
associated with the completion of the $40 million Senior Note issuance in June
1999.
Interest Income. Interest income increased $203,000 to $353,000 during the
quarter ended June 30, 2000 from $150,000 in the quarter ended June 30, 1999.
The increase in interest income was due to higher levels of cash on hand and
higher interest rates earned during the quarter ended June 30, 2000.
Provision for Income Tax. The income tax provision for the quarter ended
June 30, 2000 was $1.5 million compared to a tax benefit of $76,000 for the
quarter ended June 30, 1999.
Accreted Dividends on Preferred Stock. Accreted dividends on the preferred
stock increased $240,000 to $2.2 million during the quarter ended June 30, 2000,
from $2.0 million in the quarter ended June 30, 1999. This increase is primarily
a result of the compounding of accreted dividends.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues. Revenues increased approximately $27.2 million, or 36.4%, to
$102.0 million for the six months ended June 30, 2000 from $74.8 million for the
six months ended June 30, 1999. This increase resulted from the 13 clubs opened
or acquired the last six months of 1998 (approximately $3.4 million), 18 opened
or acquired during 1999 (approximately $10.6 million) and the eight clubs opened
or acquired in the first six months of 2000 (approximately $3.5 million). In
addition, revenues increased during the six months by approximately $10.4
million or 16.3%, at the Company's mature clubs (clubs owned and operated for at
least 24 months) resulting from increased membership dues and ancilliary
revenue. This increase was offset by a $700,000 decrease in revenue associated
with a club relocated in the first six months of 2000.
Operating Expenses. Operating expenses increased $21.4 million, or 30.6%,
to $91.5 million for the six months ended June 30, 2000, from $70.0 million for
the six months ended June 30, 1999. The increase was primarily due to a 20.6%
increase in total months of club operations (the aggregate number of full months
of operation during a given period for the clubs open at the end of such period)
to 506 for the six months ended June 30, 2000 from 419 for the six months ended
June 30, 1999, in addition to the following factors:
Payroll and related increased by $11.4 million, or 39.1% to $40.6
million for the six months ended June 30, 2000, from $29.2 million for the
six months ended June 30, 1999. This increase was principally attributable
to the acquisition or opening of 18 clubs in 1999 and the eight opened or
acquired clubs in the first six months of 2000. This increase was also
attributable to an increase in personal training payroll.
Club operating increased by $5.9 million or 23.1% to $31.2 million for
the six months ended June 30, 2000, from $25.3 million for the six months
ended June 30, 1999. This increase is attributable to the acquisition or
opening of 18 clubs in 1999 and eight opened or acquired clubs in the first
six months of 2000.
General and administrative increased by $2.3 million, or 47.1% to $7.1
million for the six months ended June 30, 2000, from $4.8 million, for the
six months ended June 30, 1999. This increase is
8
<PAGE> 10
attributable to expenses associated with the Company's expansion, including
the enhancement of the Company's management information systems.
Depreciation and amortization increased by $2.3 million, or 23.7% to
$12.2 million for the six months ended June 30, 2000, from $9.8 million for
the six months ended June 30, 1999. This increase is attributable primarily
to a full period of depreciation and amortization for fixed asset
additions, acquisitions and club openings since the quarter ended June 30,
1999 and the increased fixed and intangible assets arising from the eight
clubs opened or acquired during the first six months of 2000.
Compensation expense in connection with stock options decreased
$430,000 or 50.6% to $419,000 for the six months ended June 30, 2000 from
$849,000 for the six months ended June 30, 1999. This decrease is due to
certain stock options vesting in the six months ended June 30, 1999. While
no such vesting occurred in the first six months of 2000.
Interest Expense. Interest expense increased $2.3 million to $6.8 million
for the six months ended June 30, 2000, from $4.5 million for the six months
ended June 30, 1999. This increase was primarily due to increased borrowings
associated with the completion of the $40 million Senior Note issuance in June
of 1999.
Interest Income. Interest income increased $341,000 to $741,000 for the
six months ended June 30, 2000 from $400,000 for the six months ended June 30,
1999. This increase is primarily due to higher levels of cash on hand and higher
interest rates earned during the six months ended June 30, 2000.
Provision for Income Tax. The income tax provision for the six months
ended June 30, 2000 was $2.2 million compared to a tax provision of $319,000 for
the six months ended June 30, 1999.
