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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012
Transition Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the transition period from
Commission file number: 000-52013
Town Sports International Holdings, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
5 PENN PLAZA — 4 TH FLOOR
NEW YORK, NEW YORK
(Address of principal executive offices)
20-0640002
(I.R.S. Employer
Identification No.)
10001
(Zip code)
(212) 246-6700
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part IV of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2012 (the last business day
of the registrant’s most recently completed second fiscal quarter) was approximately $235.3 million (computed by reference to the last reported
sale price on The Nasdaq National Market on that date). The registrant does not have any non-voting common stock outstanding.
As of February 19, 2013, there were 23,837,386 shares of Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2013 Annual Meeting of Stockholders, to be filed not later than April 30,
2013, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.
Table of Contents
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
PART IV
Exhibits And Financial Statements
Item 15.
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
Exhibit Index
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F-1
TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding future financial results and
performance, potential sales revenue, legal contingencies and tax benefits, and the existence of adverse litigation and other risks, uncertainties
and factors set forth under Item 1A., entitled “Risk Factors”, of this Annual Report on Form 10-K and in our reports and documents filed with
the Securities and Exchange Commission (“SEC”). You can identify these forward-looking statements by the use of words such as “outlook”,
“believes”, “expects”, “potential”, “continues”, “may”, “will”, “should”, “seeks”, “approximately”, “predicts”, “intends”, “plans”, “estimates”,
“anticipates” or the negative version of these words or other comparable words. These statements are subject to various risks, and uncertainties,
many of which are outside our control, including the level of market demand for our services, competitive pressure, the ability to achieve
reductions in operating costs and to continue to integrate club acquisitions, environmental initiatives, the application of Federal and state tax
laws and regulations, and other specific factors discussed herein and in other SEC filings by us. We believe that all forward-looking statements
are based on reasonable assumptions when made; however, we caution 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 we undertake 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.
Item 1. Business
PART I
In this Annual Report, unless otherwise stated or the context otherwise indicates, references to “TSI Holdings”, “Town Sports”, “TSI”,
“the Company”, “we”, “our” and similar references refer to Town Sports International Holdings, Inc. and its subsidiaries and references to
“TSI, LLC” refer to Town Sports International, LLC, our wholly-owned operating subsidiary.
General
We are the largest owner and operator of fitness clubs in the Northeast and Mid-Atlantic regions of the United States (“U.S.”) and the
third largest fitness club owner and operator in the U.S., in each case based on the number of clubs. As of December 31, 2012, the Company,
through its subsidiaries, operated 160 fitness clubs under our four key regional brand names; “New York Sports Clubs” (NYSC), “Boston
Sports Clubs” (BSC), “Philadelphia Sports Clubs” (PSC) and “Washington Sports Clubs” (WSC). As of December 31, 2012, these clubs
collectively served approximately 510,000 members, including approximately 38,000 members under our restricted student and teacher
membership programs. We owned and operated a total of 108 clubs under the “New York Sports Clubs” brand name within a 120-mile radius
of New York City as of December 31, 2012, including 37 locations in Manhattan where we are the largest fitness club owner and operator. We
owned and operated 25 clubs in the Boston region under our “Boston Sports Clubs” brand name, 18 clubs (two of which are partly-owned) in
the Washington, D.C. region under our “Washington Sports Clubs” brand name and six clubs in the Philadelphia region under our
“Philadelphia Sports Clubs” brand name as of December 31, 2012. In addition, we owned and operated three clubs in Switzerland as of
December 31, 2012. We employ localized brand names for our clubs to create an image and atmosphere consistent with the local community
and to foster recognition as a local network of quality fitness clubs rather than a national chain.
We develop clusters of clubs to serve densely populated major 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
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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. Our members generally have annual income levels of between $50,000 and $150,000. We believe that this
“mid-value” segment is the broadest of the market. Our goal is to be the most recognized health club network in each of the four major
metropolitan regions that we serve. We believe that our strategy of clustering clubs provides significant benefits to our members and allows us
to achieve strategic operating advantages. In each of our markets, 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.
We currently offer three principal types of memberships in our clubs, “Passport,” which offers access to all clubs at all times, “Core,”
which offers access to a single home club at all times, and “Restricted” memberships, which is a favorably priced, restricted month-to-month
membership which offers access to a single home club during all operating hours except 4:30pm to 7:30pm, Monday through Thursday,
otherwise a usage fee applies. Members, excluding restricted members, can elect to commit to a minimum contract period of one year in order
to benefit from reduced dues and joining fees. Alternatively, our memberships are available on a month-to-month basis. These membership
types are described in further detail in the Sales discussion that follows.
Over our 39-year history since 1973, we have developed and refined our club formats, which allows us to cost-effectively construct and
efficiently operate our fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately
20,000 square feet, while our multi-recreational clubs average approximately 40,000 square feet. The aggregate average size of our clubs is
approximately 26,000 square feet. Our clubs typically have an open fitness area to accommodate cardiovascular and strength-training
equipment, as well as special purpose rooms for group fitness classes and other exercise programs. We seek to provide a broad array of
high-quality exercise programs and equipment that are popular and effective, promoting a quality exercise experience for our members. When
developing clubs, we carefully examine the potential membership base and the likely demand for supplemental offerings such as swimming,
basketball, children’s programs, tennis or squash and, provided suitable real estate is available, we will add one or more of these offerings to
our fitness-only format. For example, a multi-recreational club in a family market may include Sports Clubs for Kids programs, which can
include swim lessons and sports camps for children.
Industry Overview
According to the most recent information released by the International Health, Racquet and Sportsclub Association (“IHRSA”), total
U.S. fitness club industry revenues increased at a compound annual growth rate of 3.4% from $18.7 billion in 2007 to $21.4 billion in 2011.
Total U.S. fitness club memberships increased at a compound annual growth rate of 5.5% from 41.5 million in 2007 to 51.4 million in 2011,
with net membership growth of 3.1% for 2011 on top of a 2.9% increase for 2010.
According to the IHRSA, participation in health clubs has been growing steadily over the past four years with 53.4 million Americans
utilizing a health club in 2008, as compared to 58.3 million Americans utilizing a health club in 2011. Currently, less than 18% of the total U.S.
population belongs to a health club, leaving room for possible substantial growth in the industry and indicating a significant opportunity to
convert these non-members to members. In 2011, health club members visited clubs at an all time high of 102.5 days on average, up from 97.5
days in 2010.
According to the IHRSA, demographic trends have helped drive the growth experienced by the fitness industry over the past decade. The
greatest growth in the past few years has been in the demographic group ages 35 to 54, which has grown 18.4% from 2008 to 2011 and in the
group ages 18 to 34, which grew 10% from 2008 to 2011. These two age groups make up approximately 68% of total U.S. health club
members in 2011. The industry has benefited from the aging “baby boomer” generation as they place greater emphasis on their health,
including a focus on fitness.
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According to the Centers for Disease Control and Prevention, during the period from 1990 through 2010 , there was a dramatic increase
in obesity in the U.S. and rates remain high. State prevalence of obesity remained high across the country in 2011, with no state with a
prevalence of obesity less than 20%. 39 states had a prevalence of 25% or more and twelve of these states had a prevalence of 30% or more. As
healthcare costs rise in the U.S., some of the focus in combating obesity and other diseases is being directed at prevention. Both government
and medical research has shown that exercise and other physical activity plays a critical role in preventing obesity and other health conditions,
thereby reducing healthcare costs.
As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, we believe that we are well positioned
to benefit from these dynamics as a large operator with recognized brand names, leading regional market shares and an established operating
history.
Competitive Strengths
We believe the following competitive strengths are instrumental to our success:
Strong market position with leading brands. Based on number of clubs, we are the third largest fitness club owner and operator in the
U.S. and the largest fitness club owner and operator in the Northeast and Mid-Atlantic regions of the U.S. We are the largest fitness club owner
and operator in our New York, Boston and Washington, D.C. regions, and the third largest owner and operator in our Philadelphia region. We
attribute our positions in these markets in part to the strength of our localized owner and operator brand names, which foster recognition as a
local network of quality fitness clubs.
Regional clustering strategy provides significant benefits to members and corporations. By operating a network of clubs in a
concentrated geographic area, the value of our memberships is enhanced by our ability to offer members access to any of our clubs, which
provides the convenience of having fitness clubs near a member’s workplace and home. This is also a benefit to our corporate members, as
many corporations have employees that will take advantage of multiple gym locations. Approximately 229,000 of our members currently have
a Passport Membership, including our corporate and group Passport Memberships, and because these memberships offer enhanced privileges
and greater convenience, they generate higher monthly dues than our Core Membership in each respective region. Regional clustering also
allows us to provide special facilities to all of our members within a local area, such as swimming pools and squash, tennis and basketball
courts, without offering them at every location. In the year ended December 31, 2012, 38% of all club usage was by members visiting clubs
other than their home clubs.
Regional clustering strategy designed to enhance revenues and achieve economies of scale. We believe our regional clustering strategy
allows us to enhance revenue and earnings growth by providing high-quality, conveniently located fitness facilities on a cost-effective basis.
We believe that potential new entrants would need to establish or acquire a large number of clubs in a market to compete effectively with us.
Our clustering strategy also enables us to achieve economies of scale with regard to sales, marketing, purchasing, general operations and
corporate administrative expenses and reduces our capital spending needs. Regional clustering also provides the opportunity for members who
relocate within a region to remain members of our clubs, thus aiding in member retention.
Expertise in site selection and development process. We believe that our expertise in site selection and development provides an
advantage over our competitors given the complex real estate markets in the metropolitan areas in which we operate and the relative scarcity of
suitable sites. Before opening or acquiring a new club, we undertake a rigorous process involving demographic and competitive analysis,
financial modeling, site selection and negotiation of lease and acquisition terms to ensure that a potential location meets our criteria for a model
club. We believe our flexible club formats are well suited to the challenging real estate environments in our markets.
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Expertise of senior management. We believe that our senior management’s industry expertise, particularly that of our Chief Executive
Officer, Robert Giardina, our Chief Financial Officer, Dan Gallagher and our Chief Operating Officer, Terry Kew, provides us with a
competitive advantage. Mr. Giardina has extensive knowledge of the fitness industry and 30 years of experience with the Company.
Mr. Giardina was appointed President and Chief Executive Officer in March 2010. He originally joined the Company in 1981 and served as
President and Chief Operating Officer from 1992 to 2001, and as Chief Executive Officer from January 2002 through October 2007.
Mr. Gallagher joined the Company in February of 1999 as Vice President — Finance and became Chief Financial Officer in April 2008. Prior
to joining the Company, Mr. Gallagher’s experience included management roles at large public accounting firms including Coopers and
Lybrand and PricewaterhouseCoopers. Mr. Kew joined the Company in April 2012 as Chief Operating Officer following more than 20 years of
fitness operations and management experience at multi-unit fitness companies, including a global fitness company, where he spent eight years
serving as Chief Operating Officer before being promoted to the Global Senior Executive team in 2008. We believe that Mr. Giardina,
Mr. Gallagher and Mr. Kew are highly talented and innovative executives who have strong strategic skills and leadership capabilities to lead
the Company and execute its strategies.
Business Strategy
In the long-term, we seek to maximize our net member growth, revenues, earnings and cash flows using the following strategies:
Build and acquire new clubs. We plan to expand our club base through both acquiring and designing and building clubs. We plan to
open or acquire between seven and nine clubs in 2013 and between six and 12 clubs in 2014, with a concentration on the urban markets in our
Boston and New York regions. We typically fund club expansion through internally generated cash flows and, if needed, we can utilize
borrowings under our revolving credit facility.
Grow ancillary and other non-membership revenues. We intend to grow our ancillary and other non-membership revenues through a
continued focus on increasing the additional value-added services that we provide to our members as well as capitalizing on the opportunities
for other non-membership revenues such as in-club advertising and retail sales. Non-membership revenues have increased from $92.1 million,
or 18.2% of revenues for the year ended December 31, 2008, to $101.3 million, or 21.2% of revenues for the year ended December 31, 2012. In
the year ending December 31, 2013, we plan to remain focused on increasing our ancillary programs with continued improvements in training
and hiring and building on ancillary programs such as our personal training membership product introduced in 2011 and expanded in 2012. We
will also expand our fee-based class offering to generate additional revenue. These offerings include our Ultimate Fitness Experience (“UXF”)
class introduced in 2012, our fee-based Small Group Training programs such as Total Body Resistance Exercise (“TRX”), and our Signature
Classes which include VBarre and Pilates Tower. These sources of ancillary and other non-membership revenues generate incremental profits
with minimal capital investment and assist in attracting and retaining members. Helping to further these efforts was the reorganization of the
operating team in 2012, which allowed us to enhance and promote our in-club product offering.
Retain members by focusing on the member experience. Our Company’s mission is “Improving Lives Through Exercise.” We enact
our mission through our “Ten Essentials,” which provide a clear road map for how we want our clubs to look and how we want to serve our
members. This is the core of our member experience strategy and allows us to crystallize how we engage our staff to deliver a superior member
experience. In 2012, we reorganized the operating team and introduced a reporting line solely focused on building on our member service in the
clubs. We tailor the hours of each club to the needs of the specific member demographic utilizing each club; offer a variety of ancillary
services, including personal training, group classes, Small Group Training, Sports Clubs for Kids programs, and the XpressLine program (a
high-intensity, efficient workout program). We offer a variety of different sports facilities in each regional cluster of clubs; modern, varied and
well-maintained exercise and fitness equipment; and an assortment of additional amenities including access to babysitting, sports massage and
pro-shops. Through hiring, developing and training a qualified and diverse team that is passionate
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about fitness and health; maintaining and enhancing our programs and services; and continually increasing our attention to individual member
needs, we expect to demonstrate our commitment to increase the quality of the member experience, and thereby increase net membership. To
further ensure the member experience remains at a high quality, we provide member surveys to help analyze the areas we can improve upon as
well as the areas in which the members are satisfied overall.
