CLUB Town Sports International Holdings Inc

Town Sports International Holdings, Inc. (“TSI” or the “Company”) (NASDAQ: CLUB), a leading owner and operator of health clubs located primarily in major cities from Washington, DC north through New England, operating under the brand names “New York Sports Clubs,” “Boston Sports Clubs,” “Washington Sports Clubs” and “Philadelphia Sports Clubs,” announced its results for the first quarter ended March 31, 2010.

First Quarter Overview:

• Revenue decreased 7.1% in Q1 2010 compared to Q1 2009.
• Comparable club revenue decreased 6.0% in Q1 2010 compared to Q1 2009.
• Total member count increased 1.9% to 495,000 as of March 31, 2010 compared to 486,000 as of December 31, 2009.
• Membership attrition averaged 3.5% per month in Q1 2010 compared to 3.6% per month in both Q1 2009 and Q4 2009.
• Loss per share was ($0.03) in Q1 2010.
• Q1 2010 results include fixed asset impairment and severance charges, net of taxes, of $487,000 or ($0.02) per share. Q1 2009 results included fixed asset impairment charges, severance charges and early lease termination costs, net of taxes, of $1.4 million or ($0.06) per share.

Robert Giardina, Chief Executive Officer of TSI, commented: “I am very excited to be back with Town Sports and looking forward to the opportunity to once again work with a brand that I am so passionate about and help move this company forward. Our goal is to build on our enhanced member experience and improved retention levels by reinvigorating our sales process and driving more new members through our doors. Our first quarter financial results, including our net new member increase, were in line with our expectations and our outlook for new member gains for 2010 remains the same. While we have a lot of hard work ahead of us, we are also motivated by the opportunities we see.”

 

Quarter Ended March 31, 2010 Financial Results:

 

Revenue (in $’000s) was comprised of the following:

 

Quarters Ended March 31,

2010   2009 Revenue   % Revenue Revenue   % Revenue % Variance Membership dues $ 92,809 78.8 % $ 100,708 79.5 % (7.8 )% Initiation fees   2,024 1.7 %   3,164 2.5 % (36.0 )% Membership revenue   94,833 80.5 %   103,872 82.0 % (8.7 )% Personal training revenue 14,799 12.6 % 15,001 11.8 % (1.3 )% Other ancillary club revenue   6,963 5.9 %   6,595 5.2 % 5.6 % Ancillary club revenue 21,762 18.5 % 21,596 17.0 % 0.8 % Fees and other revenue   1,164 1.0 %   1,241 1.0 % (6.2 )% Total revenue $ 117,759 100.0 % $ 126,709 100.0 % (7.1 )%  

Total revenue for Q1 2010 decreased $9.0 million, or 7.1%, compared to Q1 2009. For Q1 2010, revenues increased $2.6 million at the 11 clubs opened or acquired subsequent to March 31, 2008 offset by decreases in revenue of 7.5% or $9.0 million at our clubs opened or acquired prior to March 31, 2008 and $2.6 million related to the 12 clubs that were closed subsequent to March 31, 2008.

Revenue at clubs operated for over 12 months (“comparable club revenue”) decreased 6.0% in Q1 2010 compared to Q1 2009.

   

Operating expenses:

  Quarter Ended March 31, 2010 2009    

Expense % of Revenue

Expense % Variance Payroll and related 41.2 % 40.0 % (4.4 )% Club operating 36.9 % 36.8 % (6.7 )% General and administrative 7.6 % 6.6 % 7.1 % Depreciation and amortization 11.6 % 11.3 % (4.5 )% Impairment of fixed assets 0.3 % 0.9 % (65.6 )% Operating expenses 97.6 % 95.6 % (5.1 )%  

Total operating expenses decreased 5.1% for Q1 2010 compared to Q1 2009. Operating margin was 2.4% for Q1 2010 compared to 4.4% for Q1 2009. Operating expenses were impacted by the following:

    Q1 2010 vs.

Q1 2009

% Variance Total months of club operation (4.4)% Total member club usage (2.2)%

Club operating. In addition to the 4.4% decrease in total months of club operation and the 2.2% decrease in total member club usage, in Q1 2010, we had decreases in operating expenses related to laundry and towel efficiencies of $1.2 million when compared to Q1 2009.

General and administrative. Increases in Q1 2010 general and administrative expenses compared to Q1 2009 were principally attributable to increases in legal and consulting fees and costs related to our first annual leadership conference in Q1 2010. Offsetting these increases were decreases in general liability insurance expense due to a reduction in claims activity and therefore a reduction of claims reserves.

Depreciation and amortization. For Q1 2010 compared to Q1 2009, depreciation and amortization decreased due to the closing of six clubs subsequent to March 31, 2009, the accelerated depreciation related to clubs closed prior to lease expiration dates in Q1 2009 and the effect of the fixed asset impairment write-offs in the year ended December 31, 2009.

