<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 SEPTEMBER 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 SEPTEMBER 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 September 30, 2000..................... 2
b) Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1999
and 2000............................................ 3
c) Condensed Consolidated Statements of Cash Flow for
the three and nine months ended September 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............... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 11
Item 2. Changes in Securities............................. 11
Item 3. Defaults upon Senior Securities................... 11
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 11
Item 5. Other Information................................. 11
Item 6. Exhibits and Reports on Form 8-K.................. 12
SIGNATURES.................................................. 13
Exhibit Index............................................... 14
</TABLE>
1
<PAGE> 3
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 27,125 $ 8,370
Accounts receivable....................................... 576 1,543
Inventory................................................. 1,070 930
Prepaid expenses and other current assets................. 1,475 2,781
-------- --------
Total current assets............................... 30,246 13,624
Fixed assets, net of accumulated depreciation of $36,388 and
$53,007 at December 31, 1999 and September 30, 2000,
respectively.............................................. 123,894 155,006
Intangible assets, net of accumulated amortization of
$12,939 and $18,398 at December 31, 1999 and September 30,
2000, respectively........................................ 37,648 53,333
Deferred tax asset.......................................... 11,829 14,592
Deferred membership costs................................... 10,841 13,016
Other assets................................................ 1,220 1,357
-------- --------
Total assets....................................... $215,678 $250,928
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................. $ 2,276 $ 2,644
Accounts payable.......................................... 3,146 2,268
Accrued expenses and Corporate income taxes payable....... 10,116 22,141
Deferred revenue.......................................... 15,723 22,511
-------- --------
Total current liabilities.......................... 31,261 49,564
-------- --------
Long-term debt and capital lease obligations................ 129,926 137,058
Deferred lease liabilities.................................. 13,852 16,748
Deferred revenue............................................ 2,049 2,789
Other liabilities........................................... 2,121 3,922
-------- --------
Total liabilities.................................. 179,209 210,081
-------- --------
Redeemable senior preferred stock, $1.00 par value;
liquidation value $45,478 and $49,639 at December 31,
1999, and September 30, 2000, respectively; authorized
100,000 shares; 40,000 shares issued and outstanding at
December 31, 1999 and September 30, 2000.................. 42,066 46,481
-------- --------
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 September 30,
2000.................................................... 23,216 25,711
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
September 30, 2000 respectively......................... 204 224
Class A voting common stock, $.001 par value; 1,014,086
and 1,005,698 shares issued and outstanding at December
31, 1999 and September 30, 2000, respectively........... 1 1
Paid-in capital........................................... 8,556 8,811
Unearned compensation..................................... (1,240) (540)
Foreign currency translation adjustment................... -- (66)
Accumulated deficit....................................... (36,334) (39,775)
-------- --------
Total stockholders' deficit........................ (5,597) (5,634)
-------- --------
Total liabilities and stockholders' deficit........ $215,678 $250,928
======== ========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
ALL FIGURES $'000
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Club operations............................ $41,161 $60,544 $114,758 $161,362
Fees and other............................. 547 683 1,720 1,877
------- ------- -------- --------
41,708 61,227 116,478 163,239
------- ------- -------- --------
Operating expenses:
Payroll and related........................ 16,154 24,461 45,346 65,076
Club operating............................. 13,690 18,790 39,002 49,955
General and administrative................. 2,766 3,876 7,596 10,979
Depreciation and amortization.............. 5,465 6,995 15,294 19,151
Compensation expense in connection with
stock options........................... 187 924 1,036 1,343
------- ------- -------- --------
38,262 55,046 108,274 146,504
------- ------- -------- --------
Operating income........................... 3,446 6,181 8,204 16,735
Interest expense............................. 3,625 3,612 8,149 10,414
Interest income.............................. (498) (190) (898) (931)
------- ------- -------- --------
Income before provision for corporate
income tax.............................. 319 2,759 953 7,252
Provision for corporate income tax........... 165 1,525 484 3,760
------- ------- -------- --------
Net Income................................. 154 1,234 469 3,492
Accreted dividends on preferred stock........ (2,103) (2,309) (5,991) (6,677)
------- ------- -------- --------
Net loss attributable to common
stockholders............................ $(1,949) $(1,075) $ (5,522) $ (3,185)
======= ======= ======== ========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
ALL FIGURES $'000
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 469 $ 3,492
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 15,294 19,151
Compensation expense in connection with stock options..... 1,036 1,343