Provide state-of-the-art fitness equipment and services. To help members develop and maintain a healthy lifestyle, train for athletic
events or lose weight, each of our clubs has a large array of cardiovascular machines and resistance training equipment and free weights.
Exercise equipment is positioned to allow for easy movement from machine to machine, facilitating a convenient and efficient workout.
Equipment in these areas is arranged in long parallel rows that are clearly labeled by muscle group, which allows members to conveniently
customize their exercise programs and reduce downtime during their workouts. We have technicians who service and maintain our equipment
on a timely basis. In addition, we have personal viewing television screens on most pieces of cardiovascular equipment. Most clubs have
between one and three studios used for exercise classes, including at least one large studio used for most group exercise classes, a cycling
studio and a mind and body studio used for yoga and Pilates classes. We offer a large variety of group fitness classes at each club and these
classes generally are at no additional cost to our members. The volume and variety of activities at each club allow each member to enjoy the
club, whether customizing their own workout or participating in group activities and classes.
In addition, as part of our efforts to provide state-of-the-art fitness equipment and services, our club formats are flexible and can easily
adapt and respond to the changing demands of our customers. This flexibility allows us to compete against private studios with unique specialty
offerings by adapting the space and formats in our own clubs to match the offerings provided by these private studios. An example of the use of
this flexibility is evidenced in our recent plans to install special training zones within our clubs as part of our UXF launch introduced in 2012
and to be expanded to our other clubs in 2013. This training zone will feature an array of innovative equipment designed to maximize the
member’s experience and support growth in personal training.
Drive comparable club revenue and profitability growth by implementing our business strategy. Our near-term financial performance
will depend largely on the revenue at clubs that we have operated for more than 12 months. We define comparable club revenue as revenue at
those clubs that were operated by us for over 12 months and comparable club revenue growth as revenue for the 13th month and thereafter as
compared to the same period in the prior year. Comparable club revenue growth continues to be a contributing factor in our revenue growth
plans. Over the past five years, with the exception of the recessionary periods experienced during the years ended December 31, 2009 and
2010, where comparable club revenue declined 5.6% and 4.3%, respectively, we have experienced positive comparable club revenue growth
during the years ended December 31, 2008, 2011 and 2012 of 2.2%, 1.8% and 1.6%, respectively. In 2009, in part as a result of the state of the
economy and the impact on consumer spending, we experienced higher member attrition and, therefore, a lower member base for most
reporting periods in 2010. The lower beginning member counts in 2010 resulted in decreased revenue recognized throughout the year. During
the latter portion of 2010, we began to see signs of recovery, which continued in 2011 as comparable club revenue growth turned positive. For
the full year 2012, we experienced positive comparable club revenue growth of 1.6%, however in the fourth quarter of 2012, we experienced a
comparable club revenue decline of 1.1%. This decline in comparable club revenue was in part due to the impact of Hurricane Sandy on our
business, including a net loss of members. Memberships declined by 12,000 in the fourth quarter, contributing to a decline of 13,000
memberships for the full-year 2012, or a 2.4% loss in members.
Marketing
Our marketing campaign, which we believe has increased awareness of our brand names, is directed by our marketing department, which
directly reports to the Chief Executive Officer. This team develops advertising strategies to convey each of our regionally branded networks as
the premier network of fitness clubs in its region.
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Our marketing team’s goal is to focus on growing our membership base, achieving broad awareness of our regional brand names and be “top of
mind”. We are organized to enable close collaboration between our marketing, sales, fitness and operations staff, which helps to align efforts
around operational objectives and new product development while ensuring a primary focus on the member experience.
Brand awareness and preference is aided by a number of factors, including visibility of multiple retail locations and associated signage
across each region, word-of-mouth recognition and referrals generated by our membership base of approximately 510,000 as of December 31,
2012, a 39-year operating history and continual advertising investment. All of these factors provide a strong foundation for our ongoing
marketing and advertising efforts.
Our regional concentration and clustering strategy creates economies of scale in our marketing and advertising investments which
increase their overall efficiency and effectiveness. Clustering enables broader reach and higher frequency for regional advertising campaigns
that typically include a mix of traditional media including radio, newspapers, magazines, out-of-home (especially transit-based) and some
television and geo-targeted and behaviorally targeted digital media, such as paid search, email blasts, online banners and video, as well as other
emerging new media vehicles. These broader market efforts are bolstered by local marketing plans and tactics, which include direct mail, local
sponsorships and co-promotions, community relations and outreach and street-level lead generation activities. Optimization of marketing mix
through measurement and modeling of the effectiveness of various media investments and formats continues to be a priority.
Our advertising and marketing message is designed to build our brand while creating an approachable personality that is attractive to
prospective members and allows them to feel comfortable with our brand. In contrast to most health club advertising, we generally forego
depicting images of hard bodies, facilities and gym equipment. Advertisements generally feature creative slogans that use current events to
communicate the serious approach we take toward fitness in a provocative and/or humorous tone. We believe this approach is easily
communicated and understood and makes our product more approachable for all consumers regardless of their health club experience.
Promotional marketing campaigns will typically feature opportunities to participate in a variety of value-added services such as personal
training, Small Group Training and youth centered sports activities. We also may offer reduced joining fees to encourage enrollment.
Additionally, we sponsor member referral incentive programs and other types of member appreciation, acquisition activities and internal
promotions to enhance loyalty and to encourage more members to take advantage of our ancillary services.
We engage in public relations, sponsorships and special events to promote our brand image across our network, regionally and in our
local communities. We have been featured in national broadcast channels and television shows, such as Good Morning America, Fox &
Friends, CNN, MSNBC, MTV and VH1; major newspapers, such as The New York Times, USA Today, Washington Post, Boston Globe, The
Wall Street Journal, and the Associated Press; and seen in magazines, such as Fitness, Self, Shape, New York, Marie Claire and Prevention
Magazines.
Our philosophy of giving back to our communities includes sponsoring company-wide and local charitable efforts. Our club management
teams and staff are also encouraged to organize and engage in charitable activities. These events have benefited organizations such as the MS
Society, HealthCorps, American Cancer Society, Susan G. Komen Race for the Cure, Avon Walk for Breast Cancer, New York Cares, as well
as many smaller local and specific charities such as: ALS Therapy Development Institute, Boys and Girls Club, North Rockland Soccer
Association, Verrazano Babe Ruth League and Help Our Military Heroes. This past year, following the aftermath of Hurricane Sandy, we
opened our clubs to the general public and provided use of our facilities for a hot shower, charging of electronic devices and complimentary
usage of our clubs. Additionally, we partnered with New York Cares — the city’s largest volunteer organization — with a “Work Out to Help
Out” fundraising event which helped raise money for New York Cares’ Hurricane Sandy rebuilding efforts.
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Sales
We sell our memberships through four channels: direct sales at the club level; through our corporate and group sales division; through our
online website; and through our outbound call center which we introduced in September 2010 principally to reach out to former members. We
are constantly reviewing other possible opportunities to sell memberships through the call center. We employ approximately 400 “in-club”
membership sales consultants who are responsible for new membership sales in and around their designated club locations. Each club generally
has either two or three membership sales consultants. These consultants report directly to the club general manager, who, in turn, reports to a
business director. Additional incentive-based compensation represents a majority of the compensation for the membership sales consultants.
Membership sales consultants must successfully complete an in-house training program through which they learn our sales strategy and gain
valuable hands-on experience. The training program consists of three days of in-classroom training followed by three weeks of in-club training.
In our New York, Boston and Washington regions, these trainings occur in our three sales academies which were introduced in August 2011.
All membership sales consultants hired and working within these regions attend these training centers where a full time sales training manager
is available to them. These academies are hosted within “working clubs” and the membership sales consultants all have the opportunity to learn
and experience the entire sales process (from prospecting to after care) and product knowledge in what we consider a live but supervised
environment. There are assessments throughout the training and the membership sales consultants must pass the course prior to being selected
and placed in a club. Both the in-house/in-club and sales academy training allows us to achieve consistency in our selling process. Successful
completion of our training program allows each membership sales consultant to be consistently trained and exit the training program with a
high level of brand standard selling skills, which will assist them in achieving their targeted sales objectives.
Our corporate and group sales division consists of approximately 15 full-time employees located throughout our markets, who
concentrate on building long-term relationships with local and regional companies and large groups. Corporate and group members accounted
for approximately 19% of our total membership base as of December 31, 2012. We offer numerous programs to meet our corporate and group
clients’ needs including an online enrollment program as well as a fully operational call center for enrollment. Ralph Lauren, Con Edison,
Viacom and Citibank are among just a few of the many corporations that are currently enrolled in our discounted corporate group
memberships. We believe this focus on relationship building, providing the corporate customer with options for enrollment and our clustering
strategy will continue to lead to new group participation in the future. Corporate and group sales are typically sold for our higher priced
Passport Memberships at a discount to our standard rates. Corporations subsidize the costs of memberships provided to their employees.
We also sell individual memberships online at www.mysportsclubs.com for our standard membership types and the website also enables
us to sell memberships for pre-established corporate and group programs. The website also allows our members to give us direct feedback
about our service levels and enables prospective members to sign up for our popular 30 days for 30 dollars web trial membership. The online
sales channel offers a high degree of convenience for customers who know and trust our brand and do not require up-front interaction with a
membership sales consultant to make their decision. In addition, selling online significantly reduces our cost of sale. Members who joined
online accounted for approximately 2.1% of memberships sold in 2012. The web site also provides information about club locations, program
offerings, exercise class schedules and sales promotions. Job seekers can also begin the employment application process through the site and
investors can access financial information and resources.
We believe that clustering clubs allows us to sell memberships based upon the opportunity for members to utilize multiple club locations
near their workplace and their home. As of December 31, 2012, we currently offer the following three types of memberships:
• The Passport Membership is our higher priced membership and entitles members to use any of our clubs in any region at any time and
our Regional Passport Membership entitles members to use any of our clubs within one region, other than the NYSC region. These
membership plans provide the convenience of
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having fitness clubs near a member’s workplace and home. The current list price of a commit Regional Passport and Passport
Memberships ranges from $69.95 per month to $89.95 per month, excluding passport restricted members and corporate and group
members. Our corporate and group memberships are sold as Passport Memberships and averaged approximately $64 per month for
those sold in the year ended December 31, 2012. The Passport Membership, excluding our passport restricted members, described
below, and including our corporate and group members was held by approximately 229,000 members, or 45% of our total members as
of December 31, 2012. In addition, we have a Passport Premium Membership at two select clubs, which includes a greater array of
member services and facilities, with list prices currently ranging from $105.95 per month to $115.95 per month.
• The Core Membership was introduced on November 1, 2010 and enables members to use a specific club at any time. The current list
price of a commit Core membership ranges from $39.95 per month to $79.95 per month based on club specific facilities and services,
the market area of enrollment and length of the membership contract. Core members can also elect to pay a per visit fee ranging from
$9.50 to $12.00 per visit to use non-home clubs. The Core Membership, excluding our core restricted members described below, was
held by approximately 138,000 members, or 27% of our members as of December 31, 2012.
• The Restricted Membership is a favorably-priced, restricted-use month-to-month only membership. In April 2010, this membership
was introduced to students and we extended the membership to teachers and first responders in April 2011 and September 2011,
respectively. Usage fees ranging from $9.50 to $12.00 per visit are applied if a restricted member chooses to use a club from 4:30pm
to 7:30pm, Monday through Thursday. The restricted Passport Membership is currently listed at $39.95 per month and the restricted
Core Membership is currently listed at $29.95 per month. Additional groups may also be offered a restricted membership at times
through our outbound call center. The Restricted Membership was held by approximately 38,000 restricted members, or 8% of our
members as of December 31, 2012.
Prior to November 1, 2010, we also offered The Gold Membership, which is no longer offered to new members. This membership
enables members to use a specific club at any time and any of our clubs during off-peak times. Gold members can elect to pay a per visit fee
ranging from $9.50 to $12.00 per visit to use non-home clubs during peak hours. This membership was held by approximately 105,000
members, or 20% of our members as of December 31, 2012.
We offer both “month-to-month” and “commit” membership options. A member may cancel a month-to-month membership at any time
with 30-days notice. Under the commit model, new members commit to a one year membership. These memberships are priced at a moderate
discount to the month-to-month membership. In 2012 and 2011, 89% and 83% of our newly enrolled members opted for a commit
membership, respectively. As of December 31, 2012, approximately 19% of our members had originated under a month-to-month non-commit
membership and 81% had originated under a commit membership. When the members’ commit period is over, they retain membership as a
month-to-month member until they choose to cancel. As of December 31, 2012, approximately 72% of our total members were on a
month-to-month basis. We believe that members prefer to have the flexibility to choose between committing for one year or to join under the
month-to-month, non-commit membership.
In joining a club, a new member signs a membership agreement that typically obligates the member to pay one-time joining fees, an
annual rate lock guarantee and maintenance fee, and monthly dues on an ongoing basis. The one-time joining fees consist of initiation fees and
processing fees. In the third quarter of 2008, we had combined these fees. We promoted new memberships by discounting these fees in 2008
and further discounting these fees in 2009, resulting in a low average joining fee per member of $20 in that year. In June 2010, we
re-introduced the one-time processing fee of between $19 and $29 per sale. Currently, our processing fee is $49 per sale. Joining fees collected
for new monthly electronic funds transfer, or EFT, members averaged approximately $57 per member for the year ended December 31, 2012,
an increase of 192% over 2009. Monthly EFT of individual membership dues on a per-member basis, including the effect of promotions and
memberships with reduced dues, averaged approximately $58 and $59 per month for the years ended December 31, 2012 and 2011,
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respectively. Due to the popularity of our lower-priced Restricted Memberships introduced in 2010, our Company-wide average dues per
member decreased in the years ended December 31, 2010 and in 2011. Two years removed from the initial launch, the Restricted Membership
base has been more stable in 2012 and had less of an impact on Company-wide average dues in 2012. Currently, 97.0% of our members pay
their membership dues through EFT, with EFT membership revenue constituting approximately 73.7% of consolidated revenue for the year
ended December 31, 2012. Substantially all other membership dues are paid in full in advance. Our membership agreements call for monthly
dues to be collected by EFT based on credit card or bank account debit authorization contained in the agreement. During the first week of each
month, we receive the EFT dues for that month after the payments are initiated by a third-party EFT processor. Discrepancies and insufficient
funds incidents are researched and resolved by our in-house account services department.