Accreted Dividends on Preferred Stock. Accreted dividends on the preferred
stock increased $480,000 to $4.4 million during the six months ended June 30,
2000, from $3.9 million during the six months ended June 30, 1999. This increase
is primarily a result of the compounding of accreted dividends.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its liquidity needs through cash
from operations and various borrowing arrangements. Principal liquidity needs
have included the acquisition and development of new clubs, debt service
requirements and other capital expenditures necessary to maintain existing
clubs.
Operating Activities. Net cash provided by operating activities for the
six months ended June 30, 2000 was $23.0 million compared to $18.1 million for
the six months ended June 30, 1999, an increase of $4.9 million. Cash flows from
operations has improved as the profitability of the mature club base and the
clubs opened or acquired during the last two quarters of 1998, continues to
improve. The balance of the increase is principally due to an increase in the
working capital deficit of the Company. Excluding cash and cash equivalents, the
Company normally operates with a working capital deficit because it receives
dues or fee revenue either (i) during the month services are rendered, or (ii)
when paid-in-full, 12 months in advance. As a result, the Company has no
material accounts receivable. In addition, because initiation fees are received
at enrollment and are recognized over the estimated average term of membership,
the Company records a deferred revenue liability. Management believes that the
Company's working capital deficit is an important source of cash flow from
operating activities that it believes will continue to grow as the Company's
membership revenues increase.
Investing Activities. The Company invested $27.5 million and $5.2 million
in capital expenditures and business acquisitions, respectively during the six
months ended June 30, 2000. The Company currently estimates total capital
expenditure and asset acquisition requirements for the remaining six months of
2000 to approximate $50.0 million, which includes $19.4 million related to the
July 13, 2000 acquisition of HDC, $4.7 million that management intends to
renovate and expand certain existing clubs including certain HDC clubs, $3.0
million to maintain certain existing clubs and $3.1 million to further upgrade
its management information systems. $19.8 million will be expended on new
greenfield club construction.
9
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Financing Activities. 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 contains restrictive covenants, including a leverage ratio and
interest coverage ratio and dividend payment restrictions and is collateralized
by all the assets of the Company. As of June 30, 2000 the Company has $6.0
million of Eurodollar loans outstanding under this line of credit at an interest
rate of 9.25%, and $1.7 million of outstanding letters of credit. As of June 30,
2000, the Company has approximately $17.3 million available under the line of
credit, which matures in October 2002, and has no scheduled amortization
requirements. Although management believes that the Company will be able to
obtain or generate sufficient funds to finance the Company's current operating
and growth plans through the end of 2000, any material acceleration or expansion
of that plan through additional greenfields or acquisitions (to the extent such
acquisitions include cash payments) may require the Company to pursue additional
sources of financing prior to the end of 2000. There can be no assurance that
such financing will be available or that it will be available on acceptable
terms. The inability to finance such further or accelerated expansion on
acceptable terms may negatively impact the Company's competitive position. The
line of Credit accrues interest at variable rates based on market conditions,
accordingly, future increase in interest rates could have a negative impact on
net income.
FORWARD-LOOKING STATEMENTS
Certain statements in this report on Form 10-Q of the Company for the six
month period ended June 30, 2000 are forward-looking statements, including,
without limitation, statements regarding future financial results and
performance, and potential sales revenue. These statements are subject to
various risks and uncertainties, many of which are outside the control of the
Company, including the level of market demand for the Company's services,
competitive pressures, the ability to achieve reductions in operating costs and
to continue to integrate acquisitions, the application of Federal and state tax
laws and regulations, and other specific factors discussed herein and in other
Securities and Exchange Commission filings by the Company. The information
contained herein represents management's best judgement as of the date hereof
based on information currently available; however, the Company does not intend
to update this information to reflect development or information obtained after
the date hereof and disclaims any legal obligation to the contrary.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
(27) Financial Data Schedules (to be filed electronically)
b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE ITEM
---- ----
<S> <C>
July 28, 2000 2, 7(a) and 7(b)
</TABLE>
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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.
<TABLE>
<S> <C>
TOWN SPORTS INTERNATIONAL, INC.
(Registrant)
DATE: August 8, 2000 By: /s/ RICHARD PYLE
----------------------------------------------------
Richard Pyle
Chief Financial Officer
(principal financial and accounting officer)
DATE: August 8, 2000 By: /s/ MARK SMITH
----------------------------------------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
</TABLE>
11
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
(27) Financial Data Schedule (to be filed electronically).
</TABLE>
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