Introduction
In this Form 10-Q, unless otherwise stated or the context otherwise indicates, references to "the Company," "we," "our," "TSI Holdings " and similar references refer toTown Sports International Holdings, Inc. and its subsidiaries. References to "TSI LLC " refer toTown Sports International, LLC , and "TSI Group " refers toTown Sports Group, LLC , both of which are wholly-owned operating subsidiaries of the Company. The Company is a diversified holding company owning subsidiaries engaged in a number of business and investment activities. The Company's largest operating subsidiary,TSI LLC , has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region ofthe United States .TSI Group was formed in 2017 to invest in public and private equities and real estate. TSI Holdings' corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for stockholders. COVID-19 Impact OnMarch 11, 2020 , theWorld Health Organization declared a global pandemic related to the COVID-19 outbreak. The pandemic has caused unprecedented economic volatility and uncertainty which has negatively impacted our recent operating results. In response to the COVID-19 pandemic, we proactively closed all of our clubs system wide byMarch 22, 2020 . We have not recognized first quarter revenue related to monthly membership dues collected in March before clubs closed. We plan to re-open clubs once local authorities issue guidelines authorizing the reopening of fitness centers and we determine it is safe to do so. However, the recent resurgence of COVID-19 in certain regions of theU.S. has led some state and local governments to delay the implementation of plans to re-open a variety of businesses, including fitness centers, and could lead to new closures in states likeFlorida where we have been permitted to re-open. Moreover re-opening protocols may include restrictions on capacity and activity that make it difficult for us to attract customers and generate revenue. For example, the Governor ofNew York announced onAugust 17, 2020 that fitness centers inNew York will be permitted to re-open at only 33% capacity and that they must require customers to wear masks indoors at all times. In many cases, state and local governments have not provided a clear timeline for the projected further easing of restrictions, which creates uncertainty for our customers. These developments may further hinder the Company's ability to generate operating revenue going forward. The March deferrals have had a significant impact on our first quarter financial results. Due to the outbreak of COVID-19, we have taken measures to protect the health and safety of our employees, including having employees work remotely, where possible. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related restrictions put in place by theU.S. and international governments, all of which are uncertain and cannot be predicted. We anticipate that the COVID-19 pandemic will continue to negatively impact our operating results and cash flow in future periods. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the "Risk Factors" sections of our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, such as those risks relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and other liabilities, our ability to comply with the covenants contained in the agreements that govern our indebtedness, our ability to attract and retain members in a competitive marketplace during a time when consumer habits in personal fitness are changing rapidly, and our ability to maintain our relationships with our vendors and landlords. Moreover, the Company is facing significant debt maturities in the near term. Our 2013 Revolving Loan Facility expired onAugust 14, 2020 and our 2013 Term Loan Facility is due to mature onNovember 15, 2020 . The Company currently does not have adequate sources of cash to repay the amounts outstanding thereunder. As a result of the Company's strained cash position and current inability to repay all amounts outstanding under the 2013 Term Loan Facility and 2013 Revolving Loan Facility, and the challenges of COVID-19, we currently anticipate thatTSI LLC , Holdings II and certain other subsidiaries of the Company that constitute the Subsidiary Guarantors (as defined in the Credit Agreement) may be forced to file a petition for relief under the Bankruptcy Code in the near future. Such a filing would subject us to the risks and uncertainties associated with bankruptcy proceedings and may place equity holders in the Company at significant risk of losing some or all of their investment inTSI LLC , Holdings II, and such subsidiaries that constitute Subsidiary Guarantors (as defined in the Credit Agreement). 35
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In addition, it is possible that the Company may be forced to file a petition
for relief under the Bankruptcy Code, which may further exacerbate the risks
described herein and further increase the likelihood that our equity holders
would lose some or all their investment in the Company. A bankruptcy filing by
such entities, or by the Company, could cause a material adverse effect on our
business, financial condition, results of operations and liquidity. In the event
of such bankruptcy filing, the Company expects that it will need to raise up to
approximately
Brand CountNew York Sports Clubs 99Boston Sports Clubs 31Washington Sports Clubs 9Philadelphia Sports Clubs 5Lucille Roberts 16Total Woman Gym and Spa 10Palm Beach Sports Clubs 3 Christi's Fitness 1 Around theClock Fitness 6LIV Fitness 2
185 We develop clusters of clubs to serve densely populated metropolitan regions and we service such populations by clustering clubs near the highest concentrations of our target customers' areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban or suburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the active mature market. In each of our main regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburbs and neighboring communities. The above reflect clubs operating prior to temporary club closures related to the COVID-19 pandemic. All clubs were closed inMarch 2020 in response to COVID-19 and remained closed as ofMarch 31, 2020 . Revenue and operating expenses We have two principal sources of revenue: • Membership revenue: Our largest sources of revenue are dues inclusive of monthly membership fees, annual maintenance fees, and initiation and processing fees paid by our members. In addition, we collect usage fees on a per visit basis for non-passport members using non-home clubs. These dues and fees comprised 76.1% of our total revenue for the three months endedMarch 31, 2020 . We recognize revenue from membership dues in the month when the services are rendered. We recognize revenue from initiation and processing fees over the estimated average membership life and annual fees over a twelve month period. • Ancillary club revenue: For the three months endedMarch 31, 2020 , we generated 16.7% of our revenue from personal training and 5.8% of our revenue from other ancillary programs and services consisting ofSports Clubs for Kids , racquet sports and Small Group Training programs. We continue to grow ancillary club revenue by building on ancillary programs such as our personal training membership product and our fee-based Small Group Training programs.