Noncash rental expense, net of noncash rental income...... 2,381 2,740
Share of net income in affiliated companies............... (240) (188)
Amortization of debt issuance costs....................... 776 1,096
Change in certain working capital components.............. 10,404 14,013
Increase in deferred tax asset............................ (2,397) (3,352)
Increase in deferred membership costs..................... (2,632) (2,175)
Other..................................................... (27) (36)
-------- --------
Total adjustments....................................... 24,595 32,592
-------- --------
Net cash provided by operating activities............... 25,064 36,084
-------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired
businesses.............................................. (42,461) (40,036)
Acquisition of businesses, net of cash acquired........... (2,732) (22,324)
Intangible and other assets............................... (112) (37)
Investment in affiliate................................... -- (210)
Landlord contributions.................................... 848 1,723
-------- --------
Net cash used in investing activities................... (44,457) (60,810)
-------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings, net of effects of acquired
businesses.............................................. 35,581 8,677
Repayments of borrowings.................................. (1,697) (2,315)
Repurchase of stock and other............................. (24) (391)
-------- --------
Net cash provided by financing activities............... 33,860 5,971
-------- --------
Net (decrease) increase in cash and cash equivalents.... 14,467 (18,755)
Cash and cash equivalents at beginning of period............ 19,154 27,125
-------- --------
Cash and cash equivalents at end of period.............. $ 33,621 $ 8,370
======== ========
Summary of change in certain working capital components, net
of effects of acquired businesses:
(Increase) decrease in accounts receivable................ $ 199 (578)
Decrease in inventory..................................... 327 176
Decrease in prepaid expenses and other current assets..... 19 509
Increase in accounts payable and accrued expenses......... 5,079 9,596
Increase in deferred revenue.............................. 4,780 4,310
-------- --------
Net changes in working capital.......................... $ 10,404 $ 14,013
======== ========
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 nine month period ended September 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 SEPTEMBER 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 nine months ended
September 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, SEPTEMBER 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 3,543
Capital lease obligations................................... 3,425 5,159
-------- --------
132,202 139,702
Less, Current portion due within one year................... 2,276 2,644
-------- --------
Long-term portion........................................... $129,926 $137,058
======== ========
</TABLE>
As of September 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 September 30, 2000
amounted to $6.0 million at an interest rate of 9.19%, and outstanding letters
of credit issued totaled $1.8 million. The unutilized portion of the line of
credit as of September 30, 2000, was $17.2 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. ACQUISITION OF HEALTH DEVELOPMENT CORPORATION
On July 13, 2000, the Company acquired Health Development Corporation,
("HDC") a Massachusetts Corporation. HDC was purchased for $18.7 million in
cash. Including $525,000 of transaction costs the aggregate purchase price
amounts to $19.2 million. The acquisition was financed with $6.0 million of line
of credit borrowings and cash on hand. HDC's operations included eight health
clubs in Massachusetts and one health club in New Hampshire. HDC also provided
management services at three health club facilities in the greater Boston area.
For financial reporting purposes the acquisition has been accounted for
under the purchase method, and accordingly, the purchase price has been assigned
to the assets and liabilities acquired on the basis of their
5
<PAGE> 7
respective fair values on the date of the acquisition. The excess of the
purchase price over the net tangible assets acquired has been allocated to
membership lists and goodwill.
The table below summarizes the purchase price allocation to assets and
liabilities acquired:
<TABLE>
<S> <C>
Assets:
Cash...................................................... $ 1,531
Income tax refund receivable.............................. 1,209
Other current assets...................................... 453
Fixed assets.............................................. 3,862
Membership lists.......................................... 2,294
Goodwill.................................................. 14,720
-------
Total Assets...................................... $24,069
Liabilities:
Accounts payable and accrued expenses..................... $ 1,190
Deferred income taxes..................................... 491
Deferred revenue.......................................... 3,155
-------
Total Liabilities................................. 4,836
Total allocation of purchase price.......................... $19,233
=======
</TABLE>
The following unaudited pro forma information has been prepared assuming
the HDC acquisition had taken place at the beginning of the respective nine
month periods reported herein. The pro forma adjustments give effect to
amortization of goodwill, amortization of membership lists, interest expense on
acquisition debt, adjustments to rent expense and the related income tax
effects. Immediately prior to the acquisition, HDC sold the land and buildings
related to two of its fitness clubs and entered into leases with the new
landlords of these clubs. Rent expense, interest on mortgages and building
depreciation related to these two clubs have also been adjusted.