We historically increased our existing member dues annually by between 1% and 3% on average, in line with increases in the cost of
living. In May 2011, we implemented a combined rate lock guarantee and maintenance fee of $29.00, which increased to $39.00 in July 2012,
to which all members agree at the time of enrollment. This fee is collected annually in January for all members joining after May 2011, and
will support average monthly dues revenue per member. In part, this fee is in lieu of a possible future dues increase for these members. In
January 2013 and January 2012, we collected approximately $7.0 million and $3.5 million, respectively, related to this new fee. This fee is
recognized into membership revenue over the subsequent 12 month period following collection. In 2012, the membership dues increase was
applied to approximately 27.0% of our membership base (members joining prior to the May 2011 rate lock guarantee) resulting in an overall
dues increase of approximately 1.0% on these members.
Usage
Our suburban clubs are generally open 5:00 AM to 10:00 PM on weekdays and 7:00 AM to 8:00 PM on weekends, while our urban clubs
are generally open 5:00 AM to 11:00 PM on weekdays and 8:00 AM to 9:00 PM on weekends. We generally consider our peak usage times to
be between 6:00 AM and 8:30 AM and 4:00 PM and 8:30 PM on weekdays. Our hours of business are based on usage patterns at each
individual club. Our total club usage, based on the number of member visits, was 29.7 million and 30.4 million member visits for the years
ended December 31, 2012 and 2011, respectively. In the year ended December 31, 2012, approximately 38% of total usage or club visits was to
members’ non-home clubs, indicating that our members take advantage of our network of clubs. Our memberships plans allow for club
members to elect to pay a per visit fee ranging from $9.50 to $12.00 to use non-home clubs, subject to peak and non-peak hourly restrictions
depending on the membership type. In the aggregate, approximately $2.2 million and $2.0 million of usage fees were generated in 2012 and
2011, respectively, and are reported in membership dues in our consolidated statements of operations.
Non-Membership Revenue
Over the past five years, we have expanded the range of ancillary club services provided to our members. Non-membership club revenue
has increased by 10.0% from 2008 to 2012 and has increased as a percentage of total revenue from 18.2% in 2008 to 21.2% in 2012. Personal
training revenue, in particular, increased 6.3% over this five-year period and increased as a percentage of total revenue from 12.2% in 2008 to
13.7% in 2012. Our personal training offerings have expanded beyond the prepaid personal training sessions and now also include single or
multi-session personal training membership products and our newly launched UXF classes. Our other ancillary offerings include our fee-based
Small Group Training and signature classes. We also offer our Sports Clubs for Kids program and tennis and racquet sports at select clubs for
an additional fee. In 2012, we continued our focus on our ancillary programs with continued improvements in training and hiring and built on
ancillary programs such as our personal training membership product introduced in 2011 and added new fee-based class offerings such as
UXF, VBarre and Pilates Tower.
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The table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2008
through 2012.
Total revenue
Non-Membership
Revenue:
Personal training
revenue(1)
Other ancillary club
revenue(2)
Fees and Other
revenue(3)
Total non-membership
revenue
2012
%
2011
$ 478,981 100.0 % $ 466,941
For the Years Ended December 31, ($ in thousands)
2010
%
100.0% $ 462,387
%
%
100.0% $ 485,392 100.0 % $ 506,709
2009
2008
%
100.0%
65,641
13.7 %
29,897
6.3 %
5,804
1.2 %
62,394
13.4%
60,875
13.2%
56,971
11.7 %
61,752
12.2%
28,297
6.1%
24,684
5.3%
23,536
4.8 %
24,329
4.8%
4,890
1.0%
4,761
1.0%
4,661
1.0 %
6,031
1.2%
$ 101,342
21.2 % $
95,581
20.5% $
90,320
19.5% $
85,168
17.5 % $
92,112
18.2%
(1) Personal training revenue in the year ended December 31, 2010 includes $2.7 million related to unused and expired sessions in three
jurisdictions, of which $570,000 is related to expired sessions that would have been recognized in 2010. See “Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for further information.
(2) Other ancillary club revenue primarily consists of Small Group Training, Signature Classes, Sports Clubs for Kids, and racquet sports.
(3) Fees and other revenue primarily consist of rental income, marketing revenue and management fees.
Club Format and Locations
Our clubs are generally located in middle- or upper-income residential, commercial, urban and suburban neighborhoods within major
metropolitan areas that are capable of supporting the development of a cluster of clubs. Our clubs typically have high visibility and are easily
accessible. In the New York metropolitan, Boston, Washington, D.C. and Philadelphia markets, we have created clusters of clubs in urban
areas and their commuter suburban areas aligned with our operating strategy of offering our target members the convenience of multiple
locations close to where they live and work, reciprocal use privileges, and standardized facilities and services.
Approximately 66% of our clubs are fitness-only clubs and the remaining clubs are multi-recreational. Our fitness-only clubs generally
range in size from 15,000 to 25,000 square feet and average approximately 20,000 square feet. Our multi-recreational clubs generally range in
size from 25,000 to 65,000 square feet, with one club being approximately 200,000 square feet. The average multi-recreational club size is
approximately 40,000 square feet. Membership for each club generally ranges from 2,000 to 4,500 members at maturity.
Our club base consists of clubs which we have developed and constructed as well as clubs we have acquired. Over the past five years
from January 1, 2008 to December 31, 2012, we constructed 15 new clubs while closing 16 clubs. Currently, 51 of our clubs, or approximately
32% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31,
2012, we had no club openings or closings, keeping our total clubs under operation at 160. This compares to two club openings and two club
closings during the year ended December 31, 2011. In both 2012 and 2011, we also upgraded certain existing clubs and plan to continue to do
so in 2013. In 2013, we are targeting to open or acquire seven to nine clubs and expect to close or relocate a total of three clubs.
To identify potential new club opportunities, we engage in detailed trade area analyses and selection processes. Target areas are identified
based upon population demographics, psychographics, traffic and commuting patterns, availability of sites and competitive market information.
We currently have identified
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approximately 150 target areas in which we may add clubs under our New York Sports Clubs, Boston Sports Clubs, Washington Sports Clubs
or Philadelphia Sports Clubs brand names. As part of our new club growth strategy we are also actively evaluating targeted acquisitions of both
single club and multiple club operators in our core markets that complement our existing club network. In addition, we have identified further
growth opportunities in secondary markets located near our existing markets. In the future, we may explore expansion opportunities in other
markets in the U.S. that share similar demographic characteristics to those in which we currently operate. We currently have two signed leases
in place for club openings expected in 2013 and 2014. We are currently targeting to open or acquire seven to nine clubs in 2013 and six to 12
clubs in 2014. We are focusing on our urban markets with our fitness-only facility to fill these club opening targets. We expect clubs to cost
approximately $2.5 million per club to build versus approximately $4.0 million invested in each of the two, larger, multi-recreational clubs
opened in 2011.
Our facilities include a mix of state-of-the-art cardiovascular equipment from some of the best manufacturers including Life Fitness,
Cybex, Precor, and Star Trac. At certain locations, additional amenities are also offered, including swimming pools, racquet and basketball
courts, babysitting services, and pro-shops. Personal training services are offered at all locations for an additional charge. In addition, in our
continuing efforts to provide our members with the best tools and equipment to take advantage of the latest exercise techniques, in 2012 we
began to outfit our clubs with a new UXF training zone, which we plan to continue to install in our clubs during 2013. The UXF training zone
is a training area within the club that features an array of innovative equipment designed to maximize the member’s workout. The UXF training
zone is approximately 600 to 800 square feet with AstroTurf flooring, a TRX frame, agility dots and ladders, kettle bells, medicine balls, slam
balls, cargo ropes, and will also feature its own sound system and clock for interval training. The UXF training zone is open to members for
free self guided workouts and UXF fee-based workout programs. The UXF training zone is also used by our personal trainers for their personal
training sessions with our members. Our fee-based programs offered at many of our clubs, include personal training, Small Group Training,
children’s programs, and other signature classes targeting adult members such as VBarre and Pilates Tower. We also offer our Xpressline
strength workout at all of our clubs which is provided for free to our members. Xpressline is an eight-station total-body circuit workout
designed to be used in 22 minutes and to accommodate all fitness levels.
Our clubs also feature personal entertainment units. The units are typically mounted on or near individual pieces of cardiovascular
equipment and are equipped with a flat-panel color screen for television viewing. We believe our members prefer the flexibility to view and
listen to the programs of their choice during their cardiovascular workout.
Club Services and Operations
Our clubs are structured to provide an enhanced member experience through effective execution of our operating plan. Our club and
support team members are the key to delivering a valued member experience and our operations are organized to maximize their overall
effectiveness. Our club operations include:
Management. We believe that our success is largely dependent on the selection and development of our team members. Our
management structure is designed to strike the right balance between consistent execution of operational excellence and nurturing a leader’s
capacity for entrepreneurial decision making. Our learning and development system allows for all club positions to receive training on the key
elements of their role as well as development training for growth. We believe a critical component to our growth is our ability to leverage
internally-developed management talent.
In 2012, in an effort to build on member service in the clubs, and to drive greater efficiency from our operations team, we reorganized the
operations team. While in the past the operations team was divided along regional operating lines, it is now aligned with our key operating
business goals of driving membership sales, retaining our members and driving revenue growth through our ancillary product offerings. A vice
president of sales, vice president of operations and vice president of fitness now lead the operating team who report into our
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chief operating officer. The vice president of operations leads a team of operations directors who provide guidance and direction to the clubs’
general managers and customer service managers to ensure that each club is maintaining a high level of member satisfaction and membership
retention. The vice president of sales leads a team of business directors who are accountable for driving membership revenue and overall club
performance. Finally, the vice president of fitness leads a team of fitness directors who are accountable for the Company’s products, including
the selection and utilization of group exercise classes and personal training classes, and is also responsible for driving ancillary revenue growth.
Functional Support. Functional teams provide technical expertise and support designed to drive the member experience and revenue
growth in specific areas of our clubs’ services, including sales and marketing, fitness and ancillary programming, learning and development, as
well as facility management and member service.
Driving excellence in fitness and ancillary programming is critical to our success. All of our fitness clubs offer one-on-one personal
training, which is sold as prepaid sessions or as part of our new personal training membership product introduced in 2011 and expanded in
2012 where members can select from either single session or multi-session packages. The personal training membership product provides
members with a certified personal trainer who works with the member to create an individualized goal-based program that keeps workouts
fresh, fuels the member’s motivation and makes exercise fun and exciting, all at an affordable price. Members receive an introductory one-hour
assessment session with a fitness manager who helps to develop a customized routine that supports the member’s fitness goals and to get the
most of out of their gym time. This initial assessment session includes a 30-minute workout evaluation, blood pressure and heart rate
measurement, body composition analysis, cardio, strength and endurance testing, and movement screening. Members who elect to receive
personal training can benefit from one-on-one coaching and guidance, with refreshed programs that evolve as the members achieve their fitness
goals. Our fitness teams are trained to provide superior fitness solutions to address member needs. We believe the qualifications of the personal
training staff help to ensure that members receive a consistent level of quality service throughout our clubs and that our personal training
programs provide valuable guidance to our members as well as a significant source of incremental revenue for us. We believe that members
who participate in personal training programs typically have a longer membership life.
Our commitment to providing a quality exercise experience to our members also includes group exercise programming. Our instructors
teach a variety of classes, including aerobics, cycling, strength conditioning, boxing, yoga, Pilates and step aerobics classes. Instructors report
through local club management and are further supported by regional managers responsible for ensuring consistency in class content,
scheduling, training and instruction. We also provide Small Group Training offerings to our members, which are fee-based programs that have
smaller groups, with a maximum of four to eight members per class, and provide more focused and typically more advanced classes. Our
fee-based offerings also include our newly launched UXF classes, as well as our signature classes, including VBarre and Power Pilates Tower.
In addition to group exercise, we offer a variety of ancillary programming for children under our Sports Clubs for Kids brand. As of
December 31, 2012, Sports Clubs for Kids was being offered in 32 locations throughout our New York Sports Clubs, Boston Sports Clubs and
Philadelphia Sports Clubs regions. Our Sports Clubs for Kids programming positions our multi-recreational clubs as family clubs, which we
believe provides us with a competitive advantage. Depending upon the facilities available at a location, Sports Clubs for Kids programming can
include traditional youth offerings such as day camps, sports camps, swim lessons, hockey and soccer leagues, gymnastics, dance, and birthday
parties. It also can include non-competitive “learn-to-play” sports programs.
Functional and leadership skills development plays a critical role in enabling our success. Team member development occurs at both the
club level and in the classroom. Managers play a vital role in the development of their teams and partner closely with our learning and
development team to advance team member skills for future
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growth with organic growth and internal promotions being the preferred choice for succession planning. Our learning programs are consistently
designed and focused on building strong functional and leadership skills across the organization. This also includes specialized fitness and
group exercise training curriculum.
Our facilities and equipment management teams are dedicated to ensuring our clubs and fitness equipment are operating at the highest
standard of performance for our members. Local teams are deployed to provide on-site support to clubs as needed.
Our club support and member services groups act as a coordinating point for all departments, supporting excellence in program execution
and ensuring consistency of policies and procedures across the entire organization that support the member experience.
Employee Compensation and Benefits
We provide performance-based incentives to our management. Senior management compensation, for example, is tied to our overall
performance. Departmental directors, business directors and general managers can achieve bonuses tied to financial and member retention
targets. We offer our employees various benefits including health, dental and disability insurance; pre-tax healthcare, commuting and
dependent care accounts; and a 401(k) plan. We believe the availability of employee benefits provides us with a strategic advantage in
attracting and retaining quality managers, program instructors and professional personal trainers and that this strategic advantage in turn
translates into a more consistent and higher-quality workout experience for those members who utilize such services.
