This is a sample of a private placement memorandum. Note that the financial statements are unaudited, but they should be audited for a private placement under Regulation A, which this is purporting to be under. As always, the material on this web site is offered with the understanding that TotalFin.com, the author, or publisher is not engaged in rendering investment, tax, legal, accounting, financial planning or other advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The investment choices and services on this site are provided as general information only, and are not intended to provide investment, tax, legal, financial planning, or other advice. This site is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, which may be referred herein. All names and locations are fictitious in this document. Table of Contents of Offering Memorandum for Newco Fitness, Inc.Introduction Offering Circular Offering Summary Risk Factors The Company Use of Proceeds Dilution Dividend Policy Capitalization Financial Information Financial Analysis Business Management Certain Transactions Shareholders Securities Description Distribution and Offering Price Legal Matters Experts Additional Information Attachment F-1 Financials Attachment 1 Subscription Agreement
Introduction Newco Fitness, Inc. acquires, develops and operates sports and fitness clubs in East Central Michigan. In its facilities the Company provides general fitness training and an array of specialized senior, kids-fit and aerobics programs.The company was started in 1996 when John Smith, the current President, made a $3,000 down payment to acquire the then closed ABC Athletic Club. In 1999 a concerted effort was made to expand the operation, and, in the next three years, sales were increased 800%, primarily through the addition of other facilities. On October 12, 2001, and October 25, 2002, Newco Fitness, Inc. was listed by the Detroit Business Journal as the 6th and 22nd fastest growing privately held company in the metropolitan area. In May of 2002 and again in 2003 the Company was listed in the top 100 out of 7,000 fitness businesses in the United States by Club Industry Magazine, and in October 2002 and repeating in 2003, Newco Fitness, Inc. was ranked 386th and 329th respectively, in the Inc. 500 list of fastest growing privately held companies in America. The President and Chief Executive Officer of Newco Fitness, Inc. is John Smith who is forty-six years old and has served with the Company for eleven years. Mr. John Smith received a congressional appointment to West Point in 1970 and later transferred to Yale University where he was awarded a Masters Degree in applied Chemistry in 1982. While studying for a graduate degree he also attended classes at Harvard Business School and MIT's nuclear engineering department. Mr. John Smith founded XYZ Capital, a predecessor to the Company in 1992, and directed the purchase of ABC Athletic Club in 1996. In the next several years, he served at various times in all capacities of the operation including billing, training, sales and front desk duties. He has been President, CEO and Director of Newco Fitness, Inc. since its inception in September, 2002. The sports and fitness industry has grown over the past two decades as the public has become increasingly aware of the benefits of regular exercise and physical fitness. In addition, there is a maturing underway in the fitness industry that has attracted the attention of financing sources. Some major club operators have commented on a consolidating trend going on in the industry that Newco Fitness, Inc. is looking to capitalize on by making profitable acquisitions. We believe many of these clubs are available at valuations that are lower than one customarily encounters in public markets. Before purchasing the Securities offered by this Offering Circular, prospective investors should carefully consider the Risk Factors and other information in this Offering Circular.
Offering Circular
OFFERING CIRCULAR
500,000 Shares
$10 Per Share Newco Fitness, Inc.$5,000,000
Common Stock
Of the 500,000 shares of Common Stock, no par value, (the "Shares" or the "Securities") offered hereby, 456,000 are being sold by Newco Fitness, Inc. ("Newco Fitness, Inc." or the "Company") and 44,000 are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." 26,851 of these 44,000 shares are being sold on a pro rata basis by John Smith, President and Chief Executive Officer of the Company. Mr. John Smith is a Selling Agent but will not be paid a selling commission, as stated below, on the sales of the Shares. Prior to this offering, there has been no public market for the Common Stock of the Company and it is not anticipated that any such public market will quickly develop following this direct offering of the Securities. For information relating to the factors considered in determining the offering price of the Securities, see the Section entitled "Distribution and Offering Price." This Offering shall expire on May 1, 2004.
The Securities offered hereby involve a high degree of risk. See "Risk Factors."
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OFFERED SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THE SECURITIES OFFERED HEREUNDER ARE EXEMPT FROM REGISTRATION. THIS OFFERING IS BEING SOLD ON A BEST EFFORTS BASIS WITH ONLY A LIMITED MINIMUM AND ESCROW. THEREFORE, PURCHASERS COULD BECOME SHAREHOLDERS IN A COMPANY THAT HAS MINIMAL RESOURCES TO PURSUE ITS OPERATING PLAN. (SEE "RISK FACTORS -- ONLY LIMITED MINIMUM OR ESCROW") | Price to
Public | Selling
Commissions
(1) | Proceeds
to Company
(2) | Proceeds
to Selling
Shareholders |
|---|
| Per Share | $10 | $0.80 | $9.20 | $9.20 | | Minimum | $100,000 | $8,000 | $83,904 | $8,096 | | Total | $5,000,000 | $400,000 | $4,195,200 | $404,800 |
(1) The Company may pay a commission to selling broker/dealers of up to 8% of the proceeds of the Offering. (2) Before deducting expenses of the offering, payable by the Company, estimated at $60,000. The shares of Common Stock are offered by the Company, subject to prior sale, subject to the right to reject any order in whole or in part and to certain other conditions.
The date of this Offering Circular is May 1, 2003
No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Offering Circular, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Offering Circular does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such an offer in such jurisdiction. Neither the delivery of this Offering Circular nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof, or that there have been no changes in the affairs of the Company since that date.
This Offering is being conducted pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Act") provided by Section 3(b) of the Act and Regulation A promulgated thereunder. This Offering is only made to suitable investors, who meet certain requirements.
Offering Summary
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the more detailed information and the Financial Statements appearing elsewhere in this Offering Circular. The Company Newco Fitness, Inc. (the "Company") acquires, develops and operates sports and fitness clubs in Northern Michigan. The Company operates ABC Athletic Club, Superior Athletic Club, Fasttrack Athletic Club, and Newcomb Athletic Club. The Company was incorporated on July 29, 2001. Until January 1, 2002, the athletic clubs were operated by a general partnership (the "Predecessor") the general partners of which were Bayshore, a Michigan Limited Partnership and Joe Johnson. Subject to regulatory approval, on or about January 1, 2002 all of the assets of the Partnership were transferred to the Company (the "Reorganization"). On or about January 6, all of Mr. Johnson's interest in the Company was redeemed by the Company. Additionally, in connection with the Reorganization, the Company succeeded to the assets of both XYZ Investors, LP, a Michigan Limited Partnership and XYZ Capital, a Michigan Sole Proprietorship. The primary assets of XYZ Investors, LP were promissory notes with a total principal amount of $841,957, on January 1, 2002, received in connection with the sale of First Foods in March of 2001. The fixed and current assets of XYZ Capital had a book value of $82,207.The Company's goal is to provide a friendly neighborhood exercise facility at a moderate price. Although the Company does not consider its memberships the least expensive available, it targets its services to individuals who want a good work out, and who do not want to pay too much for access to a facility. The Company's athletic clubs are sometimes referred to in its industry as "fitness only facilities," indicating that the Company does not provide swimming pools, tennis courts or racquetball courts. The Company's facilities do provide weight training equipment, cardiovascular equipment and aerobics facilities. The Company looks for facilities of approximately 25,000 square feet, sells approximately 4,000 memberships per facility and has special membership plans ranging from approximately $19 to $32 per member per month.On October 12, 2001, and October 25, 2002, the Predecessor was listed by the Detroit Business Journal as respectively the 6th and the 22nd fastest growing privately held company in the Detroit Metropolitan area. In May of 2002 and again in 2003 the Company was listed in the top 100 out of 7,000 fitness businesses in the United States by Club Industry Magazine, and in October 2002 the Company was ranked 386th in the Inc. 500 list of fastest growing privately held companies in America. | The Offering |
|---|
| Common Stock Offered by the Company | 456,000 Shares | | Common Stock Offered by the Selling Shareholders | 44,000 Shares | | Total Common Stock Offered | 500,000 Shares | | Common Stock to be Outstanding after the Offering | 1,365,948 Shares | | Use of Proceeds | Reduction of indebtedness created by acquisition of the Newcomb Club and the Redemption; Acquisition of Athletic Clubs and general corporate purposes. |
Investor Suitability Requirements Investment in the Shares involves a high degree of risk (See "Risk Factors"). An investment in the Shares is suitable only for persons with adequate financial means who are sophisticated. Shares will be sold only to persons who the Company believes are suitable. The Company may accept subscriptions from suitable investors who at a minimum have either (i) net worth, exclusive of the investors equity in their home, home furnishings and automobiles, of not less than $150,000, or (ii) net worth, exclusive of the investors equity in their home, home furnishings and automobiles, of not less than $75,000 had minimum gross income of $50,000 during the last tax year and anticipates (based on a good faith estimate) having a minimum gross income of at least $50,000 during the current tax year, have no need for liquidity of the amount invested, and for whom such investment does not represent more than 10% of the investor's liquid net worth.Notwithstanding the above, the Company may accept subscriptions from investors not meeting the above suitability requirements if (i) the investor has not invested more than $2,500 (including this investment) in a limited offering of a small business issuer of this type within the twelve months prior to investing herein, and (ii) the investor invests no more than $2,500 (including small business issuer investments during the preceding 12 months) in this offering.Risk Factors
The Securities offered hereby involve a high degree of risk, See "Risk Factors."