We also receive revenue (approximately 1.3% of our total revenue for the three
months ended
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Our performance is dependent in part on our ability to continually attract and retain members at our clubs. In the three months endedMarch 31, 2020 and 2019, our monthly average attrition rate was 4.4% and 3.8%, respectively. Our operating expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other salary and related expenses, occupancy costs, including elements of rent, utilities, housekeeping and contracted maintenance expenses, as well as depreciation. Variable costs are primarily related to payroll associated with ancillary club revenue, membership sales compensation, advertising, certain facility repairs and club supplies. General and administrative expenses include costs relating to our centralized support functions, such as accounting, insurance, information and communication systems, acquisition related costs, purchasing, member relations, legal and consulting fees and real estate development expenses. Payroll and related expenses are included in a separate line item on the condensed consolidated statements of operations and are not included in general and administrative expenses. Approximately$3.7 million and$2.3 million , or 41% and 34%, of general and administrative expenses relate directly to club operations for the three months endedMarch 31, 2020 and 2019, respectively, including general liability insurance, phone and data lines, computer maintenance, business licenses, office and sales supplies, recruiting and training. As clubs mature and increase their membership base, fixed costs are typically spread over an increasing revenue base and operating margins tend to improve. Conversely, when our membership base declines, our operating margins are negatively impacted. At acquired clubs, operating margins may initially decline due to costs related to the acquisition and time to implement and integrate into our process. Our primary capital expenditures relate to routine improvements at our clubs, the construction or acquisition of new club facilities and the upgrade and renovation of our existing clubs. The construction and equipment costs vary based on the costs of construction labor, as well as the planned service offerings and size and configuration of the facility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for which we are currently budgeting approximately 2.5% of projected annual revenue. In this regard, facility remodeling is also considered where appropriate. As ofMarch 31, 2020 , our consolidated operating results included three majority owned clubs for which we had control. In addition, we owned 45% of one club for which we applied the equity method of accounting. We also owned one licensed club and provided management services at one location in which we did not have an equity interest. Historical Club Count The following table set forth the changes in our club count during each of the quarters in 2019, the full-year 2019, and the first quarter of 2020. 2019 2020 Q1 Q2 Q3 Q4 Full Year Q1 Clubs included in consolidated operating results: Clubs operated at beginning of period 183 187 188 185 183 184 Acquired clubs 6 - - - 6 - New clubs opened - 1 - - 1 - Club converted to licensed club(3) - - - - - - Clubs closed (2 ) - (3 ) (1 ) (6 ) (1 ) Clubs operated at end of period 187 188 185 184 184 183 Club included in equity investment at end of period(1) 1 1 1 1 1 1 Licensed club operated at end of period(3) 1 1 1 1 1 1
Total clubs operated at end of period(1)(2) 189 190 187 186 186 185
(1) Excludes one 20% owned club that operated under a different brand name in our
(2) Excludes locations that were managed by us in which we did not have an equity
interest. As of
(3) Includes one club that transitioned to a licensed location in the first
quarter of 2018 and bears the "Washington Sports Clubs " brand name. 37
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Comparable Club Revenue We define comparable club revenue as revenue at those clubs that were operated by us for over 12 months ("comparable clubs") and comparable club revenue increase (decrease) as revenue for the 13th month and thereafter as applicable as compared to the same period of the prior year. Key determinants of comparable club revenue increases shown in the table below are new memberships, member retention rates, pricing and ancillary revenue increases. 2019 2020 Q1 Q2 Q3 Q4 Q1
Comparable club revenue (1.8 )% (3.4 )% (2.9 )% (1.2 )% (16.8 )%
The comparable club revenue decreases in the 2019 quarterly periods were primarily due to a decrease in member count and personal training revenue, partially offset by higher average dues per membership. The comparable club revenue was on a positive trend but due to the COVID-19 pandemic, decreased substantially. The club closure losses were offset due to higher average dues per membership, increased annual fees and personal training revenue. Consolidated Results of Operations The following table sets forth certain operating data as a percentage of revenue for the periods indicated:
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