<TABLE>
<CAPTION>
(IN 000'S)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Pro forma revenues.......................................... 128,598 172,957
Pro forma net loss to common shareholders................... (6,382) (3,634)
</TABLE>
This unaudited pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company and HDC had been a single
entity during the first nine months of 1999 or 2000, nor is it indicative of the
results of operations which may occur in the future. Anticipated efficiencies
from the consolidation of HDC and the Company have been excluded from the
amounts included in the pro forma summary presented above.
4. SUBSEQUENT EVENT
In November 2000, the Company entered into a $20.0 million subordinated
credit facility. The facility expires December 31, 2004 and has been provided by
an affiliate of a stockholder of the Company. Interest accrues at 13% per annum;
10% is payable on a monthly basis and 3% is accrued through maturity. The
Company paid a fee of $225,000 and issued 16,000 shares of common stock to the
lender at closing. The subordinated credit facility matures December, 2004. The
fee paid combined with the fair value of the common stock issued will be
accounted for as deferred financing costs and amortized as interest expense over
the life of the facility.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are one of the two leading owners and operators of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States. As of September 30,
2000, we operated 106 clubs that collectively served approximately 272,000
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 54
and earns an annual income in excess of $50,000.
Our goal is to develop the premier health club network in each of the major
metropolitan regions we enter. We believe that clustering clubs allows us to
achieve strategic operating advantages that enhance our ability to achieve this
goal. In entering new regions, we develop these clusters by initially opening or
acquiring clubs located in the more central urban markets of the region and then
branching out from these urban centers to suburbs and ancillary communities.
Capitalizing on this clustering of clubs, as of September 30, 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 29 locations
and operate a total of 69 clubs under the NYSC name within a defined radius of
New York City. We operate 13 clubs in the Washington, DC market, 18 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" for an
aggregate purchase price of $19.2 million, significantly, increasing our
presence in the greater Boston market. HDC operated nine fitness clubs and
provided management services at three fitness 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 forth our club growth during each of the quarters
in 1999 and each of the quarters ended September 30, 2000.
<TABLE>
<CAPTION>
1999 2000
--------------------------------- ------------------
Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3
--- --- --- --- ----- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Clubs operated at beginning of
period............................... 69 74 79 83 69 86 86 91
Greenfield clubs....................... 4 4 3 3 14 0 5 3
Acquired clubs......................... 2 1 1 0 4 1 0 12
Relocated clubs........................ (1) 0 0 0 (1) (1) 0 0
--- --- --- --- -- ---- -- ---
Clubs operated at end of period........ 74 79 83 86 86 86 91 106
Number of managed clubs included at end
of period............................ 4 4 4 4 4 2(a) 2 5(b)
</TABLE>
---------------
(a) In March 2000, we purchased two clubs previously managed by the Company.
(b) In July 2000 we acquired three managed clubs in connection with the
acquisition of HDC.
7
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue................................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses
Payroll and related..................................... 38.7 40.0 38.9 39.9
Club operating.......................................... 32.9 30.7 33.6 30.6
General and administrative.............................. 6.6 6.3 6.5 6.7
Depreciation and amortization........................... 13.7 11.4 13.1 11.7
Compensation expense in connection with stock options... 0.4 1.5 0.9 0.8
----- ----- ----- -----
Operating income........................................ 8.3 10.1 7.0 10.3
Interest expense.......................................... 8.7 5.9 7.0 6.4
Interest income........................................... (1.2) (0.3) (0.8) (0.6)
----- ----- ----- -----
Income before provision for corporate income tax........ 0.8 4.5 0.8 4.5
Provision for corporate income tax........................ 0.4 2.5 0.4 2.4
----- ----- ----- -----
Net income.............................................. 0.4 2.0 0.4 2.1
Accreted dividends on preferred stock..................... (5.0) (3.8) (5.1) (4.1)
----- ----- ----- -----
Net loss attributable to common stockholders............ (4.6)% (1.8)% (4.7)% (2.0)%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Revenues increased approximately $19.5 million, or 46.8%, to
$61.2 million during the quarter ended September 30, 2000 from $41.7 million in
the quarter ended September 30, 1999. This increase resulted from the three
clubs opened or acquired the last quarter of 1998 (approximately $636,000), 18
opened or acquired during 1999 (approximately $4.0 million) and the 23 clubs
opened or acquired in the first nine months of 2000 (approximately $9.0
million). In addition, revenues increased during the quarter by approximately
$6.3 million or 17.4%, 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 $425,000 decrease in revenue associated
with a club relocated in the first quarter of 2000.