Summary Financial and Operating Data
(Unaudited) | Statement of Operations Data - unaudited |
|---|
| | Fiscal Year Ended December 31 | Four Months
Ended April 30 |
|---|
| | 1999 | 2000 | 2001 | 2002 | 2002 | 2003 |
|---|
Revenue
(Net of deferrals) | $873,896 | $2,483,721 | $3,385,818 | $4,183,596 | $1,311,627 | $1,002,288 | Operating
Expenses | 1,006,506 | 2,095,754 | 3,208,172 | 4,170,166 | 1,263,135 | 924,746 | Pre-tax Income
(loss)-Operations | (132,610) | 387,967 | 177,646 | 13,430 | 48,492 | 77,542 | | Interest Expense | 37,679 | 58,378 | 67,567 | 123,591 | 39,361 | 33,472 | | Extraordinary Income | 0 | 0 | 131,434 | 237,502 | 0 | 0 | | >Net Income (loss) | (102,174) | 197,753 | 147,210 | 74,812 | 5,479 | 26,442 | Net Income(loss)
Per Share | $ (0.10) | $ 0.19 | $ 0.12 | $ 0.08 | 0.01 | 0.03 | Common Shares
Outstanding (1) | 1,052,002 | 1,052,002 | 1,187,251 | 899,848 | 810,539 | 909,948 | | (1) For the periods ended December 31, 1999, 2000 and 2001 shares held by XYZ Investors, L. P. were deemed not to be outstanding. For the periods ended December 31, 1999 and 2000 shares issued in connection with the Acquisition were deemed not to be outstanding. |
| Balance Sheet Data - unaudited |
|---|
| | December 31, 2002 | April 30, 2003 |
|---|
| Current Assets | $ 823,364 | $ 738,961 | | Total Assets | 3,622,348 | 3,482,422 | | Current Liabilities | 875,785 | 923,938 | | Prepaid Memberships | 790,115 | 703,408 | | Long-Term Debt | 1,447,728 | 1,383,619 | | Stockholders' Equity | $ 470,763 | $ 555,233 |
Risk Factors
RISK FACTORS
The following risk factors should be carefully considered in evaluating the Company and its business prospects before purchasing the Securities offered by this Offering Circular. The Shares offered by the Company involve a high degree of risk and should be regarded as a speculative investment. As a result, the purchase of Shares should be considered only by persons who can afford a loss of their entire investment. Prospective investors should carefully consider the following factors in addition to the other information in this Offering Circular and any other information provided to such prospective investors by the Company: Performance of Recently Acquired Club. The Company has only recently acquired the Newcomb Athletic Club. This club has not achieved the membership levels of the Company's other clubs, and operates at a lower profit margin than the other clubs. There is no certainty that this club will achieve the level of membership of the Company's other clubs. Acquisition and Development of Other Clubs; Risks of Construction Delays. The Company's growth strategy is dependant upon the Company's ability to acquire, develop, own and operate additional clubs in selected locations. The successful acquisition and development of additional clubs will depend upon various factors including, without limitation, the availability of suitable club sites, the ability of the Company to negotiate acceptable lease terms, the Company's ability to successfully manage construction schedules and budgets, and the availability of clubs for acquisition. As a result of the foregoing, there can be no assurance that the Company will be able to successfully acquire or develop additional athletic clubs and its growth strategy may be adversely affected thereby. Additionally, if the Company experiences significant delays in commencing operations in clubs it is developing, this can also have a material adverse effect on the Company.Competition. The sports and fitness industry is highly competitive. The Company faces intense competition from much larger and better financed companies such as 24 Hour Nautilus and Family Fitness. Many of these clubs attract the same types of members as the Company. The Company also competes with recreational facilities established by governments and businesses, the YMCA and YWCA, country clubs and weight reducing salons, as well as providers of products to be used in the home.Limited History of Profitability. The Company has an operating history of only ten years, and has a limited history of profitability. There is no assurance that the Company will maintain profitability. See "The Business."Limited Number of Key Personnel; Redemption of Joe Johnson. The Company currently has 133 employees, including four executive employees. Although the Company believes that personnel qualified to assist the Company in managing its operations may be available, the inability to attract and retain competent personnel could have a material adverse impact on the Company's operations, its business and its prospects. The Company does not have key man life insurance on Mr. John Smith. On or about January 6, 2002 the Company redeemed all of Mr. Joe Johnson's interest in the Company. Mr. Johnson was the general partner of ABC Athletic Clubs, the predecessor to the Company, who was primarily responsible for increasing the sales and membership of the Company's clubs. Although the Company has since hired experienced sales managers, Mr. Johnson's departure may have an adverse material impact on the Company.Only Limited Minimum or Escrow. The Shares are being offered on a best efforts basis by the Company with possible assistance by selling agents or broker dealers. There is no commitment by any broker dealer or purchaser to sell or acquire any of the offered securities. There is a very low minimum amount of subscriptions necessary before funds raised in connection with this Offering will be made available to the Company, and only a limited escrow of subscription amounts in connection with the Offering. Therefore, proceeds will be made available to the Company almost immediately upon the acceptance of the first few investor's subscribing for Shares. Initial purchasers, therefore, have no assurances that the Company will receive the full proceeds offered hereby, or even a significant portion of such proceeds. The Company's intended use of funds as set forth herein may therefore need to be significantly adjusted if the full amount offered in connection with this Offering cannot be raised. In determining whether to establish a minimum and escrow, and how much any such minimum should be, management examined the risk that the Company could not fully pursue its growth plans, the risk that the Company could not sustain operations using results of operations, and the possibility of total business failure because of lack of funds. The Company may not be able to raise any significant new shareholder interest and early subscribers may, without the protection of a higher minimum, face greater risk of losing their entire investment in the event that the Company fails.No Trading Market for the Company's Securities. No market exists for any of the Company's securities and none is expected to quickly develop following this Offering. Investors will likely experience difficulty in selling the Shares.Share Price. The Share price offered hereby has been determined by the Company after consideration of its business and prospects and the intended business of the Company. The Share price is greater than, and not related to, the book value of the Company, or to the assets or possible future assets, results of operations or other objective criteria of value. See "Dilution."Recent Reorganization. The Predecessor was reorganized as the Company effective January 1, 2002, subject to subsequent regulatory approval. In connection with the Reorganization, the Company succeeded to the assets, liabilities and business of ABC Athletic Clubs, a Michigan General Partnership, the partners of which were Bayshore, a Michigan Limited Partnership and Joe Johnson. In connection with the Reorganization, the Company also succeeded to all of the assets of XYZ Capital, a Michigan Sole Proprietorship and XYZ Investors, LP, a Michigan Limited Partnership. The assets of ABC Athletic Clubs consisted primarily of the leasehold interests, equipment, furniture, fixtures, and business of Superior Athletic Club, Fasttrack Athletic Club and ABC Athletic Club. ABC Athletic Clubs also acquired Newcomb Athletic Club. The primary asset of XYZ Investors-I, LP were promissory notes receivable in the principal amount of $841,957. XYZ Capital fixed and current assets totaled $82,207. The Acquisition. On or about July 26, 2001 the Predecessor agreed to acquire substantially all of the assets of the business of Newcomb Athletic Club from Summit Gyms, Inc. (the "Seller") for a package worth approximately $1,487,000 (the "Acquisition"). Mr. John Smith has the primary obligation to repay the last $250,000 of this purchase obligation. The Acquisition includes certain rights of the Company to prepay certain amounts owed, incurred in connection with the Acquisition, at approximately a 25% discount which, if paid immediately upon closing, would have reduced the total purchase price to $1,137,315. In connection with the Acquisition, the Company granted to the Sellers, a first priority security interest in all of the Company's equipment. Since the Acquisition, the membership of Newcomb Athletic Club has increased from 2,104 to 2,630. On or about September 29, 2002 the Acquisition was restructured. The restructuring included characterizing the Acquisition as secured loan payments rather than possible redemption of certain shares of stock issued by the Company in connection with the Acquisition. The restructuring included a $237,502 reduction in aggregate payments to the Seller, a reduction of $6,169 per month in possible monthly payments and the option to skip one payment per year, plus up to a 25% principal discount for certain pre-payments. The Redemption. On or about January 6, 2002, the Company agreed to redeem all of Mr. Johnson's interest in the Company for a package worth approximately $1,161.873. The Redemption called for an initial payment of $100,000, a two additional monthly payments of $25,000 each, and monthly payments thereafter for approximately the next six years. In connection with the Redemption, the Company granted to Mr. Johnson, a first priority security interest in all of the Company's business. On or about September 29, 2002, the Redemption was restructured. The restructuring of the Redemption included a $72,000 reduction in the aggregate payments to Mr. Johnson, a reduction of $3,000 per month in monthly payments and the option to skip one payment per year, plus up to a 25% principal discount for certain pre-payments.Certain Transactions . The current shareholders in the Company acquired their interests in connection with the Reorganization at a pro forma share price of $4.00 per share. Immediately prior to the Reorganization, Bayshore sold 12,919 additional limited partnership units at a pro forma per share price equivalent of $4.00, and XYZ Investors, LP sold 21,550 additional limited partnership units at a pro forma per share price equivalent of $4.00. Subsequent to these transactions, an additional 147,560 shares of Common Stock were sold at an average price of $4.80 per share.Need for Additional Financing; Leverage. The Company's long range growth plans will require substantial amounts of capital in addition to the amount raised hereby, even