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Town Sports International Holdings, Inc. Announces Third Quarter 2008 Financial Results

Lowers Fiscal 2008 Guidance

NEW YORK--(BUSINESS WIRE)--Oct. 30, 2008--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 third quarter ended September 30, 2008.

3rd Quarter Highlights:

-- Revenues increased 7.8% to $128.1 million.

-- Comparable club revenue increased 2.2%.

-- Personal training revenues grew 12.3%, to $14.9 million.

-- EBITDA increased 1.4% to $25.6 million.

-- Diluted earnings per share decreased 26.3% to $0.14, including a $0.02 fixed asset impairment charge.

-- Membership attrition averaged 3.6% per month.

Alex Alimanestianu, Chief Executive Officer of TSI, commented: "After a solid first half of the year, we were able to post increases in membership and same club revenue in the third quarter, but fell below our overall financial targets for the period. As the quarter progressed, we felt the increasing effects of the recessionary economy, and the outlook we are giving for the fourth quarter reflects the worsening consumer spending environment. We are convinced that health and fitness will continue to be a high priority for our target customers and we remain extremely confident in our strategy, the operational initiatives we have undertaken, and the long-term growth potential of our company. Until conditions improve, we will manage costs and capital expenditures to match the environment, while continuing to focus on delivering a high quality experience to our members."

Quarter Ended September 30, 2008 Financial Highlights:

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

                             Quarter Ended September 30,
                               2008               2007
                        ------------------ ------------------
                        Revenue  % Revenue Revenue  % Revenue % Growth
                        -------- --------- -------- --------- --------
Membership dues         $101,025     78.9% $ 93,735     78.8%    7.8%
Initiation fees            3,505      2.7%    3,202      2.7%    9.5%
                        -------- --------- -------- ---------
   Membership revenue    104,530     81.6%   96,937     81.5%    7.8%
                        -------- --------- -------- ---------
Personal training
 revenue                  14,871     11.6%   13,243     11.2%   12.3%
Other ancillary club
 revenue                   7,281      5.7%    7,245      6.1%    0.5%
                        -------- --------- -------- ---------
   Ancillary club
    revenue               22,152     17.3%   20,488     17.3%    8.1%
                        -------- --------- -------- ---------
Fees and other revenue     1,427      1.1%    1,461      1.2%   (2.3)%
                        -------- --------- -------- ---------
Total revenue           $128,109    100.0% $118,886    100.0%    7.8%
                        ======== ========= ======== =========

Total revenue for Q3 2008 increased 7.8% compared to Q3 2007 driven by growth in membership and personal training revenue. Revenue at clubs operated by us for over 12 months ("comparable club revenue") increased 2.2% during the three months ended September 30, 2008. Of this 2.2% increase, 0.9% was due to an increase in membership, 0.9% was due to an increase in price and 0.4% was due to an increase in ancillary club revenue and fees and other revenue.

Operating expenses (in $'000s) were comprised of the following:

                             Quarter Ended September 30,
                               2008               2007
                        ------------------ ------------------
                        Expense  % Revenue Expense  % Revenue % Change
                        -------- --------- -------- --------- --------
Payroll and related     $ 49,171     38.4% $ 43,331     36.5%    13.5%
Club operating            44,398     34.6%   42,360     35.6%     4.8%
General and
 administrative            8,697      6.8%    8,368      7.0%     3.9%
Depreciation and
 amortization             13,423     10.5%   10,950      9.2%    22.6%
Impairment of fixed
 assets                      839      0.7%       --      0.0%   100.0%
                        -------- --------- -------- ---------
   Operating expenses   $116,528     91.0% $105,009     88.3%    11.0%
                        ======== ========= ======== =========

Total operating expenses increased 11.0% for Q3 2008 compared to Q3 2007. Operating margin was 9.0% for Q3 2008 and 11.7% in Q3 2007.

-- The increases in payroll and related and club operating expenses were principally attributable to a 7.8% increase in the total months of club operation from 451 in Q3 2007 to 486 in Q3 2008. There was a net increase of 10 clubs in the twelve months ended September 30, 2008. In addition, we have been discounting our new member initiation fees in an effort to drive membership sales. Our payroll costs that we defer are limited to the amount of these initiation fees, thus causing a pre-tax increase in payroll of approximately $2.1 million when compared to Q3 2007; a $1.3 million effect, net of tax. In addition, payroll costs directly related to our personal training, group fitness training, and programming for children increased $1.8 million or 17.9%, principally due to the increase in revenue related to these programs.

-- The increase in depreciation and amortization expenses was principally due to clubs opened after September 30, 2007.