Impairment of fixed assets. For Q1 2010 and Q1 2009, losses of $389,000 and $1.1 million, respectively, were recorded representing impairment of fixed assets at two and four underperforming clubs, respectively.

Net Loss for Q1 2010 was $732,000 compared to net income of $639,000 for Q1 2009.

Cash flow from operating activities for Q1 2010 totaled $17.6 million, a decrease of $5.0 million from Q1 2009, which was primarily related to the increase in cash paid for interest of $7.2 million and a decrease in earnings.

Second Quarter 2010 Business Outlook:

We are limiting our guidance to the second quarter of 2010. Based on the current business environment, recent performance and current trends in the marketplace and subject to the risks and uncertainties inherent in forward-looking statements, our outlook for the second quarter of 2010 includes the following:

• Revenue for Q2 2010 is expected to be between $116.5 million and $117.5 million versus $123.9 million for Q2 2009. As percentages of revenue, we expect Q2 2010 payroll and related expenses to approximate 41.0%, club operating expenses to approximate 37.5%, general and administrative expenses to approximate 7.5%.
• In Q2 2010, we expect to record fixed asset impairment charges of approximately $1.7 million related to a future club closing. On April 23, 2010, one of our landlords exercised its right to terminate the lease before its stated expiration date and we expect we will close the club in Q3 2010. Assuming a 60% effective tax rate, this results in a charge of ($0.03) per share.
• Including the aforementioned $1.7 million of expected fixed asset impairment charges, we expect a net loss for Q2 2010 of between $1.2 million and $1.7 million, and loss per share to be in the range of ($0.05) per share to ($0.08) per share, assuming a 60% effective tax rate and 22.6 million weighted average fully diluted shares outstanding.

Investing Activities Outlook:

For the year ending December 31, 2010, we currently plan to invest $32.0 million to $35.0 million in capital expenditures. This is down from $49.3 million of capital expenditure investing activity in 2009. We expect that this 2010 amount will include $23.5 million to continue to upgrade existing clubs and $7.0 million principally related to major renovations at clubs with recent lease renewals and upgrading our in club entertainment system network. We also expect to invest $1.5 million to $2.5 million to enhance our management information systems.

Forward-Looking Statements:

Statements in this release that do not constitute historical facts, including, without limitation, statements under the captions “Second Quarter 2010 Business Outlook” and “Investing Activities Outlook”, other statements regarding future financial results and performance and potential sales revenue and other statements that are predictive in nature or depend upon or refer to events or conditions, or that include words such as “expects,” “anticipated,” “intends,” “plans,” “believes,” “estimates” or “could”, are “forward-looking” statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control, including, among others, the level of market demand for the Company’s services, economic conditions affecting the Company’s business, the geographic concentration of the Company’s clubs, competitive pressures, the ability to achieve reductions in operating costs and to continue to integrate acquisitions, environmental initiatives, any security and privacy breaches involving customer data, the application of Federal and state tax laws and regulations, the levels and terms of the Company’s indebtedness, and other specific factors discussed herein and in other releases and public filings made by the Company (including the Company’s reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission). The Company believes that all forward-looking statements are based on reasonable assumptions when made; however, the Company cautions that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to update these statements in light of subsequent events or developments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

About Town Sports International Holdings, Inc.:

New York-based Town Sports International Holdings, Inc. is a leading owner and operator of fitness clubs in the Northeast and mid-Atlantic regions of the United States and, through its subsidiaries, operated 161 fitness clubs as of March 31, 2010, comprising 109 New York Sports Clubs, 25 Boston Sports Clubs, 18 Washington Sports Clubs (two of which are partly-owned), six Philadelphia Sports Clubs, and three clubs located in Switzerland. These clubs collectively served approximately 495,000 members. For more information on TSI, visit http://www.mysportsclubs.com.

The Company will hold a conference call on Wednesday, April 28, 2010 at 4:30 PM (Eastern) to discuss the first quarter 2010 results. Robert Giardina, Chief Executive Officer, and Dan Gallagher, Chief Financial Officer, will host the conference call. The conference call will be Web cast and may be accessed via the Company's Investor Relations section of its Website at www.mysportsclubs.com. A replay and transcript of the call will be available via the Company's Website beginning April 29, 2010.

From time to time we may use our Web site as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at http://www.mysportsclubs.com. In addition, you may automatically receive email alerts and other information about us by enrolling your email by visiting the “Email Alert” section at http://www.mysportsclubs.com.