assuming full subscription hereto. In connection with the Acquisition and the Redemption the Company took on substantial debt. If only a minimal amount of shares are subscribed for and sold in connection with this Offering and the Company is unable to obtain alternative financing, the Company may be unable to make as many acquisitions as it would otherwise be able to make and may be unable to pursue its growth plans as set forth in this Offering Circular. Further, the Company's cash flow is substantially burdened by the principal and interest payments associated with the Acquisition and the Redemption. In the event that the Offering is only minimally subscribed, the Company will need to use available proceeds from operations to service this debt and may not be able to grow as quickly as intended.Dependance on Single Geographic Area. All operating or intended clubs of the Company are located in the Detroit Metropolitan area, with the exception of Newcomb Athletic Club, which is located approximately 7 miles from Detroit. In the event of an event which materially adversely affects the economy of the Detroit area (possibly such as a significant earthquake) the Company and its business could be materially adversely affected. Control by Existing Shareholders. Following this offering, assuming full subscription hereto, the present shareholders will control over 63% of the voting control of the Company, and Mr. John Smith will beneficially control over 36% of the voting control of the Company. In the event of less than a full subscription hereto the present shareholders of the Company and Mr. John Smith will control over 63% and 36%, respectively, of the voting stock of the Company.Indemnification of Officers and Directors. The Company and its Officers and Directors have entered into Indemnification Agreements under which the officers and directors are entitled to indemnification by the Company to the maximum extent permitted under Michigan law. In addition, the Subscription documents to be executed by purchasers of the Shares provide for indemnification of the Company, and its Officers, Directors and affiliates, against any liability or claims arising from any misrepresentations made by the purchasers in such Agreements.Financial Information. The unaudited financial statements dated December 31, 1998 through 2001, and for the years then ended and for the four months ending April 30, 2002 and April 30, 2003, have been prepared in accordance with generally accepted accounting principals. These financial statements are unaudited, the Company believes that the Offering Circular contains all information, including financial information, that an investor may need to make an informed investment decision. Any potential investor desiring to see more detailed financial records of the Company is encouraged to ask for them. Dilution. Investors will suffer immediate and substantial dilution in the net tangible book value per share of their investment. See - "Dilution."Unaudited Financial Statements. The Company's financial statements are unaudited. The Company believes that the Company's unaudited financial statements for year end for the years presented and the interim financial statements have been prepared in accordance with GAAP and are fairly presented. To complete a full audit now would entail completion of 2000 and 2001 audits plus the further addition of a 2002 audit before the public accounting firm would conclude its audit and allow a statement to be included in an Offering Circular. The Company has been advised that as a small customer, this may take two to three months to accomplish and at an up-front cost that the Company believes is prohibitive, at this time.
The Company
THE COMPANY
The principal executive offices of the company are located at 1901 South Bascom Avenue, Suite 76, Hillside, Michigan 95008. The telephone number is (408) 371-7144 and the facsimile number is (408) 371-7149. The company is a Michigan Corporation. The Company operates four athletic clubs in the Detroit Bay Area. The four clubs currently owned and being operated by the Company have an aggregate square footage of 71,500. The Company has an aggregate of 19,100 members and membership turns at a rate of 4,980 members per year. The average monthly membership fee is $25.00 and the Company uses automatic deduction of fees for approximately 10,500 of its members. The Company believes that it appeals to single persons with average income of $42,000. The Company owns an aggregate of 400 nautilus and 200 cardiovascular machines and operates approximately 140 aerobics classes per week. The Company has approximately 133 employees, of which approximately 21 work in sales and 9 work in management. The Company is structured so that each club has its own manager and sales manager.
Use of Proceeds
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Shares offered hereby are estimated to be $4,195,200, not including costs in connection with the Offering estimated at $60,000. Since there is only a small minimum amount on the Offering, proceeds will be made available to the Company after the first $100,000 is received. In the event that the full amount offered in connection herewith is subscribed for, the Company anticipates using approximately $2,400,000 for acquisitions of existing athletic club facilities, $800,000 for repayment of indebtedness incurred in connection with the Acquisition and the Redemption, $500,000 as reserve for possible celebrity athlete endorsements, and $495,200 for general corporate purposes. In the event that less than the full amount of this Offering is subscribed for, the Company intends to use proceeds of the offering for the same purposes as set forth above, generally on a pro rata basis. Proceeds of this offering will be made available to the Company as received after the $100,000 minimum has been received. The initial $100,000 received by the Company will be escrowed at Third National Bank. In the event that the Company does not receive $100,000 within the first 6 months of this Offering, the Company will return all proceeds still held in escrow at that time. In the event that the Company only receives $100,000 in connection with this Offering, then the Company intends to use all such proceeds for general corporate purposes and to defray the costs of one acquisition. The Company does not intended to acquire any athletic facilities from affiliates, and any such athletic facilities acquired will be acquired from unrelated parties. In the event that this Offering is fully subscribed, the Company intends to acquire eleven to sixteen athletic facilities. The Company intends to conduct such acquisitions by targeting profitable facilities with good management team, and by acquiring such operations using a small amount of cash and a larger amount of stock. In connection with such acquisitions the Company also intends to try to structure a significant earnout or management incentive contract. The indebtedness which the Company intends to repay from the proceeds of this Offering, includes portions of the debt associated with the Redemption and Acquisition. See - "Certain Transactions." The debt incurred in connection with these two transactions each bear 10% interest, compounded monthly. Both obligations include a 25% discount for advance prepayment of any or all of the principal through September 29, 2003. In each succeeding year ending September 29th, the Company maintains the right to a discount on prepayment on an annually decreasing scale of 20%, 15%, 10% and 10% in years two through five, respectively. Also, beginning in 2004 the Company may skip one monthly payment per year on each note. The face value of the Acquisition note was renegotiated to $918,566 on September 29, 2002, with payments set at $18,000 per month for approximately sixty-seven months. Mr. John Smith, Chief Executive Officer of the Company has the personal responsibility to pay the last $250,000 of the principal on this note. The face value of the Redemption note was renegotiated to $716,253 on September 29, 2002 with payments set at $12,000 per month for seventy-eight months. The aggregate initial principal amount of these two notes is approximately $1,600,000. The Company intends to apply $800,000 toward repayment of these notes on a pro rata basis. These two notes represent a cash outflow of almost 9% on sales and there is only a limited minimum on this Offering . Generally, if nothing more than the minimum amount offered in connection herewith, the Company does not believe that more than one acquisition will be possible until the Redemption and Acquisition debts are significantly reduced, recapitalized under more favorable terms or renegotiated. Independent of this offering, the Company is seeking to refinance these debts and capture the 25% prepayment discount and generally more favorable terms. These negotiations with a handful of banks and investment firms are very preliminary and completely uncertain. The Company also may explore using contract factoring or membership discounting to bridge short term operating or capital needs. However, if the offering and refinancing all were unsuccessful, or if the Company received proceeds in connection with this Offering of no more than the minimum amount as set forth on the cover page hereof, the Company would ultimately be forced to operate in a severely restricted service profile under a limited budget. This would mean that the Company would likely be able to advertise less, offer fewer aerobics classes, offer fewer personal trainers, staff the front desks with fewer people, and replace equipment less frequently. In the scenario of continued lack of availability of new capital from all sources, the Company would seek to merge with a strong partner in the industry to meet its capital outflow responsibilities. In this circumstance, such a merger would likely need to be consummated at less than favorable terms to the Company.
Dilution
DILUTION
Investors in the Shares will suffer immediate substantial dilution in the book value of their investment. As of April 30, 2003, the net tangible book value of the Company was $(187,369) or $(0.21) per share of Common Stock. After giving effect to this Offering and assuming full subscription hereof, less possible commissions payable in connection herewith, and deducting expenses in connection with this Offering, the net tangible book value of the Company will be $3,739,159 or $2.74 per share. This represents an immediate increase in net tangible book value of $2.95 per share of Common Stock for the shareholders of the Company prior to this Offering, and an immediate dilution of $7.26 per share of Common Stock for Investors herein. The following table illustrates this dilution. | Common Stock Price: | | | $ 10.00 | Net tangible book value per
share prior to Offering | | $(0.21) | | | Increase attributable to Investors: | $ 2.96 | | | Pro forma net tangible book value per share after Offering: | | | $ 2.74 | | Dilution to Investors: | | | $ 7.26
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Dividend Policy
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.