-- In the quarter ended September 30, 2008, we recorded a fixed asset impairment loss of $839,000 related to the decision to close a club prior to the lease expiration. The charge was determined based on the undiscounted cash flows expected over the remaining occupancy period.

Net income for Q3 2008 was $3.8 million compared to a net income of $5.1 million for Q3 2007.

EBITDA for Q3 2008 increased 1.4% to $25.6 million from $25.3 million for Q3 2007. EBITDA as a percentage of total revenue ("EBITDA margin") was 20.0% for Q3 2008, compared to 21.3% for Q3 2007. Please refer to the reconciliation of net income to EBITDA at the end of this release.

Nine Months Ended September 30, 2008 Financial Highlights:

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

                           Nine Months Ended September 30,
                               2008               2007
                        ------------------ ------------------
                        Revenue  % Revenue Revenue  % Revenue % Growth
                        -------- --------- -------- --------- --------
Membership dues         $301,696     78.6% $278,537     78.7%     8.3%
Initiation fees           10,393      2.7%    9,181      2.6%    13.2%
                        -------- --------- -------- ---------
   Membership revenue    312,089     81.3%  287,718     81.3%     8.5%
                        -------- --------- -------- ---------
Personal training
 revenue                  47,712     12.4%   42,646     12.0%    11.9%
Other ancillary club
 revenue                  19,517      5.1%   19,529      5.5%     0.0%
                        -------- --------- -------- ---------
   Ancillary club
    revenue               67,229     17.5%   62,175     17.5%     8.1%
                        -------- --------- -------- ---------
Fees and other revenue     4,504      1.2%    4,148      1.2%     8.6%
                        -------- --------- -------- ---------
Total revenue           $383,822    100.0% $354,041    100.0%     8.4%
                        ======== ========= ======== =========

Total revenue for the nine months ended September 30, 2008 increased 8.4% compared to the nine months ended September 30, 2007 driven by growth in membership and personal training revenue. Comparable club revenue increased 3.3% during the nine months ended September 30, 2008. Of this 3.3% increase, 1.4% was due to an increase in membership, 1.1% was due to an increase in price and 0.8% was due to an increase in ancillary club revenue and fees and other revenue.

Operating expenses (in $'000s) were comprised of the following:

                           Nine Months Ended September 30,
                               2008               2007
                        ------------------ ------------------
                        Expense  % Revenue Expense  % Revenue % Change
                        -------- --------- -------- --------- --------
Payroll and related     $146,228     38.1% $132,645     37.5%    10.2%
Club operating           128,799     33.6%  119,662     33.8%     7.6%
General and
 administrative           25,898      6.7%   25,248      7.1%     2.6%
Depreciation and
 amortization             38,788     10.1%   33,772      9.5%    14.9%
Impairment of fixed
 assets                    1,981      0.5%       --      0.0%   100.0%
                        -------- --------- -------- ---------
   Operating expenses   $341,694     89.0% $311,327     87.9%     9.8%
                        ======== ========= ======== =========

Total operating expenses increased 9.8% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Operating margin was 11.0% for the nine months ended September 30, 2008 and 12.1% for the nine months ended September 30, 2007.

-- The increases in payroll and related and club operating expenses were principally attributable to a 7.8% increase in the total months of club operation to 1,446 for the nine months ended September 30, 2008 from 1,341 for the same period last year. There was a net increase of 10 clubs in the twelve months ended September 30, 2008. In addition, we have been discounting new member initiation fees in an effort to drive membership sales. Our payroll costs that we defer are limited to the amount of these initiation fees, thus causing a pre-tax increase of approximately $4.6 million in payroll expense, a $2.7 million effect net of tax. In addition, payroll costs directly related to our personal training, group fitness training, and programming for children increased $4.7 million, or 15.2%, principally due to the increase in revenue related to these programs.

-- The increase in depreciation and amortization expenses was principally due to clubs opened after July 1, 2007. Offsetting these increases are insurance proceeds of approximately $600,000 received for fixed asset damage at two of our clubs.

-- During the nine months ended September 30, 2008, we recorded an impairment loss of $755,000 on fixed assets of a remote club that did not benefit from being part of a regional cluster and therefore experienced a decline in asset fair value, and an impairment loss of $1.2 million related to the planned closures of two clubs prior to their lease expiration dates.

Net income for the nine months ended September 30, 2008 was $15.4 million compared to $7.6 million for the nine months ended September 30, 2007. This $7.8 million increase in net income was primarily due to the loss on extinguishment of debt of $7.4 million, net of taxes recorded in the nine months ended September 30, 2007.

