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Town Sports International Holdings, Inc. Announces Second Quarter 2010 Financial Results

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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 second quarter ended June 30, 2010.

Second Quarter Overview:

  • Revenue decreased 5.2% in Q2 2010 compared to Q2 2009.

  • Comparable club revenue decreased 4.2% in Q2 2010 compared to Q2 2009.

  • Total member count, excluding short-term summer, seasonal and student

    members, decreased 2.2% compared to March 31, 2010 and 3.8% compared

    to June 30, 2009.

  • Total number of clubs in operation decreased to 161 as of June 30,

    2010 from 166 as of June 30, 2009.

  • Membership attrition averaged 3.3% per month in Q2 2010 compared to

    3.5% in Q1 2010 and 3.7% per month in Q2 2009.

  • Loss per share was ($0.04) in Q2 2010.

  • Q2 2010 results include fixed asset impairment and severance charges,

    net of taxes, of $2.0 million or ($0.09) per share. Q2 2009 results

    included severance charges, early lease termination costs and rent

    expense related to an anticipated judgment in connection with a lease

    dispute, net of taxes, of $879,000 or ($0.04) per share.

Robert Giardina, Chief Executive Officer of TSI, commented: “After being

back at TSI for a few months and visiting almost all of our clubs, I am

very encouraged by the condition of our facilities and by the experience

our members receive from the team we now have in place. We are also

pleased with our improved member attrition and the favorable response to

our recent initiatives. So while we are still in the very early stages

of reinvigorating our business, we are confident that we are putting the

right strategies in place.”

Quarter and Year to Date June 30, 2010

Financial Results:

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

 

 

Quarter Ended June 30,

 

 

2010

 

2009

Revenue

 

%

Revenue

Revenue

 

%

Revenue

%

Variance

Membership dues

$ 91,987

78.3%

$ 98,358

79.4%

(6.5)%

Initiation fees

2,432

2.1%

3,343

2.7%

(27.3)%

Membership revenue

94,419

80.4%

101,701

82.1%

(7.2)%

Personal training revenue

15,582

13.2%

15,169

12.2%

2.7%

Other Ancillary club revenue

6,171

5.3%

5,750

4.7%

7.3%

Ancillary club revenue

21,753

18.5%

20,919

16.9%

4.0%

Fees and other revenue

1,264

1.1%

1,292

1.0%

(2.2)%

Total revenue

$ 117,436

100.0%

$ 123,912

100.0%

(5.2)%

Total revenue for Q2 2010 decreased $6.5 million, or 5.2%,

compared to Q2 2009. For Q2 2010, revenues increased $1.2 million at the

eight clubs opened or acquired subsequent to June 30, 2008 offset by

decreases in revenue of 5.4% or $6.4 million at our clubs opened or

acquired prior to June 30, 2008 and $1.3 million related to the 10 clubs

that were closed subsequent to June 30, 2008.

Revenue at clubs operated for over 12 months (“comparable club revenue”)

decreased 4.2% in Q2 2010 compared to Q2 2009.

Operating expenses:

 

Quarter Ended June 30,

 

2010

 

 

 

2009

 

 

 

 

 

Expense % of Revenue

 

Expense %

Variance

Payroll and related

 

41.4%

 

 

38.9%

 

0.7%

Club operating

37.3%

36.4%

(2.8)%

General and administrative

5.4%

6.0%

(16.0)%

Depreciation and amortization

11.4%

11.6%

(6.5)%

Impairment of fixed assets

 

2.4%

 

 

—%

 

NA

Operating expenses

 

97.9%

 

 

92.9%

 

(0.1)%

Total operating expenses decreased 0.1% for Q2 2010 compared to

Q2 2009. Operating expenses were impacted by a 3.6% decrease in the

total months of clubs in operation. Operating margin was 2.1% for Q2

2010 compared to 7.1% for Q2 2009.

Payroll and related

. Offsetting the decreases in payroll

related to membership consultants and the effects from the decrease in

total club months of operations was an increase related to personal

training payroll.

Club operating

. In addition to the decrease in total

months of club operation and total member club usage, in Q2 2010,

operating expenses decreased related to laundry and towel efficiencies

of $413,000 when compared to Q2 2009. Rent and occupancy decreased

$687,000 in Q2 2010.

General and administrative

. Decreases in Q2 2010 general

and administrative expenses compared to Q2 2009 were principally

attributable to decreases in general liability insurance expense due to

a reduction in claims activity and therefore a reduction of claims

reserves.

Depreciation and amortization.

Depreciation and

amortization decreased in Q2 2010 due to the closing of five clubs

subsequent to June 30, 2009, the accelerated depreciation related to

clubs closed prior to lease expiration dates in Q2 2009 and the effect

of the fixed asset impairment write-offs in the year ended December 31,

2009 and Q1 2010.