       

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2010 and December 31, 2009

(All figures in $’000s)

(Unaudited)

  March 31,

2010

December 31,

2009

ASSETS Current assets: Cash and cash equivalents $ 25,046 $ 10,758 Accounts receivable, net 5,035 4,295 Inventory 298 224 Prepaid corporate income taxes 442 1,274 Prepaid expenses and other current assets   7,383     10,264   Total current assets 38,204 26,815 Fixed assets, net 328,401 340,277 Goodwill 32,636 32,636 Intangible assets, net 100 149 Deferred tax assets, net 52,480 50,581 Deferred membership costs 5,089 6,079 Other assets   10,466     10,929   Total assets $ 467,376   $ 467,466     LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Current portion of long-term debt $ 1,850 $ 1,850 Accounts payable 4,772 6,011 Accrued expenses 26,388 23,656 Accrued interest 2,778 6,573 Deferred revenue   38,813     35,346   Total current liabilities 74,601 73,436 Long-term debt 316,050 316,513 Deferred lease liabilities 70,642 71,438 Deferred revenue 2,040 1,488 Other liabilities   12,750     12,824   Total liabilities 476,083 475,699 Stockholders’ deficit: Common stock 23 23 Paid-in capital (22,185 ) (22,572 ) Accumulated other comprehensive income (currency translation adjustment) 1,198 1,327 Retained earnings   12,257     12,989   Total stockholders’ deficit   (8,707 )   (8,233 ) Total liabilities and stockholders’ deficit $ 467,376   $ 467,466  

 

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the quarters ended March 31, 2010 and 2009

(All figures in $’000s except share and per share data)

(Unaudited)

  Quarter Ended March 31,   2010         2009   Revenues: Club operations $ 116,595 $ 125,468 Fees and other   1,164     1,241     117,759     126,709   Operating Expenses: Payroll and related 48,511 50,747 Club operating 43,468 46,610 General and administrative 8,939 8,347 Depreciation and amortization 13,654 14,296 Impairment of fixed assets   389     1,131     114,961     121,131   Operating income 2,798 5,578 Interest expense 5,184 5,277 Interest income (18 ) (1 ) Equity in the earnings of investees and rental income   (536 )   (611 ) (Loss) income before (benefit) provision for corporate income taxes (1,832 ) 913 (Benefit) provision for corporate income taxes   (1,100 )   274   Net (loss) income $ (732 ) $ 639     (Loss) earnings per share: Basic $ (0.03 ) $ 0.03 Diluted $ (0.03 ) $ 0.03 Weighted average number of shares used in calculating (loss) earnings per share: Basic 22,605,236 23,207,417 Diluted 22,605,236 23,245,843

 

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the quarters ended March 31, 2010 and 2009

(All figures in $’000s)

(Unaudited)

  Quarters Ended March 31,   2010         2009   Cash flows from operating activities: Net (loss) income $ (732 ) $ 639 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 13,654 14,296 Impairment of fixed assets 389 1,131 Non-cash interest expense on Senior Discount Notes — 1,203 Amortization of debt issuance costs 253 200 Non-cash rental expense, net of non-cash rental income (934 ) (245 ) Compensation expense incurred in connection with stock options and common stock grants 369 415 Increase in deferred tax asset (1,899 ) (1,000 ) Net change in certain working capital components 5,485 2,042 Decrease in deferred membership costs 990 469 Landlord contributions to tenant improvements 100 1,958 (Decrease) increase in insurance reserves (229 ) 1,512 Other   172     (41 ) Total adjustments   18,350     21,940   Net cash provided by operating activities   17,618     22,579     Cash flows from investing activities: Capital expenditures   (2,809 )   (18,460 ) Net cash used in investing activities   (2,809 )   (18,460 )   Cash flows from financing activities: Proceeds from borrowings on Revolving Loan Facility — 41,000 Repayment of borrowings on Revolving Loan Facility — (42,000 ) Repayment of long term borrowings (463 ) (463 ) Change in book overdraft — 174 Repurchase of common stock — (5,355 ) Proceeds from stock option exercises   18     —   Net cash used in financing activities   (445 )   (6,644 ) Effect of exchange rate changes on cash   (76 )   (263 ) Net increase (decrease) in cash and cash equivalents 14,288 (2,788 ) Cash and cash equivalents beginning of period   10,758     10,399   Cash and cash equivalents end of period $ 25,046   $ 7,611     Summary of the change in certain working capital components: Increase in accounts receivable $ (752 ) $ (958 ) Increase in inventory (74 ) (179 ) Decrease in prepaid expenses and other current assets 2,740 1,148 Increase (decrease) in accounts payable, accrued expenses and accrued interest 2,527 (1,550 ) (Decrease) increase in accrued interest on Senior Discount Notes (3,807 ) 2,538 Change in prepaid corporate income taxes and corporate income taxes payable 831 546 Increase in deferred revenue   4,020     497   Net change in certain working capital components $ 5,485   $ 2,042