Centralized Information Systems
The year ended December 31, 2012 was the first full year of our multi-year program to replace the current proprietary Club Management
system that is used to process new memberships, bill members, check-in members and to track and analyze sales and membership statistics, the
frequency and timing of member workouts, cross-club utilization, member life, value-added services and demographic profiles by member. We
plan to continue to replace the system over the next two years to ensure we meet the changing needs of our business and can adapt and leverage
new business opportunities.
We also continue to implement significant new business process support in our existing Club Management system ensuring we can
support changing needs during this transition period.
The first phase of the transition supported our focus on member acquisition by implementing Oracle Customer Relationship Management
(“CRM”) on Demand. This system has been fully deployed since December 2011 and we further enhanced the integration with our existing
proprietary Club Management system in October 2012.
We are now in phase two of the transition which includes replacing the functionality around club check-in and registration and booking
for group exercise and all ancillary revenue offerings including Small Group Training classes, personal training sessions and Sports Clubs for
Kids. We selected a strategic partner to deliver the software to support these services and it is currently being piloted in two clubs with a
complete roll-out planned during the second half of 2013. The new cloud based system is fully integrated into our information technology
platform ensuring a seamless flow of data during the roll-out.
This program of change will continue until all functionality within the current Club Management system has been replaced and enhanced
with new software programs that are integrated together to behave as one single system. Conducting the transition in phases allows for a more
managed approach to change ensuring that we remain focused on growing and developing our core business and not being distracted by the
impact of too much change.
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Information Technology
We recognize the value of enhancing and extending the uses of information technology (“IT”) in virtually every area of our business. Our
IT strategy is aligned to support our business strategy and operating plans. We maintain an ongoing comprehensive multi-year program to
replace or upgrade key systems and to optimize their performance.
In 2012, we upgraded several business applications and IT infrastructure components in partnership with our internal business customers.
Our existing Club Management system was enhanced to sell and support a redefined personal training membership program and our clubs are
now “cashless,” as cash as a form of payment is no longer accepted. We significantly redesigned and expanded our on-line hiring capabilities
with better integration into the core HR information systems.
Significant efforts were expended on the upgrade and migration of our domain services and e-mail platforms allowing us to better service
the business and expand the population of e-mail users to include our group exercise instructors and personal trainers.
Following the formal selection process of a software vendor for the second phase of the replacement of our proprietary Club Management
system, the team delivered seven integrations between the new system and the existing systems in support of the pilot clubs launched at the end
of 2012. These integrations were delivered on a newly established messaging architecture that services both of our major cloud based
applications (CRM and Club Management) ensuring that all relevant data is synchronized across our existing enterprise systems.
In 2012 we began to redefine the data network to the clubs to introduce significantly more bandwidth for our new cloud applications and
to provide a much more robust data path as back up to the primary data circuit in the clubs. These network re-engineering efforts will continue
in 2013 as we deploy the new Club Management system.
We continuously implement infrastructure changes to accommodate growth, provide network redundancy, better manage
telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical
architecture, including disaster recovery. 2012 brought significant change in the IT services delivered for our business and set the scene for
many more enhancements to be delivered in the coming years.
Intellectual Property
We have registered various trademarks and service marks with the U.S. Patent and Trademark Office, including , NEW YORK SPORTS
CLUBS and NYSC , WASHINGTON SPORTS CLUBS and WSC , BOSTON SPORTS CLUBS and BSC , PHILADELPHIA SPORTS
CLUBS and PSC, UXF, SPORTS CLUBS FOR KIDS, and COMPANIESGETFIT.COM. We continue to register other trademarks and
service marks. We believe that our rights to these properties are adequately protected.
Competition
The fitness club industry is highly competitive and continues to become more competitive. The number of health clubs in the U.S. has
increased from 29,636 in 2007 to 29,960 in 2011, based on the most recent information available according to the IHRSA. In each of the
markets in which we operate, we compete with other fitness clubs, physical fitness and recreational facilities.
We consider the following groups to be our primary competitors in the health and fitness industry:
• commercial, multi-recreational and fitness-only chains, including, among others, Equinox Holdings, Inc., Lifetime Fitness, Inc.,
Crunch, New York Health and Racquet, LA Fitness International LLC, 24 Hour Fitness Worldwide, Inc., Bally Total Fitness Holding
Corporation, Gold’s Gym International, Inc., Retro Fitness, Snap Fitness, Anytime Fitness and Planet Fitness;
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• private studios offering cross-fit, cycling, yoga or Pilates;
• the YMCA and similar non-profit organizations;
• physical fitness and recreational facilities established by local governments, hospitals and businesses;
• exercise and small fitness clubs; racquet, tennis and other athletic clubs;
• amenity gyms in apartments and condominiums;
• weight-reducing salons;
• country clubs; and
• the home-use fitness equipment industry.
The principal methods of competition include pricing and ease of payment, required level of members’ contractual commitment, level
and quality of services, training and quality of supervisory staff, size and layout of facility and convenience of location with respect to access to
transportation and pedestrian traffic.
We consider our service offerings to be in the mid-tier of the value/service proposition and designed to appeal to a large portion of the
population who utilize fitness facilities. The number of competitor clubs that offer lower pricing and a lower level of service have continued to
grow in our markets over the last few years. These clubs have attracted, and may continue to attract, members away from both our fitness-only
clubs and our multi-recreational clubs.
We also face competition from club operators offering comparable or higher pricing with higher levels of service. The trend to larger
outer-suburban family fitness centers, in areas where suitable real estate is more likely to be available, could also compete effectively against
our suburban formats.
Competitive Position Measured by Number of Clubs
Market
Boston metropolitan
New York metropolitan
Philadelphia metropolitan
Washington, D.C. metropolitan
Switzerland
Number of
Clubs
Position
25
108
6
18
3
Leading owner and operator
Leading owner and operator
# 3 owner and operator, #2 in urban center
Tied with two competitors as leading owner and operator
Local owner and operator only
We also compete with other entertainment and retail businesses for the discretionary income in our target demographics. There can be no
assurance that we will be able to compete effectively in the future in the markets in which we operate. Competitors, who may include
companies that are larger and have greater resources than us, may enter these markets to our detriment. These competitive conditions may limit
our ability to increase dues without a material loss in membership, attract new members and attract and retain qualified personnel. Additionally,
consolidation in the fitness club industry could result in increased competition among participants, particularly large multi-facility operators
that are able to compete for attractive acquisition candidates and/or newly constructed club locations. This increased competition could increase
our costs associated with expansion through both acquisitions and for real estate availability for newly constructed club locations.
We believe that our market leadership, experience and operating efficiencies enable us to provide the consumer with a superior product in
terms of convenience, quality service and affordability. We believe that there are barriers to entry in our metropolitan areas, including
restrictive zoning laws, lengthy permit processes and a shortage of appropriate real estate, which could discourage any large competitor from
attempting to open a
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chain of clubs in these markets. However, such a competitor could enter these markets more easily through one, or a series of, acquisitions.
These barriers of entry are significant in our four metropolitan regions; however, they are not as challenging in our surrounding suburban
locations.
Seasonality of Business
Seasonal trends have a limited effect on our overall business. Generally, we experience greater membership growth at the beginning of
each year and experience an increased rate of membership attrition during the summer months. In addition, during the summer months, we
experience a slight increase in operating expenses due to our outdoor pool and summer camp operations, generally matched by seasonal
revenue recognition from season pool memberships and camp revenue.
Government Regulation
Our operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which
our clubs are located, including general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies
and state statutes that prescribe certain forms and provisions of membership contracts and that govern the advertising, sale, financing and
collection of such memberships as well as state and local health regulations.
Statutes and regulations affecting the fitness industry have been enacted in jurisdictions in which we conduct business and other states
into which we may expand in the future have adopted or may adopt similar legislation. Typically, these statutes and regulations prescribe
certain forms and provisions of membership contracts, afford members the right to cancel the contract within a specified time period after
signing or in certain circumstances, such as for medical reasons or relocation to a certain distance from the nearest club, require an escrow of
funds received from pre-opening sales or the posting of a bond or proof of financial responsibility and may establish maximum prices for
membership contracts and limitations on the term of contracts. The specific procedures and reasons for cancellation vary due to differing laws
in the respective jurisdictions, but in each instance, the canceling member is entitled to a refund of unused prepaid amounts. In addition, several
states have proposed legislation that would prohibit the automatic rollover of membership once a member’s commitment period expires. We
are also subject to numerous other types of federal and state regulations governing the sale of memberships. These laws and regulations are
subject to varying interpretations by a number of state and federal enforcement agencies and courts. We maintain internal review procedures to
comply with these requirements and believe that our activities are in substantial compliance with all applicable statutes, rules and decisions.
The tax treatment of membership dues varies by state. Some states in which we operate require sales tax to be collected on membership
dues and personal training sessions. Several others states in which we operate have proposed similar tax legislation. These taxes have the effect
of increasing the payments by our members, which could impede our ability to attract new members or induce members to cancel their
membership.
Changes in any statutes, rules or regulations could have a material adverse effect on our financial condition and results of operations.
Employees
On December 31, 2012, we had approximately 7,800 employees, of whom approximately 3,200 were employed full-time. Approximately
390 of those employees were corporate and other club support personnel. We are not a party to any collective bargaining agreement with our
employees. We operate with an open door policy and encourage and welcome the communication of our employees’ ideas, suggestions and
concerns, and believe this strengthens our employee relations. We have never experienced any significant labor shortages or had any difficulty
in obtaining adequate replacements for departing employees. We consider our relations with our employees to be good.
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Available Information
We make available through our web site at www.mysportsclubs.com in the “Investor Relations — SEC Filings” section, free of charge,
all reports and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities
and Exchange Commission (the “SEC”). Occasionally, 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://investor.mysportsclubs.com/ .
In addition, you may automatically receive email alerts and other information about us by enrolling your email by visiting the “E-mail Alerts”
section at http://investor.mysportsclubs.com/ .
The foregoing information regarding our website and its content is for convenience only. The content of our website is not deemed to be
incorporated by reference into this report nor should it be deemed to have been filed with the SEC.
Item 1A. Risk Factors
Investors should carefully consider the risks described below and all other information in this Annual Report on Form 10-K. The risks
and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business and operations. If any of the following risks actually occur, our business, financial
condition, cash flows or results of operations could be materially adversely affected.
Risks Related to Our Business
We may be unable to attract and retain members, which could have a negative effect on our business.
The performance of our clubs is highly dependent on our ability to attract and retain members, and we may not be successful in these
efforts. Most of our members hold month-to-month memberships and accordingly, most members can cancel their club membership at any
time. In addition, there are numerous factors that have in the past and could in the future lead to a decline in membership levels or that could
prevent us from increasing our membership, including a decline in our ability to deliver quality service at a competitive cost, the presence of
direct and indirect competition in the areas in which the clubs are located, the public’s interest in fitness clubs and general economic conditions.
Negative economic conditions, including increased unemployment levels and decreased consumer confidence, have contributed and in
the future could lead to significant pressures and declines in economic growth, including reduced consumer spending. In a depressed economic
and consumer environment, consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or
declines in income or asset values, which could have a material negative effect on the demand for our services and products and such decline in
demand may continue as the economy continues to struggle and disposable income declines. Other factors that could influence demand include
increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to
credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. We believe the challenges to the global
economy during the past several years have adversely affected our business and our revenues and profits and continuing challenges may result
in additional adverse effects. As a result of these factors, membership levels might not be adequate to maintain our operations at current levels
or permit the expansion of our operations.
In addition, to the extent our corporate clients are adversely affected by negative economic conditions, they may decide, as part of
expense reduction strategies, to curtail or cancel club membership benefits provided to their respective employees. Any reductions in corporate
memberships may lead to membership cancellations as we cannot assure that employees of corporate customers will choose to continue their
memberships without
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employer subsidies. A decline in membership levels may have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Low consumer confidence levels, increased competition and decreased spending could negatively impact our financial position and
result in club closures and fixed asset and goodwill impairments.
In the year ended December 31, 2011, we closed two clubs, while in 2012 we did not have any club closures. We recognized $3.4 million
of fixed asset impairments in the year ended December 31, 2012 as compared to no fixed asset impairments in the year ended December 31,
2011. The $3.4 million of fixed asset impairments in 2012 include $3.2 million related to fixed asset write-offs at four clubs sustaining
damages from Hurricane Sandy. While there were no goodwill impairments in 2012 and 2011, we have in the past experienced goodwill
impairments, in part due to decreased membership. Some of these closures and impairments were due, in large part, to the economic and
consumer environment, and increased competition in areas in which our clubs operate. If the economic and consumer environment were to
deteriorate further or not improve or if we are unable to improve the overall competitive position of our clubs, our operating performance may
experience declines and we may need to recognize additional impairments of our fixed assets and goodwill and may be compelled to close
additional clubs. In addition, we cannot ensure that we will be able to replace any of the revenue lost from these closed clubs from our other
club operations.
Our geographic concentration heightens our exposure to adverse regional developments.
As of December 31, 2012, we operated 108 fitness clubs in the New York metropolitan market, 25 fitness clubs in the Boston market, 18
fitness clubs in the Washington, D.C. market, six fitness clubs in the Philadelphia market and three fitness clubs in Switzerland. Our geographic
concentration in the Northeast and Mid-Atlantic regions and, in particular, the New York metropolitan area, heightens our exposure to adverse
developments in these areas, including those related to economic and demographic changes in these regions, competition and severe weather or
other unforeseen events, such as hurricanes. For example, in the year ended December 31, 2012, 131 clubs were closed on October 29, 2012 as
a result of Hurricane Sandy with 16 clubs that remained closed for over a week and two clubs which still remain closed as a result of flooding
and power outages caused by Hurricane Sandy. We cannot predict the impact that any future severe weather events will have on our ability to
avoid wide-spread or prolonged club closures. Any such events affecting the areas in which we operate might result in a material adverse effect
on our business, financial condition, cash flows and results of operations in the future.