Capitalization
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April 30, 2003: | (Unaudited) | | | April 30, 2003 |
|---|
| Long term obligations, less current portion | $ 1,383,619 | | Shareholders' equity | | Common Stock, no par value,
net of redemptions | 1,913,710 | | Contributed Capital | 252,225 | | Retained Earnings | (1,604,495) | | Total Shareholders' Equity | 526,433 | | Total capitalization | $1,945,059 |
Financial Information
SELECTED FINANCIAL INFORMATION
The selected financial and operating information set forth below should be read in conjunction with the unaudited financial statements set forth in an Attachment hereto. | Statement of Operations Data - unaudited |
|---|
| | Fiscal Year Ended December 31 | Four Months
Ended April 30 |
|---|
| | 1999 | 2000 | 2001 | 2002 | 2002 | 2003 |
|---|
Revenue
(Net of deferrals) | $873,896 | $2,483,721 | $3,385,818 | $4,183,596 | $1,311,627 | $1,002,288 | Operating
Expenses | 1,006,506 | 2,095,754 | 3,208,172 | 4,170,166 | 1,263,135 | 924,746 | Pre-tax Income
(loss)-Operations | (132,610) | 387,967 | 177,646 | 13,430 | 48,492 | 77,542 | | Interest Expense | 37,679 | 58,378 | 67,567 | 123,591 | 39,361 | 33,472 | | Extraordinary Income | 0 | 0 | 131,434 | 237,502 | 0 | 0 | | >Net Income (loss) | (102,174) | 197,753 | 147,210 | 74,812 | 5,479 | 26,442 | Net Income(loss)
Per Share | $ (0.10) | $ 0.19 | $ 0.12 | $ 0.08 | 0.01 | 0.03 | Common Shares
Outstanding (1) | 1,052,002 | 1,052,002 | 1,187,251 | 899,848 | 810,539 | 909,948 | | (1) For the periods ended December 31, 1999, 2000 and 2001 shares held by XYZ Investors, L. P. were deemed not to be outstanding. For the periods ended December 31, 1999 and 2000 shares issued in connection with the Acquisition were deemed not to be outstanding. |
| Balance Sheet Data - unaudited |
|---|
| | December 31, 2002 | April 30, 2003 |
|---|
| Current Assets | $ 823,364 | $ 738,961 | | Total Assets | 3,622,348 | 3,482,422 | | Current Liabilities | 875,785 | 923,938 | | Prepaid Memberships | 790,115 | 703,408 | | Long-Term Debt | 1,447,728 | 1,383,619 | | Stockholders' Equity | $ 470,763 | $ 555,233 |
Financial Analysis
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Newco Fitness, Inc. (the "Company") was founded in 2001 and is the successor to ABC Athletic Clubs, XYZ Capital and XYZ Investors, LP. The Company develops, acquires, owns and operates athletic clubs. Virtually all of the Company's revenue is currently derived from membership fees and dues by persons desiring to use the Company's athletic clubs. The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of revenue. | | As a percentage of net sales for the Fiscal Year Ended: | Four Months
Ended April 30 |
|---|
| | 1999 | 2000 | 2001 | 2002 | 2002 | 2003 |
|---|
| Revenue | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | Operating
Expenses | 115.2% | 84.4% | 91.4% | 98.0% | 96.3% | 92.2% | | Pre-tax Income from Operations | (15.2)% | 15.6% | 8.6% | 2.0% | 3.7% | 7.8% |
Four Months Ended April 30, 2003 vs Four Months Ended April 30, 2002 First four month revenue for 2003 decreased 24% to $1.0 million from $1.3 million for the same four month period ending April 30, 2002. Substantially all of this decrease came from membership fees. Management feels the decrease in sales followed from its plan to switch management emphasis from pushing sales to one of controlling costs. In particular, allocations to advertising were decreased 80%. Part of the purpose of this Offering (and part of the proceeds allocated to general corproate purposes - See "Use of Proceeds" on page 8) is to allow the Company to increase its advertising.Operating expenses decreased to 92.2% of sales from 96.3% as a result of the company focus on cost control. Overall, the pre-tax earnings for the four month period ending April 30, 2003 increased 380% to $44,070 from $9,131 for the same four month period in 2002.Fiscal 2002 Compared to Fiscal 2001 Fiscal 2002 Revenue increased 20% to $4.2 million from $3.5 million. Substantially all of this increased revenue came from membership fees. 90% of the 20% increase came from the inclusion of the Newcomb club, which was acquired in mid-2001, for an entire fiscal year. Operating expenses rose to 98.0% of sales in 2002. The Company attributes this to the fact that it invested significant senior management time in restructuring the Redemption, restructuring the Acquisition and preparing for this Offering. No bonus or overtime is received or paid to senior management for this work. Rather, the increased costs came about because senior management spent the majority of its time on the financing activities mentioned above and was not able to adequately monitor and control ongoing operations. See - "Risk Factors; Limited Number of Key Personnel; Redemption of Joe Johnson." The Company believes that this significant focus on restructuring the Redemption and the Acquisition distracted management from operations resulting in an increase in expenses beyond levels best for maximum profitability. Overall, the Company's pretax earnings decreased 48% to $127,341 from $241,512 a year earlier.Fiscal 2001 Compared to Fiscal 2000 Fiscal 2001 Revenue increased 40% to $3.5 million from $2.5 million. Substantially all of this increased revenue came from membership fees. One Quarter of the 40% increase came from the addition of the Newcomb club and three quarters of the total 40% increase came from same club sales growth. Operating expenses rose somewhat as a percentage of revenue to 91.4% in 2001. The Company attributes this to the fact that it pursued an aggressive growth strategy the acquisition of the Newcomb facility in August and the start-up to build out the Philly facility in July. In October it became clear that the redemption of the operating partners' interest would occur in early 2002. At that point, the expansion strategy was put on hold until this transaction was complete and the Company could focus on raising additional funding such as is anticipated under this offering. Overall, the Company's pre-tax profits decreased due to the increase in operating expenses to $241,512 from $329,589 a year earlier, a change of approximately 27%.Fiscal 2000 Compared to Fiscal 1999 Fiscal 2000 Revenue increased 184% to $2.5 million from approximately $1 million. Substantially all of this increased revenue came from membership fees.Operating expenses were brought under control in 2000 as the Company became profitable. Operating expenses as a percentage of sales decreased 29% to 84.4% from fiscal 1999 to fiscal 2000. The Company attributes profitability to the fact that it did not acquire or build any new clubs in 2000, did not significantly change its management structure or operating costs, and focused on membership sales throughout the year. Overall, the Company's pre-tax profits from operations increased due to the stabilization of operating expenses and increased sales to $329,589 from a loss of $170,289 a year earlier.Income Taxes The Company does not have net operating loss carry-forwards to apply against current income taxes, and therefore has paid corporate income taxes in each year it has experienced profitability. Prior to January 1, 2002, the Company operated in a partnership form with tax liability passed directly through to the partners. Income tax provisions are shown on a pro forma basis only in their historic representation herein.Seasonality Typically, the Company has experienced the sharpest growth in sales during the months of January through May, when the weather is less conducive to outdoor activities.Liquidity and Capital Resources Should the Offering be fully subscribed, the proceeds should completely satisfy the Company's cash requirements in the next six months and allow it to fully execute the initial stages of its intended acquisition and growth plans. Further, the Company believes that even if only a portion of the offering is subscribed for, the Company could achieve a more modest level of growth and acquisition. Because the Company's plans are ongoing, there is only a limited minimum amount of proceeds necessary to be received in connection with this offering prior to making proceeds herefrom available to the Company. If only a small portion of this offering is subscribed for (such as $250,000, or 5% of the total offering), this should assist the Company in its growth plans. Additionally, the Company may seek some sort of debt or bank financing, and is in the early discussion stages with certain possible investors concerning a significant investment. If no debt or equity financing is available, the Company would be forced to scale back its growth plans and grow slower or not at all. Eventually, after short term measures like factoring and discount promotions were exhausted, the business would be advised to seek a merger with a stronger player in the industry at any terms.The Company has received only limited capital since an inception, which the Company believes has limited its growth. Although the proceeds of this Offering should assist the Company in its growth plans, the Company will require further capital to fully implement its plans.The Company has a $100,000 line of credit with Third National Bank which was increased with a related $50,000 term loan from the same bank in January of 2003.