Operating Expenses. Operating expenses increased $16.8 million, or 43.9%,
to $55.0 million in the quarter ended September 30, 2000, from $38.3 million in
the quarter ended September 30, 1999. The increase was primarily due to a 27.1%
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 300 in the quarter ended September 30, 2000 from 236 in the quarter ended
September 30, 1999. More specifically operating expenses increased as follows:
Payroll and related increased by $8.3 million, or 51.4% to $24.5
million in the quarter ended September 30, 2000, from $16.2 million in the
quarter ended September 30, 1999. This increase was attributable to the
acquisition or opening of 18 clubs in 1999 and the 23 opened or acquired
clubs in the first nine months of 2000. The increase was also attributable
to an increase in personal training payroll and incentive based
compensation.
Club operating increased by $5.1 million or 37.3% to $18.8 million in
the quarter ended September 30, 2000, from $13.7 million in the quarter
ended September 30, 1999. This increase is primarily attributable to the
acquisition or opening of 18 clubs in 1999 and the 23 clubs opened or
acquired in the first nine months of 2000.
8
<PAGE> 10
General and administrative increased by $1.1 million, or 40.1% to $3.9
million in the quarter ended September 30, 2000, from $2.8 million, in the
quarter ended September 30, 1999. This increase is attributable to expenses
associated with the Company's expansion, including the enhancement of the
Company's management communication and information systems.
Depreciation and amortization increased by $1.5 million, or 28.0% to
$7.0 million in the quarter ended September 30, 2000, from $5.5 million in
the quarter ended September 30, 1999. This increase is primarily
attributable to a full period of depreciation and amortization for fixed
asset additions, acquisitions and club openings since the quarter ended
September 30, 1999 and the increased fixed and intangible assets arising
from the 23 clubs opened or acquired during the first nine months of 2000.
Compensation expense in connection with stock options increased
$737,000 or 394.1% to $924,000 in the quarter ended September 30, 2000 from
$187,000 in the quarter ended September 30 and relates to stock option
accretion and vesting.
Interest Expense. Interest expense amounted to $3.6 million during the
quarters ended September 30, 2000, and September 30, 1999.
Interest Income. Interest income decreased $308,000 to $190,000 during the
quarter ended September 30, 2000 from $498,000 in the quarter ended September
30, 1999. The decrease in interest income was due to lower levels of cash on
hand during the quarter ended September 30, 2000.
Provision for Income Tax. The income tax provision for the quarter ended
September 30, 2000 was $1.5 million compared to $165,000 for the quarter ended
September 30, 1999. The effective tax rate increased from 51.7% for the quarter
ended September 1999 to 55.3% for the quarter ended September 30, 2000. This
increase is principally due to non-deductible goodwill amortization related to
the HDC acquisition.
Accreted Dividends on Preferred Stock. Accreted dividends on the preferred
stock increased $206,000 to $2.3 million during the quarter ended September 30,
2000, from $2.1 million in the quarter ended September 30, 1999. This increase
is primarily a result of the compounding of accreted dividends.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Revenues. Revenues increased approximately $46.8 million, or 40.2%, to
$163.2 million for the nine months ended September 30, 2000 from $116.5 million
for the nine months ended September 30, 1999. This increase resulted from the
three clubs opened or acquired the last three months of 1998 (approximately $2.3
million), 18 opened or acquired during 1999 (approximately $14.6 million) and
the 23 clubs opened or acquired in the first nine months of 2000 (approximately
$12.5 million). In addition, revenues increased during the nine months by
approximately $18.5 million or 17.6%, 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 $1.1 million decrease in
revenue associated with a club relocated in the first quarter of 2000.