The level of competition in the fitness club industry could negatively impact our revenue growth and profitability.
The fitness club industry is highly competitive and continues to become more competitive. In each of the markets in which we operate,
we compete with other fitness clubs, private studios, physical fitness and recreational facilities established by local governments, hospitals and
businesses for their employees, amenity and condominium clubs, the YMCA and similar organizations and, to a certain extent, with racquet
and tennis and other athletic clubs, country clubs, weight reducing salons and the home-use fitness equipment industry. We also compete with
other entertainment and retail businesses for the discretionary income in our target demographics. We might not be able to compete effectively
in the future in the markets in which we operate. Competitors include companies that are larger and have greater resources than us and also
may enter these markets to our detriment. These competitive conditions may limit our ability to increase dues without a material loss in
membership, attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could
result in increased competition among participants, particularly large multi-facility operators that are able to compete for attractive acquisition
candidates or newly constructed club locations, thereby increasing costs associated with expansion through both acquisitions and lease
negotiation and real estate availability for newly constructed club locations.
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The number of competitor clubs that offer lower pricing and a lower level of service continue to grow in our markets. These clubs have
attracted, and may continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs, particularly in the
current consumer environment. Furthermore, smaller and less expensive weight loss facilities present a competitive alternative for consumers.
We also face competition from competitors offering comparable or higher pricing with higher levels of service or offerings. The trend to
larger outer-suburban, multi-recreational family fitness centers, in areas where suitable real estate is more likely to be available, also compete
against our suburban, fitness-only models.
In addition, large competitors could enter the urban markets in which we operate to open a chain of clubs in these markets through one, or
a series of, acquisitions.
Our trademarks and trade names may be infringed, misappropriated or challenged by others.
We believe our brand names and related intellectual property are important to our continued success. We seek to protect our trademarks,
trade names and other intellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to
successfully protect our intellectual property rights for any reason, it could have an adverse effect on our business, results of operations and
financial condition. Any damage to our reputation could cause membership levels to decline and make it more difficult to attract new members.
If we are unable to identify and acquire suitable sites for new clubs, our revenue growth rate and profits may be negatively impacted.
To successfully expand our business over the long term, we must identify and acquire sites that meet our site selection criteria. In addition
to finding sites with the right geographical, demographic and other measures we employ in our selection process, we also need to evaluate the
penetration of our competitors in the market. We face competition from other health and fitness center operators for sites that meet our criteria
and as a result, we may lose those sites or we could be forced to pay higher prices for those sites. If we are unable to identify and acquire sites
for new clubs on attractive terms, our revenue, growth rate and profits may be negatively impacted. Additionally, if our analysis of the
suitability of a site is incorrect, we may not be able to recover our capital investment in developing and building the new club.
The opening of new clubs by us in existing markets may negatively impact our comparable club revenue growth and our operating
margins.
We currently operate clubs throughout the Northeast and Mid-Atlantic regions of the United States. In the case of existing markets, our
experience has been that opening new clubs may attract some memberships away from other clubs already operated by us in those markets and
diminish their revenues. In addition, as a result of new club openings in existing markets and because older clubs will represent an increasing
proportion of our club base over time, our mature club revenue increases may be lower in future periods than in the past.
Another result of opening new clubs is that our club operating margins may be lower than they have been historically while the clubs
build a membership base. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly opened
clubs to affect our club operating margins at these new clubs.
We may experience prolonged periods of losses in our recently opened clubs.
Upon opening a club, we typically experience an initial period of club operating losses. Enrollment from pre-sold memberships typically
generates insufficient revenue for the club to initially generate positive cash flow. As a result, a new club typically generates an operating loss
in its first full year of operations and
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substantially lower margins in its second full year of operations than a club opened for more than 24 months. These operating losses and lower
margins will negatively impact our future results of operations. This negative impact will be increased by the initial expensing of pre-opening
costs, which include legal and other costs associated with lease negotiations and permitting and zoning requirements, as well as depreciation
and amortization expenses, which will further negatively impact our results of operations. We may, at our discretion, accelerate or expand our
plans to open new clubs, which may temporarily adversely affect results from operations.
We could be subject to claims related to health or safety risks at our clubs.
Use of our clubs poses some potential health or safety risks to members or guests through physical exertion and use of our services and
facilities, including exercise equipment. Claims might be asserted against us for injury suffered by, or death of members or guests while
exercising at a club. We might not be able to successfully defend such claims. As a result, we might not be able to maintain our general liability
insurance on acceptable terms in the future or maintain a level of insurance that would provide adequate coverage against potential claims.
Depending upon the outcome, these matters may have a material effect on our consolidated financial position, results of operations and
cash flows.
Security and privacy breaches may expose us to liability and cause us to lose customers.
Federal and state law requires us to safeguard our customers’ financial information, including credit card information. Although we have
established security procedures and protocol, including credit card industry compliance procedures, to protect against identity theft and the theft
of our customers’ financial information, our security and testing measures may not prevent security breaches and breaches of our customers’
privacy may occur, which could harm our business. For example, a significant number of our users provide us with credit card and other
confidential information and authorize us to bill their credit card accounts directly for our products and services. Typically, we rely on
encryption and authentication technology licensed from third parties to enhance transmission security of confidential information. Advances in
computer capabilities, new discoveries in the field of cryptography, inadequate facility security or other developments may result in a
compromise or breach of the technology used by us to protect customer data. Any compromise of our security could harm our reputation or
financial condition and, therefore, our business. In addition, a party who is able to circumvent our security measures or exploit inadequacies in
our security measures, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose
customers to computer viruses or other disruptions. Actual or perceived vulnerabilities may lead to claims against us. To the extent the
measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could
result in significant fines, penalties or damages and harm to our reputation.
Loss of key personnel and/or failure to attract and retain highly qualified personnel could make it more difficult for us to develop our
business and enhance our financial performance.
We are dependent on the continued services of our senior management team, including our Chief Executive Officer, Robert Giardina, our
Chief Financial Officer, Dan Gallagher and our Chief Operating Officer, Terry Kew. We believe the loss of such key personnel could have a
material adverse effect on us and our financial performance. Currently, we do not have any long-term employment agreements with our
executive officers, and we may not be able to attract and retain sufficient qualified personnel to meet our business needs.
Terrorism and the uncertainty of armed conflicts may have a material adverse effect on clubs and our operating results.
Terrorist attacks, such as the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of
violence or war may affect the markets in which we operate, our operating results or the market on which our common stock trades. Our
geographic concentration in the major cities in the
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Northeast and Mid-Atlantic regions and, in particular, the New York City and Washington, D.C. areas, heightens our exposure to any such
future terrorist attacks, which may adversely affect our clubs and result in a decrease in our revenues. The potential near-term and long-term
effect these attacks may have for our members, the markets for our services and the market for our common stock are uncertain; however, their
occurrence can be expected to further negatively affect the U.S. economy generally and specifically the regional markets in which we operate.
The consequences of any terrorist attacks or any armed conflicts are unpredictable; and we may not be able to foresee events that could have an
adverse effect on our business.
Disruptions and failures involving our information systems could cause customer dissatisfaction and adversely affect our billing and
other administrative functions.
The continuing and uninterrupted performance of our information systems is critical to our success. We use a fully-integrated information
system to process new memberships, bill members, check-in members and track and analyze sales and membership statistics, the frequency and
timing of member workouts, cross-club utilization, member life, value-added services and demographic profiles by member. This system also
assists us in evaluating staffing needs and program offerings. We believe that, without investing in enhancements, this system was approaching
the end of its life cycle. Thus, in 2011, we began the process of replacing this system and continued the process throughout 2012. We plan to
complete this transition in phases during 2013 and 2014. Correcting any disruptions or failures that affect our proprietary system could be
difficult, time-consuming and expensive because we would need to use contracted consultants familiar with our system.
Any failure of our current system could also cause us to lose members and adversely affect our business and results of operations. Our
members may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or
failures that affect our billing and other administrative functions could have an adverse affect on our operating results.
Infrastructure changes are being undertaken to accommodate our growth, provide network redundancy, better manage
telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical
architecture. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, acts of terrorism and similar events could damage
our systems. In addition, computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our sites. Any
system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose members, damage
our reputation, and adversely affect our business and results of operations.
Our growth could place strains on our management, employees, information systems and internal controls, which may adversely impact
our business.
Future expansion will place increased demands on our administrative, operational, financial and other resources. Any failure to manage
growth effectively could seriously harm our business. To be successful, we will need to continue to improve management information systems
and our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close
coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming and
expensive, increase management responsibilities and divert management attention.
Our cash and cash equivalents are concentrated in a small number of banks.
Our cash and cash equivalents are held, primarily, in a small number of commercial banks. These deposits are not collateralized. In the
event these banks become insolvent, we would be unable to recover most of our cash and cash equivalents deposited at the banks. Cash and
cash equivalents held in a small number of commercial banks as of December 31, 2012 totaled $37.0 million. During 2012, in any one month,
this amount has been as high as approximately $109.5 million.
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Regulatory changes in the terms of credit and debit card usage, including any existing or future regulatory requirements, could have an
adverse effect on our business.
Our business relies heavily on the use of credit and debit cards in sales transactions. Regulatory changes to existing rules or future
regulatory requirements affecting the use of credit and debit cards or the fees charged could impact the consumer and financial institutions who
provide card services. This may lead to an adverse impact on our business if the regulatory changes result in unfavorable terms to either the
consumer or the banking institutions.
Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and,
if we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of
operations could be adversely affected.
Our business requires significant levels of capital to finance the development of additional sites for new clubs and the construction of our
clubs. If cash from available sources is insufficient or unavailable due to restrictive credit markets, or if cash is used for unanticipated needs,
we may require additional capital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be
unable to do so on favorable terms or at all. Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to
borrow, which could force us to issue new equity securities. If we issue new equity securities, existing shareholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we
cannot raise funds on acceptable terms, we may not be able to execute our current growth plans, take advantage of future opportunities or
respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans and
operating results.
We may incur rising costs related to construction of new clubs and maintaining our existing clubs. If we are not able to pass these cost
increases through to our members, our returns may be adversely affected.
Our clubs require significant upfront investment. If our investment is higher than we had planned, we may need to outperform our
operational plan to achieve our targeted return. We cannot assure that we can offset cost increases by increasing our membership dues and
other fees and improving profitability through cost efficiencies.
We may be required to remit unclaimed property to states for unused, expired personal training sessions.
We recognize revenue from personal training sessions as the services are performed (i.e., when the session is trained). Unused personal
training sessions expire after a set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. The
State of New York has informed us that it is considering whether we are required to remit the amount received by us for unused, expired
personal training sessions to the State of New York as unclaimed property. As of December 31, 2012, we had approximately $13.4 million of
unused and expired personal training sessions that had not been recognized as revenue and was recorded as deferred revenue. We do not
believe that these amounts are subject to the escheatment or abandoned property laws of any jurisdiction, including the State of New York.
However, it is possible that one or more of these jurisdictions may not agree with our position and may claim that we must remit all or a portion
of these amounts to such jurisdiction.
Our growth and profitability could be negatively impacted if we are unable to renew or replace our current club leases on favorable
terms, or at all, and we cannot find suitable alternate locations.
We currently lease substantially all of our fitness club locations pursuant to long-term leases (generally 15 to 25 years, including option
periods). During the next five years, or the period from January 1, 2013 through December 31, 2017, we have leases for 11 club locations that
are due to expire without any renewal options, one of which expires in 2013, and 46 club locations that are due to expire with renewal options.
For leases with
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renewal options, several of them provide for our unilateral option to renew for additional rental periods at specific rental rates (for example,
based on the consumer price index or stated renewal terms already set in the leases) or based on the fair market rate at the location. Our ability
to negotiate favorable terms on an expiring lease or to negotiate favorable terms on leases with renewal options, or conversely for a suitable
alternate location, could depend on conditions in the real estate market, competition for desirable properties and our relationships with current
and prospective landlords or may depend on other factors that are not within our control. Any or all of these factors and conditions could
negatively impact our revenue, growth and profitability.
Risks Related to Our Leverage and Our Indebtedness
On May 11, 2011, TSI, LLC entered into a $350.0 million senior secured credit facility (“2011 Senior Credit Facility”). The 2011 Senior
Credit Facility consists of a $300.0 million term loan facility (“2011 Term Loan Facility”), and a $50.0 million revolving loan facility (“2011
Revolving Loan Facility”). The 2011 Senior Credit Facility was amended in August 2012 primarily to reduce interest rates on the 2011 Term
Loan Facility and further amended in November 2012 to allow for a $60.0 million incremental term loan which was used together with
available cash-on-hand to fund our special dividend payment on December 11, 2012. The 2011 Term Loan Facility matures on May 11, 2018,
and the 2011 Revolving Loan Facility matures on May 11, 2016.
We may be negatively affected by economic conditions in the U.S. and key international markets.
We must maintain liquidity to fund our working capital, service our outstanding indebtedness and finance investment opportunities.
Without sufficient liquidity, we could be forced to curtail our operations or we may not be able to pursue new business opportunities. If our
current resources do not satisfy our liquidity requirements, we may have to seek additional financing. The principal sources of our liquidity are
funds generated from operating activities, available cash and cash equivalents and borrowings under our $50.0 million 2011 Revolving Loan
Facility.
The capital and credit markets have been experiencing volatility and disruption in the recent past. As a result, one or more of our current
lenders could experience financial difficulty, and as a result fail to provide the required lending amounts under our 2011 Revolving Loan
Facility. If this should occur, we may need to seek additional financing from other sources. The availability of financing will depend on a
variety of factors, such as economic and market conditions, the availability of credit and our credit ratings, as well as the possibility that lenders
could develop a negative perception of the prospects of our Company or the fitness industry in general. We may not be able to successfully
obtain any necessary additional financing on favorable terms, or financing altogether.