Business
BUSINESS
General The Company owns and operates four athletic clubs in the Detroit Metropolitan area. The Company is the successor to all of the assets, liabilities and business of a Michigan General Partnership, whose general partners were an individual and a Michigan Limited Partnership, and a Michigan Limited Partnership. The company was formed to continue the acquisition, development, ownership and operations of a chain of athletic clubs serving the Northern Michigan market.Background The predecessor to Newco Fitness, Inc. was started with a $3,000 down payment to acquire a then-closed ABC Athletic Club, in 1993. In the next several years, sales were increased at that facility by approximately 300% and Mr. John Smith served at various times in all capacities of the operation including billing, training, sales, and front desk duties.In 1999 a concerted effort was made to expand the operation, and Mr. Joe Johnson, the President of Results Marketing, an athletic club promotion company, was recruited to push the expansion. In the next three years, sales were increased an additional 800%, primarily through the addition of three other facilities. These additions were all financed from operating cash flow or seller financing, without incurring any bank debt.From 1998 through 2001, XYZ Investors, L.P., a related entity to the Company, also acquired potato chip and snack food businesses, which were consolidated as Michigan Premier Foods and sold in March 2001. Many of the same Investorsn Newco Fitness, Inc. were also Investorsn Michigan Premier. The residual promissory note from the sale of Michigan Premier has now been contributed to Newco Fitness, Inc. in consideration for stock. See - "Certain Transactions."Mr. Joe Johnson's interest in the Company was repurchased in early 2002. Throughout 2002 the Company retained the services of several sales and marketing professionals to perform the sales functions for the Company following Mr. Johnson's departure.Industry Overview The sports and fitness industry has grown in the past two decades as the public has become increasingly aware of the benefits of regular exercise and physical fitness. Revenue of the overall sports and fitness club industry in the United States are estimated to have exceeded $7 billion in 2001. The sports and fitness club industry is highly fragmented and competitive, and is characterized by at least two different types of clubs; high end Mega Fitness-clubs and basic sports and fitness facilities serving the middle and lower end of the market. The Company primarily competes within the later, which typically offer relatively fewer services and exercise options and compete primarily on the basis of location and effective advertising and sales.The Company strives to match its equipment and exercise choices to those segments of the market that are growing most rapidly. Recently, America Sports Data, Inc. reported that treadmill usage is up 37 percent, step aerobics is up 15 percent, resistance equipment is up 20 percent and stair climber and free weight use are each up 10 percent. This annual increase is specifically in those areas where the Company attempts to provide service. In the May, 2002 issue of the publication Industry Outlook, it was reported that the overall market the trend was up 6.2% from 2000 which showed $7.3 billion in sales to 2001 which came in at $7.75 billion.In addition to the overall growth of the market, the Company believes that there is a maturing underway in the fitness industry. In the 1987's many "lifetime" cash up front memberships were sold by athletic clubs. In the 1997's this has been replaced by monthly dues and electronic funds transfer payment programs with much lower or nonexistent up front fees. The resulting large and fairly stable receivables base and good margins have attracted the attention of financing sources. Some major club operators have also commented on a consolidating trend going on in the industry. The Company estimated that in the 1987's only about 10% of all athletic clubs were operated by multi-site companies, whereas, in the 1997's that percentage may have grown to 35%. The Company is looking to capitalize on this consolidation trend by making profitable acquisitions.Strategy Newco Fitness, Inc. strategy is to grow by bringing operating discipline to a highly fragmented market, and duplicate a successful operating plan in each of the acquired locations. The Company intends to acquire and build athletic clubs in the best possible locations in each region into which the Company expands. The Company believes that a desirable location for each club is one of the requirements for good performance of a fitness only athletic club. There is no assurance that clubs in desirable locations will be available for acquisition or available at reasonable prices.In addition to operating success, the Company believes that an advantage exists for those club chains that can make use of formal capital markets to finance their growth. The Company intends to do so, acquiring private clubs for a low multiple of the club's annual earnings. The Company believes that if it can establish a truly public market for its stock and the attendant liquidity, it may justify a much higher earnings multiple, which would then make acquiring clubs that much easier. The Company has been in contact with owners of number of athletic clubs in the last eighteen months and believes that such clubs are available in sufficient numbers to make the Company's strategy possible.A few other fitness companies have also started to make acquisitions or in other ways position themselves to profit from the apparent consolidation trend that is starting in the athletic club market. To be as advanced as possible in this acquisition race, the Company has recently had preliminary discussions with several club owners representing one or more clubs each, about possible future merger or acquisition. All of these discussions are in the early stages and by themselves no single acquisition is probable. In the aggregate, however, the Company believes that it has found a receptive audience to its acquisition plans. Many of these companies are willing to entertain little cash and a larger percentage in Newco Fitness, Inc. stock in payment for their clubs. Generally, the Company has had the initial contacts and described the plan of selling stock, raising money and acquiring new clubs with a combination of cash and mostly stock.In its long term plan, the Company has targeted thirteen club chains representing one hundred and forty-six clubs as most likely major acquisition candidates. The Company has met with, and had its facilities visited by, an investment firm which the Company believes has the ability to finance those acquisitions when and if they become remittable. No immediate action, agreement or understanding is pending with this firm.Overall, the Company, because of its numerous club owner contacts throughout the last ten years and more recent and focused discussions, feels there are acquisition candidates at a low multiple of earnings available for negotiated purchase. The Company, in its early days, operated on a tight budget. If, in spite of the Company's belief, no funds nor favorable acquisitions are available, management believes that it can operate on a tight budget again and, in such event, would then seek to slowly work out of its tight cash flow constraints or, in a worst case scenario, seek to merge with a stronger member of the fitness industry. In the event that the Company were required to operate on a tight budget, the Company would consider decreasing expenses by eliminating all but critical capital expenditures and sharply curtailing payroll expenses.Acquisitions The Company has recently been in contact with several owners representing a number of athletic clubs, each proposing that the Company acquire their clubs, in the last nine months. The Company believes that the athletic club industry experienced tremendous growth in the 1970's, mostly through individual enthusiasts and business people who built neighborhood clubs, and that many of these owners are reaching retirement age and interested in being acquired. The Company believes that many of these clubs are available for purchase for a combination of cash and stock at valuations that are lower than one customary encounters in public markets. Although no market currently exists, and none is expected to quickly develop, the Company intends to achieve a public market for its stock as soon as it is possible. The Company then intends to use its stock for making such acquisitions.The Company is negotiating with representatives of certain celebrity athletes concerning the possibility of their endorsing Newco Fitness, Inc.. The representative has signed an exclusive agreement with the Company and the celebrity athlete has visited the business. The athlete has expressed approval of the character and flavor of the business as consistent with the celebrity athlete's endorsement criteria. A six-figure endorsement arrangement was outlined and the invitation to the Company left open. The Company is in regular contact with the representative and is contemplating the best possible approach to consummating this endorsement arrangement. The Company believes that if consummated such endorsements would have three benefits for the Company. The Company should benefit from additional membership sales from being associated with the celebrity. Acquisitions should be easier to complete because of the good name associated with the celebrity athlete. Finally, the Company may benefit from some general good will.Sales and Marketing The Company believes that its historical sales orientation has been important to its success and that in the fitness only market there is generally a lack of professional management. The fitness only club industry is a fixed cost business. Once the facilities, equipment and staff are in place, added members generally translate into added profit. Generating sales, especially long term sales, is a key to success. The Company believes that many fitness only clubs believe that if they have the latest equipment and biggest weights, the people will come. The Company disagrees with this thinking and believes that its sales orientation often results in higher profits than it would have if it focused on operations as many small clubs do.Competition The athletic club market is highly fragmented. The top ten athletic club chains in the United States have less than a ten percent (10%) combined market share. There are approximately nine regional chains with about $25 million to $100 million in sales, and one national chain, Bally's, with about $400 million in sales. In Northern Michigan, 24 Hour Nautilus is the current market leader, with 32 clubs and about $49 million in sales. The Company believes that the 24 Hour Nautilus clubs are well run and attract a young customer. The Company believes that it is the second largest athletic club chain in the Detroit Metropolitan region with four clubs and $4 million in sales. The Company competes in Northern Michigan by avoiding any direct geographical challenge to 24 Hour Nautilus. Further, the Company takes a more comfortable approach to its marketing and tries to attract an older clientele to avoid unprofitable price or advertising wars.The Company believes that it has market advantage over smaller clubs and believes that it favorably competes when it directs its attention to geographical or market segments controlled by such smaller clubs. Dyna Fitness-clubs provide a non-golf urban country club atmosphere and generally compete in a different market segment than fitness only clubs such as those owned and operated by the Company. | Current Facilities |
|---|
| Athletic Clubs | Square Feet | Date Acquired
or Built | Membership | ABC Athletic Club
1405 ABC Athletic Club Avenue
Detroit, MI 43118 | 13,000 | November, 1993 | 4,900 | Superior Athletic Club
321 Beach Avenue
Detroit, MI 43125 | 25,000 | October, 1999 | 9,890 | 2nd Street Athletic Club
98753 S. Third Street
Detroit, MI 43112 | 5,000 | August, 2000 | 1,700 | Newcomb Athletic Club
9653 Pine Street
Newcomb, MI 94538 | 28,500 | July, 2001 | 2,610 | | TOTAL | | | 19,100 |
|---|
| Headquarters
1901 S. Bascom Avenue
Suite 76
Hillside, MI 43008 | 3,000 | October, 1996 | |