EBITDA for the nine months ended September 30, 2008 increased 26.5% to $82.6 million from $65.3 million for the nine months ended September 30, 2007. EBITDA margin, or EBITDA as a percentage of total revenue, was 21.5% for the nine months ended September 30, 2008 compared to 18.4% for the nine months ended September 30, 2007. The increase in EBITDA was primarily due to the loss on extinguishment of debt of $12.5 million recorded in the nine months ended September 30, 2007. Please refer to the reconciliation of net income to EBITDA at the end of this release.

Cash flow from operating activities for the nine months ended September 30, 2008 totaled $76.9 million, an increase of $14.3 million, or 22.8% from the same period last year.

2008 Business Outlook:

During this third quarter our growth in net members was weaker than anticipated. We are forecasting these membership trends to soften further in the fourth quarter and are lowering our previous guidance for the year as follows:

-- Total revenue of $504.0 million to $508.0 million, down from $510.0 million to $520.0 million.

-- Net income of $16.5 million to $17.5 million, down from $21.3 million to $22.3 million.

-- Earnings per share on a fully diluted basis of $0.62 to $0.66 for 2008, down from $0.80 to $0.84.

Investing Activities Outlook:

For the year ending December 31, 2008, the Company estimates it will invest between $90.0 million and $95.0 million in capital expenditures. This amount includes approximately $22.0 million to continue to upgrade existing clubs, $9.0 million to support and enhance our management information systems and $5.0 million for the construction of a new regional laundry facility in our New York Sports Clubs market. The remainder of our 2008 capital expenditures will be committed to building or expanding clubs. The Company now expects to open 9 new clubs and close four clubs in 2008. Two clubs expected to open in 2008 are now expected to open in early Q1 2009. As of September 30, 2008 we opened six clubs and closed three clubs.

While we are still evaluating our capital investment plans for the year ending December 31, 2009, our total capital expenditures are expected to be between $60.0 million and $70.0 million and we expect to open between four and six clubs and close four clubs.

Forward-Looking Statements:

Statements in this release that do not constitute historical facts, including, without limitation, statements under the captions "2008 Business Outlook" and "2008 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 the level of market demand for the Company's services, competitive pressures, the ability to achieve reductions in operating costs and to continue to integrate acquisitions, the application of federal and state tax laws and regulations, and other specific factors discussed herein and in other releases and public filings made by the Company (including Forms 10-K and 10-Q filed with the Securities and Exchange Commission); accordingly, actual results could differ materially from any such forward-looking statement. The forward-looking statements speak only as of the date hereof and the Company does not intend to update this information, except as required by law, to reflect developments or information obtained after the date hereof, and the Company disclaims any legal obligation to the contrary.

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 164 fitness clubs as of September 30, 2008, comprising 112 New York Sports Clubs, 23 Boston Sports Clubs, 19 Washington Sports Clubs (two of which are partly-owned), seven Philadelphia Sports Clubs, and three clubs located in Switzerland. These clubs collectively served approximately 519,000 members, excluding pre-sold, short-term and seasonal memberships. For more information on TSI visit http://www.mysportsclubs.com.

The Company will hold a conference call on Thursday, October 30, 2008 at 4:30 PM (Eastern) to discuss the second quarter 2008 results. Alex Alimanestianu, 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 October 31, 2008.

      TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED BALANCE SHEETS
               September 30, 2008 and December 31, 2007
                       (All figures in $'000s)
                             (Unaudited)

                                            September 30, December 31,
                                                2008          2007
                                            ------------- ------------
                   ASSETS
Current assets:
Cash and cash equivalents                       $ 10,662     $  5,463
Accounts receivable, net                          13,107        8,815
Inventory                                            236          230
Prepaid income taxes                               1,309           --
Prepaid expenses and other current assets          7,934       11,334
                                            ------------- ------------
   Total current assets                           33,248       25,842
Fixed assets, net                                349,820      337,152
Goodwill                                          50,176       50,165
Intangible assets, net                               470          477
Deferred tax assets, net                          46,745       44,345
Deferred membership costs                         16,034       17,974
Other assets                                      11,901       12,808
                                            ------------- ------------
   Total assets                                 $508,394     $488,763
                                            ============= ============