Economic conditions, both domestic and foreign, may affect our financial performance. Prevailing economic conditions, including
unemployment levels, inflation, availability of credit, energy costs and other macro-economic factors, as well as uncertainty about future
economic conditions, adversely affect consumer spending and, consequently, our business and results of operations.
Our leverage may impair our financial condition, and we may incur significant additional debt.
We currently have a substantial amount of debt. As of December 31, 2012, our total outstanding consolidated debt was $315.7 million.
Our substantial debt could have important consequences, including:
• making it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
• increasing our vulnerability to general adverse economic and industry conditions;
• limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of clubs and other
general corporate requirements;
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• requiring a substantial portion of our cash flow from operations for the payment of interest on our debt, which is variable on our 2011
Revolving Loan Facility and partially variable on our 2011 Term Loan Facility, and/or principal pursuant to excess cash flow
requirements and reducing our ability to use our cash flow to fund working capital, capital expenditures and acquisitions of new clubs
and general corporate requirements;
• increasing our vulnerability to interest rate fluctuations in connection with borrowings under our 2011 Senior Credit Facility, some of
which are at variable interest rates;
• limiting our ability to refinance our existing indebtedness on favorable terms, or at all; and
• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.
In addition, as of December 31, 2012, we had $43.9 million of unutilized borrowings under our 2011 Revolving Loan Facility. If new
debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they currently face could intensify.
The current debt under the 2011 Senior Credit Facility has a floating interest rate and an increase in interest rates may negatively
impact our financial results.
Interest rates applicable to our debt are expected to fluctuate based on economic and market factors that are beyond our control. In
particular, the unhedged portion of our outstanding debt under our 2011 Senior Credit Facility has a floating interest rate. Any significant
increase in market interest rates, and in particular the short-term Eurodollar rates, would result in a significant increase in interest expense on
our debt, which could negatively impact our net income and cash flows.
The Company may be unsuccessful in its efforts to effectively hedge against interest rate changes on our variable rate debt.
In its normal operations, the Company is exposed to market risk relating to fluctuations in interest rates. In order to minimize the negative
impact of such fluctuations on the Company’s cash flows, the Company may enter into derivative financial instruments, such as interest rate
swaps. The Company’s current interest rate swap arrangement is with one financial institution and covers $160.0 million of our current $315.7
million outstanding term loan principal balance with the swap expiring on May 13, 2015. We are exposed to credit risk if the counterparty to
the agreement is not able to perform on its obligations. Additionally, a failure on our part to effectively hedge against interest rate changes may
adversely affect our financial condition and results of operations. We are required to record the interest rate swap at its fair value. Changes in
interest rates can significantly impact the valuation of the instrument resulting in non-cash changes to our financial position.
Covenant restrictions under our indebtedness may limit our ability to operate our business and, in such an event, we may not have
sufficient assets to settle our indebtedness.
Our 2011 Senior Credit Facility and certain other agreements regarding our indebtedness contain, among other things, covenants that may
restrict our ability to finance future operations or capital needs or to engage in other business activities and that may impact our ability and the
ability of our restricted subsidiaries to:
• borrow money;
• pay dividends or make distributions;
• purchase or redeem stock;
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• make investments and extend credit;
• engage in transactions with affiliates;
• engage in sale-leaseback transactions;
• consummate certain asset sales;
• effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of our assets; and
• create liens on our assets.
In addition, the 2011 Senior Credit Facility requires the Company, on a consolidated basis, to maintain specified financial ratios and
satisfy certain financial condition tests that may require us to take action to reduce our debt or to act in a manner contrary to our business
objectives. The 2011 Senior Credit Facility requires the Company, on a consolidated basis, to maintain a maximum total leverage ratio not
greater than 4.50:1.00 as of December 31, 2012; an interest expense coverage ratio of no less than 2.00:1.00; and a covenant that limits capital
expenditures to $40.0 million for the four quarters ending in any quarter during which the total leverage ratio is greater than 3.00:1.00 and to
$50.0 million for the four quarters ending in any quarter during which the total leverage ratio is less than or equal to 3.00 to 1.00 but greater
than 2.50:1.00. This covenant does not limit capital expenditures if the total leverage ratio is less than or equal to 2.50:1.00. We were in
compliance with these covenants as of December 31, 2012 with a total leverage ratio of 3.00:1.00 and an interest coverage ratio of 4.22:1.00.
Our total capital expenditures for full-year 2012 were $22.5 million.
Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet certain
financial ratios and financial condition tests. We may be unable to meet those tests and the lenders may decide not to waive any failure to meet
those tests. A breach of any of these covenants would result in a default under the 2011 Senior Credit Facility. If an event of default under the
2011 Senior Credit Facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be
immediately due and payable. If any such event should occur, we might not have sufficient assets to pay our indebtedness and meet our other
obligations, which would have a material adverse effect on our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We own our 151 East 86th Street, New York location, which houses a fitness club and a retail tenant that generated approximately
$2.0 million of rental income for us for the year ended December 31, 2012. We lease the remainder of our fitness clubs pursuant to long-term
leases (generally 15 to 25 years, including options). In the next five years, or the period from January 1, 2013 through December 31, 2017, we
have leases for 11 club locations that are due to expire without any renewal options, one which is due to expire in 2013, and 46 club locations
that are due to expire with renewal options. Renewal options include terms for rental increases based on the consumer price index, fair market
rates or stated renewal terms already set in the lease agreements.
We lease approximately 26,400 square feet of office space in New York City and have smaller regional offices in Fairfax, VA and
Boston, MA, for administrative and general corporate purposes. We closed one of our corporate locations in Manhattan of approximately
10,000 square feet in March 2011 at the end of the lease term and relocated those employees to an existing Manhattan location.
We lease approximately 82,000 square feet in Elmsford, NY for the operation of a centralized laundry facility for New York Sports Clubs
offering towel service, and for construction and equipment storage. This
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space also serves as corporate office space and replaced approximately 10,800 square feet of corporate office space in Manhattan. Total square
footage related to the laundry facility is 42,000 and total square footage related to the corporate office and warehouse space is 40,000.
The following table provides information regarding our club locations:
Location
New York Sports Clubs:
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Manhattan
Bronx, NY
Brooklyn, NY
Brooklyn, NY
Brooklyn, NY
Brooklyn, NY
Brooklyn, NY
Address
151 East 86th Street
61 West 62nd Street
614 Second Avenue
151 Reade Street
1601 Broadway
349 East 76th Street
248 West 80th Street
502 Park Avenue
117 Seventh Avenue South
303 Park Avenue South
30 Wall Street
1635 Third Avenue
575 Lexington Avenue
278 Eighth Avenue
200 Madison Avenue
2162 Broadway
633 Third Avenue
217 Broadway
23 West 73rd Street
34 West 14th Street
503-511 Broadway
1372 Broadway
300 West 125th Street
19 West 44th Street
128 Eighth Avenue
2527 Broadway
3 Park Avenue
10 Irving Place
160 Water Street
230 West 41st Street
1221 Avenue of the Americas
200 Park Avenue
232 Mercer Street
225 Varick Street
885 Second Avenue
301 West 145th Street
1400 5th Avenue
1601 Bronxdale Avenue
110 Boerum Place
1736 Shore Parkway
179 Remsen Street
324 Ninth Street
1630 E 15th Street
26
Date Opened or Management
Assumed
January 1977
July 1983
July 1986
January 1990
September 1991
April 1994
May 1994
February 1995
March 1995
December 1995
May 1996
October 1996
November 1996
December 1996
February 1997
November 1997
April 1998
March 1999
April 1999
July 1999
July 1999
October 1999
May 2000
August 2000
December 2000
August 2001
August 2001
November 2001
November 2001
November 2001
January 2002
December 2002
September 2004
August 2006
February 2007
October 2007
December 2007
November 2007
October 1985
June 1998
May 2001
August 2003
August 2007
Table of Contents
Location
Brooklyn, NY
Brooklyn, NY
Brooklyn, NY
Brooklyn, NY
Queens, NY
Queens, NY
Queens, NY
Queens, NY
Queens, NY
Queens, NY
Staten Island, NY
Scarsdale, NY
Mamaroneck, NY
Croton-on-Hudson, NY
Larchmont, NY
Nanuet, NY
Great Neck, NY
East Meadow, NY
Commack, NY
Oceanside, NY
Long Beach, NY
Garden City, NY
Huntington, NY
Syosset, NY
West Nyack, NY
Woodmere, NY
Hartsdale, NY
Somers, NY
Port Jefferson Station, NY
White Plains, NY
Hawthorne, NY
Dobbs Ferry, NY
Smithtown, NY
Carmel, NY
Hicksville, NY
New Rochelle, NY
Deer Park, NY
Garnerville, NY
Stamford, CT
Danbury, CT
Stamford, CT
Greenwich, CT
Westport, CT
West Hartford, CT
Princeton, NJ
Matawan, NJ
Marlboro, NJ
Ramsey, NJ
Mahwah, NJ
Springfield, NJ
Address
7118 Third Avenue
439 86th Street
242 Bedford Avenue
147 Greenpoint Avenue
69-33 Austin Street
153-67 A Cross Island Parkway
2856-2861 Steinway Street
8000 Cooper Avenue
99-01 Queens Boulevard
39-01 Queens Blvd
300 West Service Road
696 White Plains Road
124 Palmer Avenue
420 South Riverside Drive
15 Madison Avenue
58 Demarest Mill Road
15 Barstow Road
625 Merrick Avenue
6136 Jericho Turnpike
2909 Lincoln Avenue
265 East Park Avenue
833 Franklin Avenue
350 New York Avenue
49 Ira Road
3656 Palisades Center Drive
158 Irving Street
208 E. Hartsdale Avenue
Somers Commons, 80 Route 6
200 Wilson Street
4 City Center
24 Saw Mill River Road
50 Livingstone Avenue
5 Browns Road
1880 Route 6
100 Duffy Avenue
Trump Plaza, Huguenot Street
455 Commack Avenue
20 W. Ramapo Road
106 Commerce Road
38 Mill Plain Road
1063 Hope Street
6 Liberty Way
427 Post Road, East
65 Memorial Road
301 North Harrison Street
450 Route 34
34 Route 9 North
1100 Route 17 North
7 Leighton Place
215 Morris Avenue
27
Date Opened or Management
Assumed
May 2004
April 2008
Future opening
Future opening
April 1997
June 1998
February 2004
March 2007
June 2007
December 2007
June 1998
October 1995
January 1997
January 1998
December 1998
May 1998
July 1989
January 1999
January 1999
May 1999
July 1999
May 2000
February 2001
March 2001
February 2002
March 2002
September 2004
February 2005
July 2005
September 2005
January 2006
June 2008
December 2007
July 2007
November 2008
March 2008
March 2009
October 2011
Reopened February 2006
January 1998
November 1998
May 1999
January 2002
November 2007
May 1997
April 1998
April 1998
June 1998
June 1998
August 1998
Table of Contents
Location
Colonia, NJ
Somerset, NJ
Hoboken, NJ
West Caldwell, NJ
Jersey City, NJ
Newark, NJ
Ridgewood, NJ
Westwood, NJ
Livingston, NJ
Princeton, NJ
Hoboken, NJ
Englewood, NJ
Clifton, NJ
Montclair, NJ
Butler, NJ
East Brunswick, NJ
Bayonne, NJ
Boston Sports Clubs:
Boston, MA
Boston, MA
Boston, MA
Boston, MA
Boston, MA
Boston, MA
Boston, MA
Allston, MA
Weymouth, MA
Wellesley, MA
Andover, MA
Lynnfield, MA
Lexington, MA
Franklin, MA
Cambridge, MA
West Newton, MA
Waltham, MA
Watertown, MA
Newton, MA
Somerville, MA
Medford, MA
Westborough, MA
Woburn, MA
Providence, RI
Providence, RI
Washington Sports Clubs:
Washington, D.C.
Washington, D.C.
Washington, D.C.
Washington, D.C.
Washington, D.C.
Washington, D.C.
Address
1250 Route 27
120 Cedar Grove Lane
59 Newark Street
913 Bloomfield Avenue
147 Two Harborside Financial Center
1 Gateway Center
129 S. Broad Street
35 Jefferson Avenue
39 W. North Field Rd.
4250 Route 1 North
210 14th Street
34-36 South Dean Street
202 Main Avenue
56 Church Street
1481 Route 23
300 State Route 18
550 Route 440 North
1 Bulfinch Place
201 Brookline Avenue
361 Newbury Street
350 Washington Street
505 Boylston Street
560 Harrison Avenue
695 Atlantic Avenue
15 Gorham Street
553 Washington Street
140 Great Plain Avenue
307 Lowell Street
425 Walnut Street
475 Bedford Avenue
750 Union Street
625 Massachusetts Avenue
1359 Washington Street
840 Winter Street
311 Arsenal Street
135 Wells Avenue
1 Davis Square
70 Station Landing
1500 Union Street
300 Presidential Way
131 Pittman Street
10 Dorrance Street
214 D Street, S.E
1835 Connecticut Avenue, N.W
2251 Wisconsin Avenue, N.W
1211 Connecticut Avenue, N.W
1345 F Street, N.W
5345 Wisconsin Ave., N.W
28
Date Opened or Management
Assumed
August 1998
August 1998
October 1998
April 1999
June 2002
October 2002
June 2003
June 2004
February 2005
April 2005
December 2006
December 2006
March 2007
January 2008
January 2009
March 2009
December 2011
August 1998
June 2000
November 2001
February 2002
January 2006
February 2006
October 2006
July 1997
May 1999
July 2000
July 2000
July 2000
July 2000
July 2000
January 2001
November 2001
November 2002
January 2006
August 2006
December 2007
December 2007
September 2008
December 2008
December 2008
January 2009
January 1980
January 1990
May 1994
July 2000
August 2002
February 2002
Table of Contents
Location
Washington, D.C.