The ABC Athletic Club has a long established clientele and is solidly rooted as a neighborhood club in the Willow Glen area of Detroit. Originally 9,000 square feet, the club has been expanded three times to accommodate membership growth. In 2000 the equipment in the club was completely replaced with the top of the line cardio and nautilus machines. Additionally, there are cedar men's and women's saunas and a co-ed Jacuzzi. A baby-sitting program is coupled to the aerobics program so that there is coverage for child care during all classes.The Superior facility is the Company's prototype club. The 25,000 square foot facility is filled with cardiovascular equipment and exercise machines. The site is at the intersection of two primary streets in one of the busiest sections of Detroit. In addition to a large free weight room there is a raised semicircular aerobics room. Full baby sitting is offered and there are men's and women's steam rooms. Private training is available to all members at a charge, and women enjoy a separate women-only work out area.The Fasttrack location is located within the YWCA in downtown Detroit. At only 5,000 square feet the Fasttrack facility has evolved into an executive fitness center. The primary business feature of this location is the lease. The Company currently pays the YWCA one third of its profits as rent, and does not pay any fixed rent. The Company believes that this arrangement has lowered its risk and provided an increased certainty of positive results at this location.The Newcomb location is the largest at 28,500 square feet and the Company believes has the greatest upside potential. The previous owner operated the facility as a muscle building club. Newco Fitness, Inc. is currently working to transform the facility to a friendly neighborhood athletic club. The club has a complete range of fitness and exercise equipment. The site had a noticeable lack of signage when acquired, and the Company has recently negotiated with the city of Newcomb to install a new marquis sign. The Newcomb club also has a growing aerobics program, matching child care, extensive personal training, rental lockers and association with an on site chiropractic clinic. Revenue Structure and Recognition The revenue generated by the athletic clubs is, for the most part, from membership fees. The payment of these fees takes two forms. First, there can be an up-front fee plus first and last month's dues, followed by monthly payments, typically for 13 to 25 months. In this case, funds are recorded as received except for the "last" month which is deferred until the member cancels. If the member wishes to pay 100% of their membership dues up-front, then approximately $77.00 is credited immediately to revenue and the remainder is straight lined over the term of the membership and credited month by month to revenue. All deferrals are exactly matched by an equal and offsetting liability (to provide service) on the financial statements. This accounting approach is similar to the case in the publishing industry where subscriptions are prepaid and an offsetting liability to the deferred subscription revenue is carried on the books to cover the future production costs of the magazines. This is the case even though the Company's primary service is fitness only equipment which requires no help or service on the part of the Company for patronage use. As of April 30, 2003 the Company had received $703,408 in payments or contract receivables that were deferred and will not be credited to revenue until 2003 or 2004.Employees The Company has approximately 133 full and part time employees. Twenty-one employees are in sales, nine are in management, ten are in headquarters and accounting, forty-three are in aerobics, and fifty are in customer services and operations related functions. Ninety-two employees are part time employees. Generally, the Company's employees are quite young and turnover is quite high compared to other businesses. A substantial ongoing investment in business training and professionalism is required. The Company believes that its relationship with its employees is good. The Company is not aware of any collective bargaining actions within its business. The Company's employees are not represented by any labor unions.The number of sales personnel employed by the Company is quite high relative to industry norms. This reflects the Company's understanding that this is a sales business with fixed costs. The Company has emphasized development of a good sales team and intends to continue such emphasis. Several of the Company's sales managers have 5 to 15 years experience and are veterans in the industry.Programs The Company provides general fitness training and an array of specialized senior, kids-fit and aerobics programs. The aerobics program, in particular, is a strong facet of the Company and has been run by Michelle Peterson since 1993.Newco Fitness, Inc. employs approximately 43 aerobics instructors. Michelle Peterson, the Company's aerobics director, has chaired the prestigious Dance for Heart event for the last several years. Also, being managed by Ms. Peterson is the Kids-R-Fit program and Forever Young for Seniors. The Kids-R-Fit program is an example of a new trend that the business is now pursuing. The Senior Program has been a mainstay at the clubs for a number of years. The second Tuesday of the month Seniors birthday party is typical of the type of social functions in which this group routinely participates.The personal training program is one of the fastest growing areas of the business and has experienced 100% growth in 2002. The Company charges $30 to $50 per hour for personal training which is offered at each of its facilities. The Company is looking to expand this area as it continues its general plan to put in place the highest dollar per square foot programs possible.Proprietary Rights The Company's name and the names of the individual clubs operated by the Company are afforded some trademark protection under common law rules. The Company is considering seeking registration with the Patent and Trademark Office of its name, but has not yet decided to do so.Mission Statement Newco Fitness, Inc. are the friendliest neighborhood clubs in the world; a growing business family of open and honest professionals who meet their commitments and are, and act as, owners.Goal To assemble, via acquisition, the largest chain of athletic clubs in the United States.Government Regulation State and federal consumer protection laws regulate the Company's advertising, sales and other trade practices. These regulations, and others under consideration, regulate the Company in such things as the type and form of sales contract the Company may use, the ability of members to cancel otherwise binding agreements within a certain period of time, the manner of dealing with prepaid memberships, and the like.Legal Proceedings The Company is not a party to any legal proceedings which management believes will have a material adverse effect on the financial condition or operations of the Company.
Management
MANAGEMENT
Directors and Officers Certain information about the Company's directors and executive officers is listed below:| Name and Position | Age | Tenure with
Company | Position |
|---|
| John Smith | 43 | (1992-96) | President and Chief Executive Officer, Director | | Brian Hanson | 53 | (1999-96) | Director | | Karen Berkshire | 34 | (1998-96) | Secretary, Chief Financial Officer, Director | | William Sholes | 34 | (2002-96) | Vice President of Operations |
John Smith received a congressional appointment to West Point in 1970 and later transferred to Yale University where he was awarded a masters degree in applied Chemistry in 1982. While studying for a graduate degree he also attended classes at Harvard Business School and MIT's nuclear engineering department. Mr. John Smith founded XYZ Capital, a predecessor to the Company in 1992. He has been President, Chief Executive Officer and a member of the Board of directors of the Company since its inception in September, 2002. Mr. John Smith is the husband of Karen Berkshire. Karen Berkshire has worked for eleven years in accounting and financial headquarters functions since graduating from the University of Iowa's finance program. She first had lead accounting responsibility at a Gannet Newspaper Group subsidiary in 1992. In 1998 she was the founding controller at XYZ Capital, a predecessor to the Company. Ms. Berkshire is the wife of John Smith. Brian Hanson has been a director of the Company since January 6, 2002. In 1999, Mr. Hanson was a general partner in Michigan Premier Foods, an investment of the predecessor to the Company. Mr. Hanson spent twenty-five years in the high technology industry, most recently at Tandem (1989-1999).William Sholes has served as Vice President of Operations for the Company since May, 2002. Mr. Sholes served as an electrical Mechanic Technician for Phoenix Engineering Corporation from April, 2001 to May, 2002; as President of Michigan Premier Foods, a company owned and operated by XYZ Investors, L.P., a predecessor to the Company, from August, 1999 until April, 2001; and as President of Motorsports Promotion from January, 1997 until August, 1999. Mr. John Smith studied law enforcement at Lakewood Community College from September, 1993 until March, 1996. As part of its overall corporate governance activities, the Company is seeking to add two qualified outside directors within nine months.Executive Compensation The following table sets forth certain information with respect to the historical and proposed compensation of the officers to be paid by the Company for services rendered to the Company.| Name and Position(1) | Salary |
|---|
| John Smith, President and Chief Executive Officer (2) | $ 104,000 | | William Sholes, Vice President of Operations | $ 90,000 |
(1) Mr. John Smith is the only paid director or officer of the Company. Also, he is the only Company employee paid more than $100,000. He has no employment contract or arrangement for future salary. (2) Since May 1, 2002, Mr. John Smith has, in lieu of salary, agreed to have redeemed by the Company approximately $6,000 worth of his shares of Common Stock in the Company continually reducing his percentage ownership, at the then-current per share fair market value, each month. In total for 2002, Mr. John Smith received $31,146 in salary. Also, the Company redeemed shares were acquired by Mr. John Smith for $6 per share. At the time of this redemption new shares under a Private Placement were being sold at $6 per share which was relied on as a fair market value. There is no agreement for Mr. John Smith to continue to work without compensation. There is no specific redemption agreement or plan. No salary is being accrued for Mr. John Smith for future payment, however the foregone salary is reflected on the financial statements as if paid with an offset to contributed capital (see F-14). Director Compensation The Company presently does not pay any Board fees to Directors. The Company may, in the future grant options exercisable for up to 1,000 shares of Company common stock to directors for each Board meeting actually attended by such director. No such options have yet been granted, although it is the Company's intent to do so on a regular basis in the future. Although this is the intent, no option plan is yet drafted. Further the Company's plans to grant options here are fully subject to prior regulatory approval as a condition that must be satisfied before any option plan is initiated.Compensation Plans The Company intends to reserve 300,000 shares of Common Stock for issuance to key employees under an intended employee stock option plan (the "Plan"). See - "Description of the Securities." The Plan will be administered by the Board of Directors, which will determine the term of options to be granted under the plan, the exercise price, the number of shares subject to the options, the option recipients, and the exercisability thereof.Under the Plan, the Company has commitments to grant options covering an aggregate of 68,300 shares of Common Stock to 15 key employees upon regulatory approval of the Plan. No options have been granted to the Company's officers and directors and no options are exercisable within sixty days.
