Town Sports fourth quarter total revenue decreases 0.2%

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 fourth quarter and full-year ended December 31, 2010.

Fourth Quarter and Full-Year Overview:

• Revenue decreased 0.2% in Q4 2010 compared to Q4 2009 and 4.7% in full-year 2010 compared with full-year 2009. Q4 2010 total revenue includes $2.7 million of personal training revenue recognized for expired and unused sessions in three of our jurisdictions.
  • Comparable club revenue decreased 1.7% in Q4 2010 compared to Q4 2009 and 4.3% in full-year 2010 compared to full-year 2009.
• Total member count increased 1.4% to 493,000 at December 31, 2010, compared to December 31, 2009.
• Membership attrition averaged 3.4% per month in Q4 2010 and 3.5% per month in full-year 2010 compared to 3.6% per month in Q4 2009 and 3.8% per month in full-year 2009.
• Earnings (loss) per share was $0.06 in Q4 2010 and $(0.01) in full-year 2010 compared to $(0.33) in Q4 2009 and $(0.25) in full-year 2009.
• Q4 2010 results included $2.7 million of personal training revenue, or $1.5 million net of taxes, recognized for expired and unused personal training revenue, or approximately $0.07 per share. Q4 2009 results reflected internal use software and fixed asset impairment charges and the effect of an accounting error, which collectively resulted in charges, net of taxes, of $7.4 million, or $(0.33) per share.

Robert Giardina, Chief Executive Officer of TSI, commented: "We are very pleased with the progress we made in 2010, and how Town Sports is positioned as we enter 2011. We ended the year with some positive momentum in the business for the first time in more than two years, including improvements in our comparable club revenue comparison, as well as our personal training and membership trends. Our balance sheet has also improved from a year ago, and we believe our approach to the business is on track. We have a great team in place to execute our strategies."

Total revenue for Q4 2010 decreased $257,000, or 0.2% compared to Q4 2009. For Q4 2010, revenues increased $253,000 at the four clubs opened or acquired subsequent to December 31, 2008 offset by decreases in revenue of 2.0% or $2.2 million at our clubs opened or acquired prior to December 31, 2008 and $822,000 related to the 10 clubs that were closed subsequent to December 31, 2008.

In Q4 2010, we recognized $2.7 million of personal training revenue for unused and expired personal training sessions in three of the jurisdictions we operate in.

Revenue at clubs operated for over 12 months ("comparable club revenue"), excluding the $2.7 million of unused and expired sessions recorded as personal training revenue, decreased 1.7% in Q4 2010 compared to Q4 2009.

Total operating expenses decreased 14.1% for Q4 2010 compared to Q4 2009. Operating expenses were impacted by a 2.5% decrease in the total months of clubs in operation. Total operating expense in Q4 2009 included $12.3 million of impairment charges. Without giving effect to these Q4 2009 charges, operating expenses decreased by 4.5% in Q4 2010 compared to Q4 2009. Operating margin was 8.0% for Q4 2010, which includes the benefit of $2.7 million of revenue from unused and expired personal training sessions, compared to (6.9)% for Q4 2009.

Payroll and related. The decreases in payroll and related expenses in Q4 2010 compared to Q4 2009 were principally related to the effects from the decrease in total club months of operation and payroll expense related to membership consultants. The amount of membership consultant payroll deferred over the prior two years has been declining with our decline in joining fees collected. We limit the amount of payroll costs that we defer to the amount of joining fees collected. This resulted in a decrease in membership consultant commissions expensed in Q4 2010 relating to deferrals established in prior years. Also contributing to this decrease was the increase in the amount of payroll costs deferred in full-year 2010 compared to the full-year 2009 as joining fees collected increased in 2010.

General and administrative. Decreases in Q4 2010 general and administrative expenses compared to Q4 2009 were principally attributable to our cost reduction efforts within various general and administrative expense accounts, including reductions in general liability insurance and information and communication costs.