Washington, D.C.
Washington, D.C.
Washington, D.C.
North Bethesda, MD
Germantown, MD
Silver Spring, MD
Bethesda, MD
Alexandria, VA
Fairfax, VA
West Springfield, VA
Clarendon, VA
Philadelphia Sports Clubs:
Philadelphia, PA
Philadelphia, PA
Chalfont, PA
Philadelphia, PA
Ardmore, PA
Radnor, PA
Swiss Sports Clubs:
Basel, Switzerland
Zurich, Switzerland
Basel, Switzerland
Item 3. Legal Proceedings
Address
1990 K Street, N.W
783 Seventh Street, N.W
3222 M Street, N.W
14th Street, N.W
10400 Old Georgetown Road
12623 Wisteria Drive
8506 Fenton Street
6800 Wisconsin Avenue
3654 King Street
11001 Lee Highway
8430 Old Keene Mill
2700 Clarendon Boulevard
220 South 5th Street
2000 Hamilton Street
One Highpoint Drive
1735 Market Street
34 W. Lancaster Avenue
555 East Lancaster Avenue
St. Johanns-Vorstadt 41
Glarnischstrasse 35
Gellerstrasse 235
Date Opened or Management
Assumed
February 2004
October 2004
February 2005
June 2008
June 1998
July 1998
November 2005
November 2007
June 1999
October 1999
September 2000
November 2001
January 1999
July 1999
January 2000
October 2000
March 2002
December 2006
August 1987
August 1987
August 2001
On or about March 1, 2005, in an action styled Sarah Cruz, et al v. Town Sports International, d/b/a New York Sports Club , plaintiffs
commenced a purported class action against TSI, LLC in the Supreme Court, New York County, seeking unpaid wages and alleging that TSI,
LLC violated various overtime provisions of the New York State Labor Law with respect to the payment of wages to certain trainers and
assistant fitness managers. On or about June 18, 2007, the same plaintiffs commenced a second purported class action against TSI, LLC in the
Supreme Court of the State of New York, New York County, seeking unpaid wages and alleging that TSI, LLC violated various wage payment
and overtime provisions of the New York State Labor Law with respect to the payment of wages to all New York purported hourly employees.
On September 17, 2010, TSI, LLC made motions to dismiss the class action allegations of both lawsuits for plaintiffs’ failure to timely file
motions to certify the class actions. The court granted the motions on January 29, 2013, dismissing the class action allegations in both lawsuits.
On September 22, 2009, in an action styled Town Sports International, LLC v. Ajilon Solutions, a division of Ajilon Professional Staffing
LLC (Supreme Court of the State of New York, New York County, 602911-09), TSI, LLC brought an action in the Supreme Court of the State
of New York, New York County, against Ajilon for, among other things, breach of contract seeking, among other things, money damages, in
connection with Ajilon’s failure to design and deliver to TSI, LLC a new sports club enterprise management system known as GIMS.
Subsequently, on October 14, 2009, Ajilon brought a counterclaim against TSI, LLC alleging breach of contract, asserting, among other things,
failure to pay outstanding invoices in the aggregate amount of approximately $2.9 million. Following a jury trial, a jury verdict was rendered
on January 28, 2013, that awarded TSI, LLC damages against Ajilon in the amount of approximately $3.4 million and also awarded Ajilon
damages against TSI, LLC in the amount of approximately $214,000. After the Court granted Ajilon’s motion to set aside the part of the jury
verdict that had rejected the bulk of Ajilon’s counterclaim, the Court increased the award of damages against TSI, LLC from approximately
$214,000 to approximately $2.9 million. The result is a net amount owed to TSI, LLC in the amount of approximately $400,000. TSI, LLC is
considering its legal alternatives, including appealing the Court’s decision.
29
Table of Contents
On February 7, 2007, in an action styled White Plains Plaza Realty, LLC v. TSI, LLC et al ., the landlord of one of TSI, LLC’s former
health and fitness clubs filed a lawsuit in state court against it and two of its health club subsidiaries alleging, among other things, breach of
lease in connection with the decision to close the club located in a building owned by the plaintiff and leased to a subsidiary of TSI, LLC, and
take additional space in the nearby facility leased by another subsidiary of TSI, LLC. The trial court granted the landlord damages against its
tenant in the amount of approximately $700,000, including interest and costs (“Initial Award”). TSI, LLC was held to be jointly liable with the
tenant for the amount of approximately $488,000, under a limited guarantee of the tenant’s lease obligations. The landlord subsequently
appealed the trial court’s award of damages, and on December 21, 2010, the appellate court reversed, in part, the trial court’s decision and
ordered the case remanded to the trial court for an assessment of additional damages, of approximately $750,000 plus interest and costs (the
“Additional Award”). On February 7, 2011, the landlord moved for re-argument of the appellate court’s decision, seeking additional damages
plus attorneys’ fees. On April 8, 2011, the appellate court denied the landlord’s motion. On August 29, 2011, the Additional Award (amounting
to approximately $900,000), was entered against the tenant. TSI, LLC does not believe it is probable that TSI, LLC will be held liable to pay
for any amount of the Additional Award. Separately, TSI, LLC is party to an agreement with a third-party developer, which by its terms
provides indemnification for the full amount of any liability of any nature arising out of the lease described above, including attorneys’ fees
incurred to enforce the indemnity. In connection with the Initial Award (and in furtherance of the indemnification agreement), TSI, LLC and
the developer have entered into an agreement pursuant to which the developer has agreed to pay the amount of the Initial Award in installments
over time. The indemnification agreement also covers the Additional Award. The developer to date has not paid the amount of the Additional
Award to the landlord, and the landlord has commenced a special proceeding in the Supreme Court of the State of New York, Westchester
County, to collect the Additional Award directly from the developer. A motion to dismiss the special proceeding made by the developer was
denied by the court on March 13, 2012. Discovery in the special proceeding is ongoing.
On or about October 4, 2012, in an action styled James Labbe, et al. v. Town Sports International, LLC , plaintiff commenced a purported
class action in New York State court on behalf of personal trainers employed in New York State. Labbe is seeking unpaid wages and damages
from TSI, LLC and alleges violations of various provisions of the New York State labor law with respect to payment of wages and TSI, LLC’s
notification and record-keeping obligations. On December 18, 2012, TSI, LLC filed a motion to stay the class action pending a decision on
class certification in the Cruz case and to dismiss the Labbe action if the Cruz case is certified. On January 29, 2013, Labbe responded to the
motion to stay and filed a cross-motion to consolidate the Labbe case with the Cruz case. These motions have been effectively mooted by the
dismissal of the class claims in Cruz. While it is not possible to estimate the likelihood of an unfavorable outcome or a range of loss in the case
of an unfavorable outcome to TSI, LLC at this time, TSI, LLC intends to contest this case vigorously.
In addition to the litigation discussed above, we are involved in various other lawsuits, claims and proceedings incidental to the ordinary
course of business, including personal injury and employee relations claims. The results of litigation are inherently unpredictable. Any claims
against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and
result in diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot be predicted with certainty.
While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any
reasonably possible loss associated with the resolution of such proceedings is not expected to be material either individually or in the aggregate.
Item 4. Mine Safety Disclosures
Not applicable.
30
Table of Contents
PART II
Item 5.
Price Range of Common Stock
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock currently trades on The NASDAQ Global Market, under the symbol CLUB. The following table sets forth, for each
quarterly period in the last two fiscal years, the high and low sales prices (in dollars per share) of our common stock as quoted or reported on
The NASDAQ Global Market:
Year ended December 31, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter(a)
Year ended December 31, 2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 13.44
$ 13.48
$ 13.88
$ 13.55
$ 5.40
$ 7.84
$ 9.88
$ 9.00
$
7.37
$ 10.63
9.31
$
9.32
$
$
$
$
$
3.59
3.47
6.47
6.40
(a) Pursuant to NASDAQ Exchange rules, the “ex-dividend” date with respect to the $3.00 per share special cash dividend was set as
November 28, 2012. Accordingly, prior to the commencement of trading on November 28, 2012, the Company’s stock price was reduced
by $3.00 to reflect the payment of the cash dividend. The closing price per share on November 27, 2012 and November 28, 2012 was
$12.39 and $9.85, respectively.
Holders
As of February 19, 2013, there were approximately 96 holders of record of our common stock. There are additional holders who are not
“holders of record” but who beneficially own stock through nominee holders such as brokers and benefit plan trustees.
Dividends Policy
Prior to December 11, 2012, we have not paid dividends since we have been a publicly traded company. On November 16, 2012, as a
means of returning value to our shareholders, the board of directors declared a special cash dividend of $3.00 per share to common stock
holders of record as of November 30, 2012, paid on December 11, 2012. The special dividend was funded by borrowings of $60.0 million
under our 2011 Senior Credit Facility, as amended, together with available cash on hand. Actual dividends paid on December 11, 2012 were
$70.3 million with an additional $1.1 million of dividends to be paid as restricted shares vest. The board of directors currently intends to retain
all earnings, if any, to finance the operation and expansion of our business and we currently do not have any immediate plans to pay cash
dividends in the near term. Consequently, stockholders will need to sell shares of our common stock to realize a return on their investment, if
any.
The declaration and payment of dividends to holders of our common stock by us, if any, are subject to the discretion of our board of
directors. Our board of directors will take into account such matters as general economic and business conditions, our strategic plans, our
financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us and our subsidiaries and such
other factors as our board of directors may consider to be relevant. We rely on dividends received from TSI, LLC to generate the funds
31
Table of Contents
necessary to pay dividends on our common stock. The credit agreement of TSI, LLC restricts the ability of TSI, LLC to pay cash dividends to
TSI Holdings in order for TSI Holdings to pay cash dividends other than (a) in an amount up to $25.0 million, subject to pro forma compliance
with a total leverage ratio of no greater than 4.50:1.00 and an interest expense coverage ratio of no less than 2.00:1.00, and (b) an additional
amount based on excess cash flow, such additional amounts subject to pro forma compliance with a total leverage ratio of less than 2.75:1.00,
an interest expense coverage ratio of more than 2.00:1.00 and a minimum liquidity condition of $25.0 million of unrestricted cash and revolver
availability, as well as certain other limitations, and (c) in an amount up to the lesser of $20.0 million or an amount based on equity proceeds
received by TSI Holdings and contributed to TSI, LLC net of dividends, investments and prepayments of unsecured debt paid from such equity
proceeds, subject to certain other limitations.
Issuer Purchases of Equity Securities
We did not purchase any equity securities during the fourth quarter ended December 31, 2012.
Recent Sales of Unregistered Securities
We did not sell any securities during the year ended December 31, 2012 that were not registered under the Securities Act of 1933, as
amended.
32
Table of Contents
Stock Performance Graph
The graph depicted below compares the annual percentage change in our cumulative total stockholder return with the cumulative total
return of the Russell 2000 and the NASDAQ composite indices.
* $100 invested on 12/31/07 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Town Sports International Holdings, Inc
NASDAQ Composite
Russell 2000
2007
$ 100.00
$ 100.00
$ 100.00
2008
$ 33.37
$ 59.03
$ 66.21
2009
$ 24.37
$ 82.25
$ 84.20
Notes :
(1) The graph covers the period from December 31, 2007 to December 31, 2012.
December 31,
2011
2010
42.47 $
$
76.88
97.32 $
98.63
$
$ 106.82 $ 102.36
2012
$ 145.45
$ 110.78
$ 119.09
(2) The graph assumes that $100 was invested at the market close on December 31, 2007 in our common stock, in the Russell 2000 and in
the NASDAQ composite indexes and that all dividends were reinvested.
(3) A special cash dividend of $3.00 per share of common stock was declared by our board of directors on November 16, 2012 to
shareholders of record on November 30, 2012, paid on December 11, 2012.
(4) Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
(5) We include a comparison against the Russell 2000 because there is no published industry or line-of-business index for our industry and
we do not have a readily definable peer group that is publicly traded.
33
Table of Contents
Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Annual Report on Form 10-K or future filings
made by the Company under those statutes, the Stock Performance Graph is not deemed filed with the Securities and Exchange Commission, is
not deemed soliciting material and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made
by the Company under those statutes, except to the extent that the Company specifically incorporates such information by reference into a
previous or future filing, or specifically requests that such information be treated as soliciting material, in each case under those statutes.
Item 6.
Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(In thousands, except share, per share, club and membership data)
The selected consolidated balance sheet data as of December 31, 2012 and 2011 and the selected consolidated statement of operations and
cash flow data for the years ended December 31, 2012, 2011 and 2010 have been derived from our audited consolidated financial statements
included elsewhere herein. The selected consolidated balance sheet data as of December 31, 2010, 2009 and 2008 and the selected consolidated
statement of operations and cash flow data for the years ended December 31, 2009 and 2008 have been derived from our audited consolidated
financial statements not included herein. Other data and club and membership data for all periods presented have been derived from our
unaudited books and records. Our historical results are not necessarily indicative of results for any future period. You should read these
selected consolidated financial and other data, together with the accompanying notes, in conjunction with the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section of this Annual Report and our consolidated financial statements and the
related notes appearing at the end of this Annual Report.