Impairment of fixed assets. In Q2 2010, we recorded fixed

asset impairment charges of $2.9 million, $1.2 million representing the

write-off of fixed assets at an underperforming club and $1.7 million

related to the planned closure of another club prior to the lease

expiration date. There were no fixed asset impairment charges in Q2 2009.

Net Loss for Q2 2010 was $815,000 compared to net income of

$2.5 million for Q2 2009.

For the six months ended June 30, 2010, total revenue decreased

$15.4 million or 6.2% compared to the same period in 2009 and operating

margin was 2.2% compared to 5.7% for the six months ended June 30, 2009.

For the six months ended June 30, 2010, we recorded fixed asset

impairment charges of $3.3 million compared to $1.1 million in the same

period in 2009. Net loss was $1.5 million compared to net income of

$3.2 million for the six months ended June 30, 2009.

Cash flow from operating activities for the six months ended June

30, 2010 totaled $29.5 million, a decrease of $21.5 million from the six

months ended June 30, 2009, which was primarily related to the decrease

in earnings and increases in cash paid for interest and taxes of $7.3

million and $4.9 million, respectively.

Third Quarter 2010 Business Outlook:

We are limiting our guidance to the third 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 third quarter of 2010

includes the following:

  • Revenue for Q3 2010 is expected to be between $113.5 million and

    $114.5 million versus $120.4 million for Q3 2009. As percentages of

    revenue, we expect Q3 2010 payroll and related expenses to approximate

    40.0%, club operating expenses to approximate 39.5% and general and

    administrative expenses to approximate 7.0%.

  • We expect a net loss for Q3 2010 of between $1.0 million and $1.5

    million, and loss per share to be in the range of ($0.04) per share to

    ($0.07) 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 $26.0

million to $28.0 million in capital expenditures. This is down from

$49.3 million of capital expenditures in 2009. We expect that the 2010

amount will include approximately $20.0 million to continue to upgrade

existing clubs and $4.0 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

enhance our management information systems. The remainder of our 2010

capital expenditures will be committed to building or expanding clubs.

Forward-Looking Statements:

Statements in this release that do not constitute historical facts,

including, without limitation, statements under the captions “Third

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 June 30, 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 484,000

members, excluding short-term, seasonal and student members, and 12,000

student members. For more information on TSI, visit http://www.mysportsclubs.com.

The Company will hold a conference call on Thursday, July 29, 2010 at

4:30 PM (Eastern) to discuss the second 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 Web site at www.mysportsclubs.com.

A replay and transcript of the call will be available via the Company's

Web site beginning July 30, 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

June 30, 2010

and December 31, 2009

(All figures in $’000s)

(Unaudited)

 

 

 

June 30,

2010

 

December 31,

2009

ASSETS

Current assets:

Cash and cash equivalents

$

 

 

 

32,938

$

10,758

Accounts receivable, net

5,366

4,295

Inventory

220

224

Prepaid corporate income taxes

2,616

1,274

Prepaid expenses and other current assets

 

 

 

 

9,013

 

 

10,264

 

Total current assets

50,153

26,815

Fixed assets, net

315,408

340,277

Goodwill

32,627

32,636

Intangible assets, net

78

149

Deferred tax assets, net

54,752

50,581

Deferred membership costs

4,189

6,079

Other assets

 

 

 

 

9,789

 

 

10,929

 

Total assets

$

 

 

 

466,996

 

$

467,466

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:

Current portion of long-term debt

$

1,850

$

1,850

Accounts payable

5,546

6,011

Accrued expenses

25,830

23,656

Accrued interest

6,586

6,573

Deferred revenue

 

 

 

 

38,297

 

 

35,346

 

Total current liabilities

78,109

73,436

Long-term debt

315,587

316,513

Deferred lease liabilities

69,538

71,438

Deferred revenue

1,939

1,488

Other liabilities

 

 

 

 

11,019

 

 

12,824

 

Total liabilities

476,192

475,699

Stockholders’ deficit:

Common stock

23

23

Paid-in capital

(21,774

)

(22,572

)

Accumulated other comprehensive income (currency translation

adjustment)

1,113

1,327

Retained earnings

 

 

 

 

11,442

 

 

12,989

 

Total stockholders’ deficit

 

 

 

 

(9,196

)

 

(8,233

)

Total liabilities and stockholders’ deficit

$

 

 

 

466,996

 

$

467,466

 

 

Preliminary, Subject to Change

 

 

 

 

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For

the quarters and six months ended June 30, 2010 and 2009

(All

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

(Unaudited)

 

 

Quarter Ended June 30,

Six Ended June 30,

2010

 

2009

2010

 

2009

Revenues:

Club operations

$

116,172

$

122,620

$

232,767

$

248,088

Fees and other

 

1,264

 

 

1,292

 

 

2,428

 

 

2,533

 

 

117,436

 

 

123,912

 

 

235,195

 

 

250,621

 

Operating Expenses:

Payroll and related

48,605

48,246

97,116

98,993

Club operating

43,804

45,054

87,272

91,664

General and administrative

6,292

7,488

15,231

15,835

Depreciation and amortization

13,407

14,346

27,061

28,642

Impairment of fixed assets

 

2,865

 

 

 

 

3,254

 

 

1,131

 

 

114,973

 

 

115,134

 

 

229,934

 

 

236,265

 

Operating income

2,463

8,778

5,261

14,356

Interest expense

5,179

5,289

10,363

10,566

Interest income

(17

)

(35

)

(1

)

Equity in the earnings of investees and rental income

 

(518

)

 

(398

)

 

(1,054

)

 

(1,009

)

(Loss) income before (benefit) provision for corporate income taxes

(2,181

)

3,887

(4,013

)

4,800

(Benefit) provision for corporate income taxes

 

(1,366

)

 

1,363

 

 

(2,466

)

 

1,637

 

Net (loss) income

$

(815

)

$

2,524

 

$

(1,547

)

$

3,163

 

 

(Loss) earnings per share:

Basic

$

(0.04

)

$

0.11

$

(0.07

)

$

0.14

Diluted

$

(0.04

)

$

0.11

$

(0.07

)

$

0.14

Weighted average number of shares used in calculating (loss)

earnings per share:

Basic

22,625,137

22,546,449

22,615,241

22,875,107

Diluted

22,625,137

22,592,436

22,615,241

22,924,421

 

 

Preliminary, Subject to Change

 

 

 

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For

the six months ended June 30, 2010 and 2009

(All

figures in $’000s)

(Unaudited)

 

Six Months Ended June 30,

2010

 

2009

Cash flows from operating activities:

Net (loss) income

$

(1,547

)

$

3,163

Adjustments to reconcile net income to net cash provided by

operating activities

Depreciation and amortization

27,061

28,642

Impairment of fixed assets

3,254

1,131

Non-cash interest expense on Senior Discount Notes

1,203

Amortization of debt issuance costs

506

406

Non-cash rental expense, net of non-cash rental income

(2,171

)

(667

)

Compensation expense incurred in connection with stock options and

common stock grants

737

841

Increase in deferred tax asset

(4,171

)

(2,474

)

Net change in certain operating assets and liabilities

4,409

10,945

Decrease in deferred membership costs

1,890

4,660

Landlord contributions to tenant improvements

100

2,993

(Decrease) increase in insurance reserves

(1,081

)

301

Other

 

485

 

 

(134

)

Total adjustments

 

31,019

 

 

47,847

 

Net cash provided by operating activities

 

29,472

 

 

51,010

 

 

Cash flows from investing activities:

Capital expenditures

 

(6,262

)

 

(28,485

)

Net cash used in investing activities

 

(6,262

)

 

(28,485

)

 

Cash flows from financing activities:

Proceeds from borrowings on Revolving Loan Facility

5,000

Repayment of borrowings on Revolving Loan Facility

(19,000

)

Repayment of long term borrowings

(925

)

(925

)

Change in book overdraft

126

Repurchase of common stock

(5,355

)

Proceeds from exercise of stock options

76

36

Tax benefit from stock option exercises

 

 

 

21

 

Net cash used in financing activities

 

(849

)

 

(20,097

)

Effect of exchange rate changes on cash

 

(181

)

 

(68

)

Net increase in cash and cash equivalents

22,180

2,360

Cash and cash equivalents beginning of period

 

10,758

 

 

10,399

 

Cash and cash equivalents end of period

$

32,938

 

$

12,759

 

 

Summary of the change in certain operating assets and liabilities:

Increase in accounts receivable

$

(1,090

)

$

(1,035

)

Decrease (increase) in inventory

3

(103

)

Decrease in prepaid expenses and other current assets

1,084

1,581

Increase in accounts payable, accrued expenses and accrued interest

2,352

452

Increase in accrued interest on Senior Discount Notes

6,346

Change in prepaid corporate income taxes and corporate income taxes

payable

(1,342

)

5,648

Increase (decrease) in deferred revenue

 

3,402

 

 

(1,944

)

Net change in certain working capital components

$

4,409

 

$

10,945

 

 

 

Preliminary, Subject to Change

Town Sports International Holdings, Inc., New York

Investors:

212-246-6700

extension 1650

Investor.relations@town-sports.com

or

Integrated

Corporate Relations,

Joseph Teklits, 203-682-8390

joseph.teklits@icrinc.com

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