Depreciation and amortization. Depreciation and amortization decreased in Q4 2010 due to the closing of one club subsequent to December 31, 2009 and the effect of the fixed asset impairment write-offs in the year ended December 31, 2009 and the first half of 2010.

Impairment of fixed assets. In Q4 2009, we recorded fixed asset impairment charges of $2.1 million, representing the write-off of fixed assets at four underperforming clubs. There were no fixed asset impairment charges in Q4 2010.

Impairment of internal-use software. In Q4 2009, we recorded a $10.2 million impairment charge related to an internally developed software project. Although the software project was not yet completed and is the subject of litigation, we determined that it is not probable that we would continue in the development of this project. There were no such impairment charges in Q4 2010.

Corporate income taxes. In Q4 2010, we recorded a provision for corporate income taxes of $3.0 million and in Q4 2009 we recorded a benefit for corporate income taxes of $5.2 million. Q4 2010 includes the correction of an accounting error that resulted in additional provision for corporate income taxes. In Q4 2010, we identified un-reconciled temporary deductible differences, mainly related to fixed assets, which gave rise to deferred tax assets of $357,000. These un-reconciled temporary differences principally relate to periods prior to 2008. As we were unable to identify a specific transaction that created this un-reconciled difference, such as the disposal of a certain asset, a current deduction could not be taken on our 2010 tax return. Accordingly, we wrote-off the deferred tax asset. We do not believe that this error correction is material to the current or prior reporting periods.

Net income for Q4 2010 was $1.3 million compared to a net loss of $7.3 million for Q4 2009.

For the full-year ended December 31, 2010, total revenue decreased $23.0 million, or 4.7%, compared to full-year 2009. Operating margin was 4.0% for 2010 compared to 1.6% for 2009. For 2010, we recorded fixed asset impairment charges of $3.3 million compared to $6.7 million in 2009. For 2009, we recorded an internal-use software impairment charge of $10.2 million. Net loss was $290,000 compared to net loss of $5.7 million for 2009.

Cash flow from operating activities for full-year 2010 totaled $51.2 million, a decrease of $25.0 million from full-year 2009. The decrease was related to the decrease in earnings, excluding depreciation and amortization and impairment of fixed assets of $12.6 million, and increases in cash paid for interest of $7.6 million. In addition, our landlord contributions decreased $4.7 million in full-year 2010 when compared with that of 2009 and prepaid rent increased approximately $5.0 million, which reduced our 2010 cash flows from operations compared to 2009. Deferred revenue and deferred membership costs increased $1.8 million in the aggregate in 2010 and decreased $1.4 million in the aggregate in 2009, offsetting the decrease in cash.

First Quarter 2011 Business Outlook:

We are limiting our guidance to the first quarter of 2011. 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 first quarter of 2011 includes the following:

• Revenue for Q1 2011 is expected to be between $115.5 million and $116.5 million versus $117.8 million for Q1 2010. As percentages of revenue, we expect Q1 2011 payroll and related expenses to approximate 39.7%, club operating expenses to approximate 38.0%, general and administrative expenses to approximate 7.0% and depreciation and amortization to approximate 11%.
• We expect net income for Q1 2011 of between breakeven and $500,000, and earnings per share to be in the range of $0.00 per share to $0.02 per share, assuming a 34% effective tax rate and 22.8 million weighted average fully diluted shares outstanding.

Investing Activities Outlook:

For the year ending December 31, 2011, we currently plan to invest $29.0 million to $32.0 million in capital expenditure, which represents an increase from $22.0 million of capital expenditures in 2010. This amount includes approximately $7.5 million to $8.5 million related to the two planned club openings in the second half of 2011, approximately $15.5 million to continue to upgrade existing clubs and $4.3 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 $2.0 million to $3.0 million to enhance our management information and communication systems.

SOURCE Town Sports International Holdings, Inc.