    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt               $  1,902     $ 10,898
Accounts payable                                   9,110       10,891
Accrued expenses                                  32,482       34,186
Accrued interest                                     414          738
Corporate income taxes payable                        --          811
Deferred revenue                                  44,963       41,798
                                            ------------- ------------
   Total current liabilities                      88,871       99,322
Long-term debt                                   314,013      305,124
Deferred lease liabilities                        67,567       61,221
Deferred revenue                                   5,295        7,300
Other liabilities                                 14,752       15,613
                                            ------------- ------------
   Total liabilities                             490,498      488,580
Stockholders' equity:
Common stock                                          27           26
Paid-in capital                                  (14,733)     (16,977)
Accumulated other comprehensive income
 (currency translation adjustment)                   830          814
Retained earnings                                 31,772       16,320
                                            ------------- ------------
   Total stockholders' equity                     17,896          183
                                            ------------- ------------
   Total liabilities and stockholders'
    equity                                      $508,394     $488,763
                                            ============= ============
      TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

               CONDENSED CONSOLIDATED INCOME STATEMENTS
  For the Quarters and Nine Months Ended September 30, 2008 and 2007
       (All figures in $'000s except share and per share data)
                             (Unaudited)

                   Quarter Ended September      Nine Months Ended
                              30,                  September 30,
                   ------------------------- -------------------------
                       2008         2007         2008         2007
                   ------------ ------------ ------------ ------------
Revenues:
   Club operations $   126,682  $   117,425  $   379,318  $   349,893
   Fees and other        1,427        1,461        4,504        4,148
                   ------------ ------------ ------------ ------------
                       128,109      118,886      383,822      354,041
                   ------------ ------------ ------------ ------------
Operating
 Expenses:
   Payroll and
    related             49,171       43,331      146,228      132,645
   Club operating       44,398       42,360      128,799      119,662
   General and
    administrative       8,697        8,368       25,898       25,248
   Depreciation
    and
    amortization        13,423       10,950       38,788       33,772
   Impairment of
    fixed assets           839                     1,981
                   ------------ ------------ ------------ ------------
                       116,528      105,009      341,694      311,327
                   ------------ ------------ ------------ ------------
Operating income        11,581       13,877       42,128       42,714
Loss on
 extinguishment of
 debt                       --           --           --       12,521
Interest expense         5,783        6,493       17,930       19,902
Interest income            (76)        (344)        (291)        (882)
Equity in the
 earnings of
 investees and
 rental income            (634)        (447)      (1,701)      (1,351)
                   ------------ ------------ ------------ ------------
   Income before
    provision for
    corporate
    income taxes         6,508        8,175       26,190       12,524
Provision for
 corporate income
 taxes                   2,668        3,100       10,738        4,884
                   ------------ ------------ ------------ ------------
   Net income      $     3,840  $     5,075  $    15,452  $     7,640
                   ============ ============ ============ ============

Earnings per
 share:
   Basic           $      0.15  $      0.19  $      0.59  $      0.29
   Diluted         $      0.14  $      0.19  $      0.58  $      0.29
Weighted average
 number of shares
 used in
 calculating
 earnings per
 share:
   Basic            26,445,288   26,225,449   26,389,804   26,122,531
   Diluted          26,547,121   26,678,939   26,464,915   26,583,782
      TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the Nine Months Ended September 30, 2008 and 2007
                       (All figures in $'000s)
                             (Unaudited)

                                                      Nine Months
                                                  Ended September 30,
                                                  --------------------
                                                    2008       2007
                                                  --------- ----------
Cash flows from operating activities:
   Net income                                     $ 15,452  $   7,640
                                                  --------- ----------
Adjustments to reconcile net income to net cash
 provided by operating activities:
   Depreciation and amortization                    38,788     33,772
   Impairment of fixed assets                        1,981         --
   Non-cash interest expense on Senior Discount
    Notes                                           10,328      9,268
   Loss on extinguishment of debt                       --     12,521
   Amortization of debt issuance costs                 583        630
   Noncash rental expense, net of noncash rental
    income                                            (242)       495
   Compensation expense incurred in connection
    with stock options and common stock grants         876        616
   Net changes in certain operating assets and
    liabilities                                      3,770      3,168
   Increase in deferred tax asset                   (2,400)    (9,778)
   Landlord contributions to tenant improvements     4,282      3,958
   Change in reserve for self-insured liability
    claims                                           1,738      2,085
   Decrease (increase) in deferred membership
    costs                                            1,940     (1,834)
   Other                                              (190)       104
                                                  --------- ----------
      Total adjustments                             61,454     55,005
                                                  --------- ----------
      Net cash provided by operating activities     76,906     62,645
                                                  --------- ----------
Cash flows from investing activities:
   Capital expenditures                            (63,162)   (64,580)
   Insurance Proceeds                                1,074         --
   Acquisition of business                              --     (4,450)
                                                  --------- ----------
      Net cash used in investing activities        (62,088)   (69,030)
                                                  --------- ----------
Cash flows from financing activities:
   Proceeds from New Credit Facility                    --    185,000
   Costs related to issuance of New Credit
    Facility                                            --     (2,634)
   Repayment of Senior Notes                            --   (169,999)
   Premium paid on extinguishment of debt and
    related costs                                       --     (9,309)
   Repayment of long term borrowings                (1,435)    (1,105)
   Repayment of borrowings on Revolving Loan
    Facility                                        (9,000)        --
   Change in book overdraft                           (583)     2,122
   Proceeds from exercise of stock options           1,194      1,997
   Excess tax benefit from stock option exercises      174      1,061
                                                  --------- ----------
      Net cash (used in) provided by financing
       activities                                   (9,650)     7,133
                                                  --------- ----------
      Effect of exchange rate changes on cash           31        111
                                                  --------- ----------
      Net increase in cash and cash equivalents      5,199        859
Cash and cash equivalents at beginning of period     5,463      6,810
                                                  --------- ----------
      Cash and cash equivalents at end of period  $ 10,662  $   7,669
                                                  ========= ==========