Certain Transactions
CERTAIN TRANSACTIONS
The Predecessor was reorganized as the Company effective January 1, 2002, subject to subsequent regulatory approval. In connection with the Reorganization, the Company succeeded to the assets, substantially all liabilities and business of ABC Athletic Clubs, a Michigan General Partnership, the partners of which were Bayshore, a Michigan Limited Partnership and Joe Johnson. In connection with the Reorganization, the Company also succeeded to all of the assets of XYZ Capital, a Michigan Sole Proprietorship, and XYZ Investors, LP, a Michigan Limited Partnership. The assets of ABC Athletic Clubs consisted primarily of the leasehold interests, equipment, furniture, fixtures, and business of Superior Athletic Club, Fasttrack Athletic Club and ABC Athletic Club Athletic Club. ABC Athletic Clubs also had the right to acquire Newcomb Athletic Club (which was acquired by Newco Fitness, Inc.) and had commenced development of the intended Philly Athletic Club. (Although this development was terminated June 2002). The primary assets of XYZ Capital were fixed and current assets with a book value of $82,207. The primary assets of XYZ Investors, LP were promissory notes receivable with a total principal amount of $841,957 on January 1, 2002. These notes were received in connection with the sale of First Foods, a combination of several businesses, including potato chip and snack food businesses. The consideration received by the owners of ABC Athletic Clubs and XYZ Investors, L.P. for the Company's purchase of their assets consisted of 1,097,123 shares of common stock and 257,250 shares of common stock respectively, of which 90,128 shares of common stock was received by XYZ Capital, the general partner of XYZ Investors, L.P. Of the shares received by ABC Athletic Clubs, 480,937 were reacquired by the Company in connection with the Redemption as set forth below, and 148,200 were reacquired by the Company in connection with the Acquisition (some prior to the Reorganization) and the restructuring of the Acquisition as set forth below. There were no cash or notes received and the estimated fair market value of the stock at that time was approximately $4.00 per share. In connection with the Reorganization, and in addition to the shares of Common stock the partners received in connection with the acquisition of their partnership interests, the partners of ABC Athletic Clubs and XYZ Investors, L.P. received rights to purchase an aggregate of 227,529 shares of Common Stock in the Company for a per share's price of $4.00 (the "Rights"). These Rights mature as to one third of such shares each January 9, commencing January 9, 2003, and continuing for the following two years, and is exercisable for three years following such maturity. At the date of this Offering Circular, no such Rights have been exercised. On or about July 26, 2001 the Predecessor agreed to acquire substantially all of the assets of the business of Newcomb Athletic Club from Summit Gyms, Inc. for a package worth approximately $1,482,000 and consisting of 148,280 shares of Newco Fitness, Inc. common stock which the Company agreed to repurchase at a rate of $19,300 to $25,000 each month if certain financial conditions were met. The Acquisition includes certain rights of the Company to prepay certain amounts owed, incurred in connection with the Acquisition, at a substantial discount, which if paid in total immediately after closing, would reduce the purchase price to $1,137,315. In connection with the Acquisition, the Company granted to the Sellers, a first priority security interest in all of the Company's equipment. On or about September 29, 2002 the Acquisition was restructured. The restructuring included characterizing the Acquisition as secured loan payments rather than possible redemption of certain shares of stock issued by the Company in connection with the Acquisition. The restructuring included a $237,502 reduction in aggregate payments to the Seller, a reduction of $6,169 per month in possible monthly payments (from $24,169 to $18,000 per month) and the option to skip one payment per year, plus up to a 25% principal discount for certain pre-payments. Mr. John Smith has the primary responsibility to pay the last $250,000 of this purchase obligation. Since the Acquisition, the membership of Newcomb Athletic Club has increased from 2,104 to 2,630. The Company currently has a short term loan with Third National Bank in the amount of $150,000 which matures on July 9, 2004. The current shareholders in the Company acquired their interests in connection with the Reorganization at a pro forma share price of $4.00 per share. Immediately prior to the Reorganization, Bayshore sold a number of additional limited partnership unit equal to approximately 12,919 shares to six persons at a pro forma per share price equivalent of $4.00, and XYZ Investors I, L.P. sold a number of additional limited partnership units equal to approximately 21,550 shares of common stock to 7 persons at a pro forma per share price equivalent of $4.00. Between approximately May of 2002 and April, 2003, the Company sold an aggregate of 148,560 shares of Common Stock to 39 persons in private transactions at per share prices averaging approximately $4.75. From May 1, 2002 to April 30, 2003, Mr. John Smith has, in lieu of salary, agreed to have redeemed by the Company approximately $6,000 worth of his shares of Common Stock in the Company, at the then-current per share fair markets value, each month. The Company has reserved 300,000 shares of Common Stock for issuance to key employees under an employee stock option plan (the "Plan"). The Company has commitments to grant options covering an aggregate of 68,300 shares of Common Stock to 15 key employees upon regulatory approval of the Plan.
Shareholders
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 1, 2003, and as adjusted to reflect the sale of the shares offered hereby (i) by each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) by each director of the Company, (iii) by each of the executive officers of the Company, (iv) by all directors and executive officers of the Company as a group, and (v) by each Selling Shareholder. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable laws. | | Shares
Beneficially
Owned | Percent
Before the
Offering | Shares
to be
sold in
Offering | Shares
Owned After
Offering(1) | Percent
After the
Offering(1) |
|---|
| John Smith (2) | 519,072 | 57.0% | 26,851 | 492,221 | 36.0% | | Karen Berkshire (3) | 519,072 | 57.0% | 26,851 | 492,221 | 36.0% | | Brian Hanson | 34,397 | 3.8% | - | 34,397 | 2.5% | | Ben Siles | 20,000 | 2.2% | 12,000 | 8,000 | (4) | | Jerome Highland | 2,250 | 4% | 225 | 2,025 | (4) | | Kevin Wayland | 2,490 | 4% | 249 | 2,241 | (4) | | David Scorese | 9,683 | 1.1% | 969 | 8,714 | (4) | | Martin Borden | 2,767 | (4) | 277 | 2,490 | (4) | | All directors and officers as a group (3 persons) | 553,469 | 60.8% | 26,851 | 526,618 | 38.5% |
(1) Assuming full subscription hereto. (2) Including 5,261 shares beneficially held by Ms. Berkshire. (3) Including 513,811 shares beneficially held by Mr. John Smith. (4) Less than one percent.
Securities Description
DESCRIPTION OF THE SECURITIES
The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par value. Common Stock As of the date of this Offering Circular, there were 909,948 shares of Common Stock held of record by 90 shareholders. Assuming full subscription to this Offering and giving effect to the issuance of 456,000 shares of Common Stock offered hereby, there will be 1,365,948 shares of Common Stock outstanding upon the close of this Offering. Holders of the Company's Common Stock are entitled to one vote per each share and may exercise cumulative voting rights under Michigan law. Holders of Common Stock are entitled to receive pro rata such dividends, if any, as may be declared by the Board of directors of the Company, out of funds legally available therefore, subject to any preferential dividend rights of outstanding preferred stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the net assets of the Company available after the payment of all creditors and liquidation preferences, if any, of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, conversion or redemption rights. The outstanding shares of Common Stock are fully paid and non-assessable. Preferred Stock The Company's Amended and Restated Articles of Incorporation authorize the issuance of up to 10,000,000 shares of Preferred Stock. To the date of this Offering Circular, no rights, preferences or privileges of any shares of preferred stock have been designated and there are no shares of preferred stock outstanding. Nonetheless, the Company's Articles of Incorporation give the power to the Company's Board of directors may so designate rights, preferences and privileges of series of preferred stock at any time. Options and Rights The Company intends to reserve 300,000 shares of Common Stock for issuance to key employees under an employee stock option plan (the "Plan"). As of the date of this Offering Circular, there are outstanding commitments to grant options to purchase up to 68,300, contingent upon finalization of an intended stock option plan, approval of the Plan by the Company's Board of Directors and shareholders, and appropriate regulatory approval. Although the Company eventually intends to issue the committed options, the Option Plan has not yet been drafted and no regulatory approval has been initiated or discussed. In connection with the Reorganization, and in addition to the shares of Common stock the partners received in connection with the acquisition of their partnership interests, the partners of ABC Athletic Clubs and XYZ Investors, L.P. received rights to purchase an aggregate of 227,529 shares of Common Stock in the Company for a per share's price of $4.00 (the "Rights"). These Rights mature as to one third of such shares each January 9, commencing January 9, 2003, and continuing for the following two years, and is exercisable for three years following such maturity. At the date of this Offering Circular, no such Rights have been exercised. Michigan Law and Certain Article and Bylaw Provisions The Articles and Bylaws of the Company contain certain provisions permitted under the Michigan General Corporation Law relating to the liability of directors, officers and agents. These provisions eliminate, to the extent legally permissible, the monetary liability of directors, officers and agents for a breach of fiduciary duty. These provisions also provide for the indemnification of directors, officers and agents to the fullest extent permitted by Michigan law. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors and officers.