Operating Expenses. Operating expenses increased $38.2 million, or 35.3%,
to $146.5 million for the nine months ended September 30, 2000, from $108.3
million for the nine months ended September 30, 1999. The increase was primarily
due to a 23% increase in total months of club operations to 805.5 for the nine
months ended September 30, 2000 from 655 for the nine months ended September 30,
1999. More specifically operating expenses increased as follows:
Payroll and related increased by $19.7 million, or 43.5% to $65.1
million for the nine months ended September 30, 2000, from $45.3 million
for the nine months ended September 30, 1999. This increase was principally
attributable to the acquisition or opening of 18 clubs in 1999 and the 23
opened or acquired clubs in the first nine months of 2000. This increase
was also attributable to an increase in personal training payroll and
incentive based compensation.
Club operating increased by $11.0 million or 28.0% to $50.0 million
for the nine months ended September 30, 2000, from $39.0 million for the
nine months ended September 30, 1999. This increase is attributable to the
acquisition or opening of 18 clubs in 1999 and 23 opened or acquired clubs
in the first nine months of 2000.
9
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General and administrative increased by $3.4 million, or 44.5% to
$11.0 million for the nine months ended September 30, 2000, from $7.6
million, for the nine months ended September 30, 1999. This increase is
attributable to expenses associated with the Company's expansion, including
the enhancement of the Company's management communication information
systems.
Depreciation and amortization increased by $3.9 million, or 25.2% to
$19.2 million for the nine months ended September 30, 2000, from $15.3
million for the nine months ended September 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 September 30, 1999 and the increased fixed and intangible assets
arising from the 23 clubs opened or acquired during the first nine months
of 2000.
Compensation expense in connection with stock options increased
$307,000 or 29.6% to $1.3 million for the nine months ended September 30,
2000 from $1.0 million for the nine months ended September 30, 1999 and
relates to stock option accretion and vesting.
Interest Expense. Interest expense increased $2.3 million to $10.4 million
for the nine months ended September 30, 2000, from $8.1 million for the nine
months ended September 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 was $931,000 for the nine months ended
September 30, 2000 and $898,000 for the nine months ended September 30, 1999.
Provision for Income Tax. The income tax provision for the nine months
ended September 30, 2000 was $3.8 million compared to $484,000 for the nine
months ended September 30, 1999.
Accreted Dividends on Preferred Stock. Accreted dividends on the preferred
stock increased $686,000 to $6.7 million during the nine months ended September
30, 2000, from $6.0 million during the nine months ended September 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
nine months ended September 30, 2000 was $36.1 million compared to $25.1 million
for the nine months ended September 30, 1999, an increase of $11.0 million. Cash
flows from operations has improved as the profitability of the mature club base
and the clubs opened or acquired since the last quarter of 1998 continue 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 membership receivables. 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 $40.0 million and $22.3 million
in capital expenditures and business acquisitions, respectively during the nine
months ended September 30, 2000. The Company currently estimates total capital
expenditure and asset acquisition requirements for the remaining three months of
2000 to approximate $10.0 million. The Company currently estimates capital
expenditure requirements for 2001 to approximate $50.0 million, which includes
$4.7 million to renovate and expand clubs, $8.3 million to maintain certain
existing clubs, $5.0 million, to further upgrade management information systems,
and approximately $32.0 million for new greenfield clubs.
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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 September 30, 2000 the Company has $6.0
million of Eurodollar loans outstanding under this line of credit at an interest
rate of 9.19%, and $1.8 million of outstanding letters of credit. As of
September 30, 2000, the Company has approximately $17.2 million available under
the line of credit, which matures in October 2002, and has no scheduled
amortization requirements. In November, 2000 the Company entered into a
subordinated credit facility which will provide the Company an additional $20.0
million of available credit. Subordinated credit facility borrowings will accrue
interest at 13% per annum of which 10% is payable monthly. This subordinated
credit facility matures in December 2004. 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 2001, 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 2001. 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. In addition 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 nine
month period ended September 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.
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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: November 7, 2000 By: /s/ RICHARD PYLE
----------------------------------------------------
Richard Pyle
Chief Financial Officer
(principal financial and accounting officer)
DATE: November 7, 2000 By: /s/ MARK SMITH
----------------------------------------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
(27) Financial Data Schedule (to be filed electronically).
</TABLE>
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