Summary of change in certain operating assets and
 liabilities:
   (Increase) in accounts receivable              $ (3,611) $  (4,479)
   (Increase) decrease in inventory                     (4)       210
   Decrease (increase) in prepaid expenses and
    other current assets                             3,478     (1,219)
   Increase in accounts payable, accrued expenses
    and accrued interest                             4,884      2,509
   Change in corporate income taxes                 (2,120)      (456)
   Increase in deferred revenue                      1,143      6,603
                                                  --------- ----------
      Net changes in certain operating assets and
       liabilities                                $  3,770  $   3,168
                                                  ========= ==========
                          Quarter Ended          Nine Months Ended
                          September 30,            September 30,
                     ------------------------ ------------------------
                       2008     2007   % Chg.   2008     2007   % Chg.
                     -------- --------        -------- --------

Net income           $ 3,840  $ 5,075         $15,452  $ 7,640
   Provision for
    corporate income
    taxes              2,668    3,100          10,738    4,884
   Interest expense,
    net of interest
    income             5,707    6,149          17,639   19,020
   Depreciation and
    amortization      13,423   10,950          38,788   33,772
                     -------- --------        -------- --------
      EBITDA*        $25,638  $25,274    1.4% $82,617  $65,316   26.5%
                     ======== ========        ======== ========

      EBITDA margin     20.0%    21.3%           21.5%    18.4%

* Loss on extinguishment of debt is no longer excluded from EBITDA as
 it was in prior periods.

Non-GAAP Financial Measures

EBITDA consists of net income (loss) plus interest expense, net of interest income, provision for corporate income taxes, depreciation and amortization. This term, as we define it, may not be comparable to a similarly titled measure used by other companies and is not a measure of performance presented in accordance with GAAP. EBITDA has its limitations as an analytical tool and should not be considered as a substitute for net income, operating income, cash flows provided by operating activities or other income or cash flow data prepared in accordance with GAAP. The funds depicted by EBITDA are not necessarily available for discretionary use if they are reserved for particular capital purposes, to maintain compliance with debt covenants, to service debt or to pay taxes. EBITDA margin is defined as EBITDA as a percentage of sales.

EBITDA is used by both management, investors and industry analysts in conjunction with traditional GAAP operating performance measures as an important overall assessment of our performance and we do not place undue reliance on this measure as our only measure of operating performance.

-- The elimination of items related to our capital and tax structures, including depreciation and amortization, enables a more accurate comparison of operating performance to other companies in our industry, as these structures may vary from company to company.

-- The elimination of certain non-cash or non-operating items such as interest income, interest expense and income taxes, provides a meaningful measure of corporate performance as well as a comparison of our operating performance to companies in our industry. The Company believes it is beneficial to share with the investment community the same measurements against which it measures its own performance (and therefore the performance of its management team).

-- EBITDA is the baseline measurement used to determine executive officer annual performance bonuses, as noted in the Compensation Discussion and Analysis in the Company's proxy statement. Management also uses EBITDA in its presentations to its board of directors.

-- We are required to comply with certain financial covenants and borrowing limitations that are based on variations of EBITDA measurements in certain of our financing documents. The Company believes it is important investors have visibility into the Company's performance in this regard.

CONTACT: Town Sports International Holdings, Inc., New York
Investor Contact, 212-246-6700 extension 1650
Investor.relations@town-sports.com
or
Integrated Corporate Relations
Joseph Teklits, 203-682-8258
joseph.teklits@icrinc.com

SOURCE: Town Sports International Holdings, Inc.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Town Sports International Holdings, Inc.'s business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.