Distribution and Offering Price
DISTRIBUTION AND OFFERING PRICE
The Company is offering an aggregate of 456,000 Shares of Common Stock to suitable investors. The Company may offer Shares through registered broker/dealers, on a best efforts basis. The Company may pay to such selling broker/dealers a commission on such sales as set forth on the cover page of this Offering Circular. No proceeds of this Offering will be made available to the Company until the Company has received proceeds of $100,000. The two persons employed by the Company who will primarily be responsible for selling shares in connection with this Offering are John Smith and William Sholes. Messrs. John Smith and William Sholes are the President and Vice President of Operations, respectively. Neither of Messrs. John Smith and William Sholes are registered as brokers or dealers and neither have been involved in selling stock for any entity other than the Company and its predecessors within the four years prior to this Offering. The Company plans to conduct the offering by first contacting its existing members who are already familiar with the business of the Company. The Company intends to then advertise in financial publications focusing on the Northern Michigan market. The Company has not entered into any negotiation nor has any plans with any broker-dealer to help sell the offering. If the workload to handle the administration and selling of the offering becomes too great, management will seek out broker-dealers to complete the offering in an expeditious manner. The Selling Shareholders are selling an aggregate of 44,000 shares of Common Stock in connection with this Offering. The shares offered by the Company and the shares offered by the Selling Shareholders will be sold on a pro rata basis of shares subscribed for. Among the Selling Shareholders, shares will also be sold on a pro rata basis. The Share price offered hereby for the Common Stock has been determined by the Board of Directors of the Company after consideration of the Company's business and prospects and the intended business of the Company, the absence of a public market for the Company's securities, among other things. The Share price is greater than, and not related to, the book value of the Company, or to the assets or possible future assets, results of operations or other objective criteria of value. In order to subscribe for Shares, an investor must complete and execute a Subscription Agreement. Any subscription for Shares must be accompanied by full tender of the amount of purchase in the form of a check made payable to Newco Fitness, Inc. Subscriptions will be effective only upon acceptance by the Company and the Company reserves the right to reject any subscription for any reason.
Legal Matters
LEGAL MATTERS
The Omega Law Partners, Ford City, Michigan, has passed upon certain matters on behalf of the Company in connection with this transaction. Peter Nestle, a principal in The Omega Law Partners, beneficially owns 2,500 shares of Common Stock in the Company.
Experts
EXPERTS
The financial statements of the Company dated December 31, 1998 through 2002 and for the years then ended and for April 30, 2002 and April 30, 2003 and the periods then ended, have been prepared in accordance with generally accepted accounting principles. Any potential investor desiring to see more detailed financial records of the Company is encouraged to ask for them.
Additional Information
ADDITIONAL INFORMATION
The Company has filed an offering statement on Form 1-A with the Securities and Exchange Commission (the "Commission"), under Regulation A of the rules and regulations adopted pursuant to the Securities Act of 1933, as amended, with respect to the shares of Common Stock offered hereby. This Offering Circular does not contain all of the information contained in the Offering Statement and reference is made to the Offering Statement and exhibits thereto for further information with respect to the Company and the shares of Common Stock to which this Offering Circular relates. The Offering Statement may be inspected, without charge, at the Commission's Michigan district office, 123 Main St., Detroit, Michigan 43010. Copies of all or any part of it may be obtained from the Commission's Public Reference Room, Washington D.C., 20401, upon payment of the prescribed fees.
Attachment F-1 FinancialsNewco Fitness, Inc. INDEX TO FINANCIAL STATEMENTS Years ended December 31, 1998, 1999, 2000, 2001 and 2002 Four Months Ended April 30, 2002 and 2003 (unaudited) Contents
Balance Sheets
Newco Fitness, Inc.
BALANCE SHEETS
(unaudited) | | | | ASSETS | | | | | Dec 31,
1998 | Dec 31,
1999 | Dec 31,
2000 | Dec 31,
2001 | Dec 31,
2002 | April 30,
2003 | |
| | CURRENT ASSETS: | | Cash | $0 | $1,000 | $2,970 | $200 | $(4,703) | $(923) | | Installment contracts receivable | 0 | 147,096 | 499,960 | 610,386 | 540,559 | 489,949 | | Inventory | 605 | 605 | 1,512 | 3,228 | 202 | 0 | | Receivables, advances and prepaids | 0
------------ | 0
------------ | 0
------------ | 78,729
------------ | 287,306
------------ | 294,935
----------- | | Total current assets | 605 | 148,701 | 504,442 | 692,543 | 823,364 | 783,961 |
|---|
| | PROPERTY AND EQUIPMENT: | | Exercise equipment | 172,746 | 232,226 | 858,662 | 1,401,714 | 1,380,137 | 1,380,137 | | Leasehold improvements | 165,000 | 467,442 | 540,492 | 612,975 | 622,553 | 682,553 | | Office furniture and equipment | 56,553
------------ | 57,853
------------ | 69,719
------------ | 87,054
------------ | 93,067
------------ | 93,067
------------ | | | 394,299 | 757,521 | 1,468,873 | 2,101,743 | 2,095,757 | 2,155,757 | | less- Accumulated depreciation | (394,299)
------------ | (230,904)
------------ | (377,660)
------------ | (632,050)
------------- | (925,190)
------------- | (998,395)
-------------- | | Total property and equipment, net | 0
------------ | 526,617
------------ | 1,091,213
------------- | 1,469,693
------------- | 1,170,567
------------- | 1,157,362
------------- |
|---|
| | OTHER ASSETS: | | Investment in XYZ Investors - I, LP | 76,000 | 76,000 | 76,000 | 82,207 | | | | Notes receivable | 0 | 0 | 0 | 0 | 1,067,318 | 1,048,470 | | Intangible assets net of amortization | 0
----------- | 0
------------ | 0
------------- | 1,097,129
------------- | 811,099
------------- | 742,629
------------- | | | $76,605
====== | $751,318
======= | $1,671,655
======== | $3,341,572
======== | $3,872,348
======== | $3,732,422
======== |
|---|
| | LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | CURRENT LIABILITIES: |
|---|
| Bank overdraft | $13,154 | $12,671 | $14,003 | $16,130 | $12,114 | $856 | | Current portion of long-term debt | 17,618 | 32,715 | 72,453 | 150,007 | 385,884 | 419,774 | | Current portion of capital lease obligations | 0 | 54,396 | 160,413 | 131,303 | 32,900 | 30,698 | | Accounts payable | 86,000 | 383,356 | 225,618 | 288,895 | 361,978 | 307,198 | | Accrued expenses | 0 | 14,492 | 23,293 | 81,261 | 82,909 | 66,455 | | Deferred revenue | 111,912 | 281,153 | 606,204 | 753,446 | 249,556 | 213,459 | | Installment contract obligations | 0 | 147,096 | 499,681 | 610,386 | 540,559 | 489,949 | | Income taxes payable | 0
---------- | 0
---------- | 0
---------- | 0
---------- | 52,529
---------- | 70,157
---------- | | Total current liabilities | 228,684 | 925,879 | 1,601,665 | 2,031,428 | 1,718,429 | 1,598,546 |
|---|
| | NONCURRENT LIABILITIES: | | Long-term debt, net of current portion | 223,926 | 327,373 | 247,345 | 177,336 | 1,447,728 | 1,383,619 | | Capital lease obligations, net of current portion | | 49,830 | 119,002 | 73,009 | 43,408 | 29,307 | | Deferred rent | 61,022
---------- | 137,722
---------- | 242,951
---------- | 200,071
---------- | 192,020
---------- | 165,717
---------- | | Total noncurrent liabilities | 284,948
------------ | 514,925
------------ | 609,298
------------ | 450,416
------------ | 1,683,156
------------ | 1,578,643
------------ |
|---|
| | STOCKHOLDERS' EQUITY (DEFICIT): | | Common stock | 76,000 | 122,830 | 153,830 | 1,506,320 | 1,853,808 | 1,907,503 | | Contributed capital | 103,038 | 103,038 | 103,038 | 103,038 | 247,892 | 252,225 | | Retained earnings (deficit) | (616,065)
------------ | (915,354)
------------ | (796,176)
------------ | (749,630)
------------ | (1,630,937)
------------ | (1,604,495)
------------ | | Total stockholders' equity (deficit) | (437,027)
------------ | (689,486)
------------ | (539,308)
------------ | 859,728
------------ | 470,763
------------ | 555,233
------------ |
|---|
| | $76,605
====== | $751,318
======= | $1,671,655
======== | $3,341,572
======== | $3,872,348
======== | $3,732,422
======== |
|---|
| | | The accompanying notes are an integral part of these balance sheets. |
Statements of OperationsNewco Fitness, Inc.
STATEMENTS OF OPERATIONS
(unaudited) |
|