2012
2011
2010
2009
2008
Year Ended December 31,
$ 478,981
$ 466,941
$ 462,387
$ 485,392
$ 506,709
Statement of Operations Data:
Revenues
Operating expenses:
Payroll and related(1)
Club operating
General and administrative
Depreciation and amortization
Impairment of fixed assets
Impairment of internal-use software
Goodwill impairment(2)
Operating income
Loss on extinguishment of debt(3)
Interest expense, net of interest income
Equity in the earnings of investees and rental income
Net income (loss) before provision (benefit) for
corporate income taxes
Provision (benefit) for corporate income taxes(4)
181,632
178,950
24,139
49,391
3,436
—
—
41,433
1,010
24,597
(2,461)
18,287
6,321
177,528
176,463
25,799
51,536
—
—
—
35,615
4,865
24,127
(2,391)
9,014
2,699
Net income (loss)
$
11,966
$
6,315
Earnings (loss) per weighted average number of
shares:
Basic
Diluted
Dividends declared per common share(5)
$
$
$
0.51
0.50
3.00
$
$
$
0.28
0.27
—
34
185,583
174,135
28,773
52,202
3,254
—
—
193,891
178,854
31,587
56,533
6,708
10,194
—
18,440
—
21,013
(2,139 )
7,625
—
20,969
(1,876)
(434 )
(144 )
(11,468)
(5,800)
193,580
172,409
33,952
52,475
3,867
—
17,609
32,817
—
23,583
(2,307)
11,541
9,204
(290 ) $
(5,668)
$
2,337
(0.01 ) $
(0.01 ) $
$
—
(0.25)
(0.25)
—
$
$
$
0.09
0.09
—
$
$
$
$
Table of Contents
2012
2011
2010
As of December 31,
2009
2008
Balance Sheet Data:
Cash and cash equivalents
Working capital deficit(6)
Total assets
Long-term debt, including current installments
Total stockholders’ (deficit) equity
Net debt(7)
$
$
37,758
(7,822)
403,910
310,339
(55,496)
277,985
$
47,880
(18,117)
449,542
288,994
354
243,870
$
38,803
(13,111 )
464,166
316,513
(6,945 )
277,710
10,758
(36,747)
467,466
318,363
(8,233)
307,605
$
10,399
(56,333)
511,638
338,010
772
327,611
Cash Flow Data:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Other Data:
Non-cash rental expense, net of non-cash
rental income
Non-cash share-based compensation expense
Club and Membership Data:
New clubs opened
Clubs closed or relocated
Wholly-owned clubs operated at end of period
Total clubs operated at end of period(8)
Total members at end of period(9)
Restricted members at end of period(10)
Comparable club revenue increase
(decrease)(11)
Revenue per weighted average club (12)
Average revenue per member(13)
Average joining fees collected per
member(14)
Annual attrition(15)
2012
2011
Year Ended December 31,
2010
2009
2008
$
60,053
(22,490)
(47,722)
$
74,885
(30,907)
(35,349)
$
51,238
(22,035)
(1,765)
$
76,241
(49,277)
(26,763)
$
95,622
(95,108)
4,196
(4,037)
1,306
(3,663)
1,412
(5,552)
1,336
(2,494)
1,704
(411)
1,268
2012
2011
Year Ended December 31,
2010
2009
—
—
158
160
510,000
38,000
2
(2)
158
160
523,000
38,000
—
(1)
158
160
493,000
17,000
4
(9)
159
161
486,000
—
2008
9
(4)
164
166
510,000
—
$
$
$
1.6%
3,032
922
57
41.0%
$
$
$
1.8%
2,934
915
55
39.9%
$
$
$
(4.3)%
2,881
947
37
41.9%
$
$
$
(5.6)%
2,957
969
19
45.2%
$
$
$
2.2%
3,142
990
45
40.2%
(1)
In the year ended December 31, 2009, Payroll and related includes a correction of an accounting error of $751 related to deferred
membership costs which was previously disclosed in the Company’s 2010 Annual Report. See Note 2 — Correction of Accounting
Errors to the Company’s consolidated financial statements in the 2010 Annual Report for further details.
(2) Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value
exceeds the fair value, goodwill is considered impaired. The amount of the impairment loss is measured as the difference between the
carrying value and the implied fair value of goodwill, which is determined based on purchase price allocation.
(a) We performed an interim impairment test as of December 31, 2008. As a result of the test, it was determined that all of the
goodwill in our Boston Sports Clubs region, amounting to $15,766, and goodwill of $1,843 at two of our outlier clubs that did not
benefit from being part of a regional cluster was impaired. A deferred tax benefit of $1,755 was recorded in connection with these
impairment charges.
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Table of Contents
(3) The $4,865 loss on extinguishment of debt recorded for the year ended December 31, 2011 resulted from the debt refinancing on May 11,
2011. The proceeds from the 2011 Senior Credit Facility were used to repay the remaining outstanding principal amount of the 2007
Senior Credit Facility of $164,000 and the remaining outstanding principal amount of the Senior Discount Notes of $138,450. We
incurred $2,538 of call premium on the Senior Discount Notes together with the write-off of $2,327 of net deferred financing costs
related to the debt extinguishment.
The $1,010 loss on extinguishment of debt recorded for the year ended December 31, 2012 is comprised of a $464 write-off of net
deferred financing costs and debt discount related to the August 22, 2012 debt repricing and a write-off of $546 of net deferred financing
costs and debt discount in connection with the August 28, 2012 voluntary prepayment of $15.0 million on our term loan facility.
(4) Corporate income taxes for the year ended December 31, 2012 and 2011 includes income tax benefits totaling $483 and $343,
respectively, related to the correction of accounting errors. See Note 13 — Corporate Income Taxes to the Company’s consolidated
financial statements in this Annual Report for further details.
(5)
In the year ended December 31, 2012, the board of directors of the Company declared a special cash dividend of $3.00 per share, payable
on December 11, 2012 to common stock holders of record at the close of business on November 30, 2012. The aggregate amount of the
dividends paid totaled $70,296 with another $1,104 payable as restricted shares vest.
(6) The working capital deficit as of December 31, 2011 and 2010 reflects a revision to reclassify a portion of deferred tax assets from
noncurrent to current assets of $20,218 and $9,776, respectively. Refer to Note 2 — “Correction of Accounting Errors” in the Notes to
Consolidated Financial Statements for further details on the reclassifications as of December 31, 2011 and 2010. The working capital
deficit as of December 31, 2009 and 2008 reflect conforming reclassifications of $9,874 and $10,878, respectively.
(7) Net debt represents the total principal balance of long-term debt outstanding, net of cash and cash equivalents.
(8)
Includes wholly-owned and partly-owned clubs. In addition, in 2008 through 2012 we managed between three to four university fitness
clubs in which we did not have an equity interest.
(9) Represents members at wholly-owned and partly-owned clubs.
(10) Restricted members include students, teachers and first responders. This membership allows for club usage at restricted times, at a
discount to other memberships offered.
(11) Total revenue for a club is included in comparable club revenue increase (decrease) beginning on the first day of the thirteenth full
calendar month of the club’s operation.
(12) Revenue per weighted average club is calculated as total revenue divided by the product of the total number of clubs and their weighted
average months in operation as a percentage of the period.
(13) Average revenue per member is total revenue from wholly-owned clubs for the period divided by the average number of memberships
from wholly-owned clubs for the period, including restricted memberships, summer student and summer pool memberships, where
average number of memberships for the period is derived by dividing the sum of the total memberships at the end of each month during
the period by the total number of months in the period.
(14) Average joining fees collected per member is calculated as total initiation and processing fees divided by the number of new members,
excluding pre-sold, summer student and summer pool memberships and including restricted memberships that began in April 2010,
during each respective year.
(15) Annual attrition is calculated as total member losses for the year divided by the average monthly member count over the year excluding
pre-sold, summer student and summer pool memberships and including our restricted memberships that began in April 2010, during each
respective year.
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction
with the “Selected Consolidated Financial and Other Data” section of this Annual Report and our consolidated financial statements and the
related notes appearing at the end of this Annual Report. In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions (see “FORWARD-LOOKING STATEMENTS” discussion). Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not
limited to, those set forth in “Item 1A. Risk Factors” of this Annual Report.
Overview
We are the largest owner and operator of fitness clubs in the Northeast and Mid-Atlantic regions of the U.S. As of December 31, 2012,
we operated 160 clubs that collectively served approximately 510,000 members. We develop clusters of clubs to serve densely populated major
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. Our
members generally have annual income levels of between $50,000 and $150,000. We believe that this “mid-value” segment of the market is not
only the broadest but also the segment with the greatest growth opportunities.
Our goal is to be the most recognized health club network in each of the four major metropolitan regions that we serve. We believe that
our strategy of clustering clubs provides significant benefits to our members and allows us to achieve strategic operating advantages. In each of
our markets, 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. Capitalizing on this clustering of clubs, as of
December 31, 2012, approximately 45% of our members participated in our Passport Membership which allows unlimited access to all of our
clubs in our clusters within one, or all of, our regions, respectively, for a higher monthly membership dues, while approximately 27% of our
members participate in our Core membership, which allows unlimited access to the member’s home club. Approximately 8% of our members
participate in our Restricted Membership which is a favorably-priced, restricted-use month-to-month only membership. Approximately 20% of
our members participate in our previously offered Gold membership which allows unlimited access to a designated club and access to all other
clubs during off-peak hours.
We have executed our clustering strategy successfully in the New York region, our most mature region, through the network of fitness
clubs we operate under our New York Sports Clubs brand name. We are the largest fitness club operator in Manhattan with 37 locations and
operated a total of 108 clubs under the New York Sports Clubs brand name within a 120-mile radius of New York City as of December 31,
2012. As of December 31, 2012, we owned and operated 25 clubs in the Boston region under our Boston Sports Clubs brand name, 18 clubs
(two of which are partly-owned) in the Washington, D.C. region under our Washington Sports Clubs brand name, six clubs in the Philadelphia
region under our Philadelphia Sports Clubs brand name and three clubs in Switzerland. We employ localized brand names for our clubs to
create an image and atmosphere consistent with the local community and to foster recognition as a local network of quality fitness clubs rather
than a national chain.
Revenue and Operating Expenses
We have two principal sources of revenue:
• Membership revenue: Our largest sources of revenue are dues and joining fees paid by our members. In addition, we collect usage
fees on a per visit basis subject to peak and off-peak hourly restrictions depending on membership type. In May 2011, we
implemented a combined rate lock guarantee and maintenance fee currently at $39.00, to which all members agree at the time of
enrollment. This fee is
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collected annually in January for all members joining after May 2011 and is recognized into membership revenue over the subsequent
12 month period following collection. These dues and fees comprised 78.8% of our total revenue for the year ended December 31,
2012. We recognize revenue from membership dues in the month when the services are rendered. Approximately 97% of our
members pay their monthly dues by Electronic Funds Transfer, or EFT, while the balance is paid annually in advance. We recognize
revenue from joining fees over the estimated average membership life.
• Ancillary club revenue: For the year ended December 31, 2012, we generated 13.7% of our revenue from personal training and
6.3% of our revenue from other ancillary programs and services consisting of programming for children, signature classes, Small
Group Training and other member activities, as well as sales of miscellaneous sports products.
We also receive revenue (approximately 1.2% of our total revenue for the year ended December 31, 2012) from the rental of space in our
facilities to operators who offer wellness-related offerings, such as physical therapy and juice bars. In addition, we sell in-club advertising and
sponsorships and generate management fees from certain club facilities that we do not wholly own. We also collect laundry related revenue for
the laundering of towels for third parties. We refer to these revenues as fees and other revenue.
Our performance is dependent on our ability to continually attract and retain members at our clubs. We experience attrition at our clubs
and must attract new members in order to maintain our membership and revenue levels. In the years ended December 31 2012 and 2011, our
annual attrition rate, including restricted members, was 41.0% and 39.9%, respectively. In 2009 and into 2010, our annual attrition rates were at
higher levels at 45.2% and 41.9%, respectively, partially as a result of the recessionary economy. In 2011, attrition showed modest
improvement over 2010 and was similar to pre-recessionary 2008 levels due to an improved member experience, a more stabilized economy
and increased retention programs.
Our operating and selling expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other
salary and related expenses, occupancy costs, including most 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, 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 consolidated statement of operations and are not included in general and
administrative expenses.
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.
Our primary capital expenditures relate to the construction or acquisition of new club facilities and upgrading and expanding 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 3.0% to 5.0% of projected annual revenue. Expansions of certain facilities are also performed
from time to time, when incremental space becomes available on acceptable terms and utilization and demand for the facility dictate. In this
regard, facility remodeling is also considered where appropriate.
From 2011 to 2012, operating income increased 16.3% and from 2010 to 2011 operating income increased 93.1%. In 2012, we recorded
fixed asset impairment charges totaling $3.4 million, of which $3.2 million related to write-offs of fixed assets for four clubs that sustained
damages from Hurricane Sandy during the fourth quarter
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of 2012. In 2011, we did not incur any fixed asset impairment charges and in 2010, we recorded fixed asset impairment charges of $1.6 million
related to three underperforming clubs and $1.7 million related to the planned closure of a club prior to its lease expiration date.
Operating income
Increase over prior period
Net income (loss)
Increase over prior period
Cash flows provided by operating activities
(Decrease) increase over prior period
2012
Year Ended December 31,
2011
($ amounts in thousands)
$ 41,433
16.3%
$ 11,966
89.5%
$ 60,053
(19.8)%
$
$
$
35,615
93.1%
6,315
2,277.6%
74,885
46.2%
2010
$ 18,440
$
141.8%
(290)
94.9%
$ 51,238
(32.8)%
Historically, we have focused on building or acquiring clubs in areas where we believe the market is underserved or where new clubs are
intended to replace existing clubs at their lease expiration. Based on our experience, a new club tends to experience a significant increase in
revenues during its first three years of operation as it reaches maturity. Because there is relatively little incremental cost associated with such
increasing revenue, there is a greater proportionate increase in profitability. We believe that the revenues and operating income of our immature
clubs will increase as they mature. In contrast, operating income margins may be negatively impacted in the near term by our planned new club
openings. In most cases, we are able to transfer many of the members of closed clubs to other clubs thereby enhancing overall profitability. We
will continue to pursue club acquisition opportunities as well as assess club relocations and closures of underperforming clubs. We currently
are targeting to open or acquire seven to nine clubs in 2013 and close or relocate a total of three clubs.
As of December 31, 2012, 158 of our fitness clubs were wholly-owned by us and our consolidated financial statements include the
operating results of all such clubs. Two locations in Washington, D.C. were partly-owned by us, with our profit sharing percentages
approximating 20% (after priority distributions) and 45%, respectively, and are treated as unconsolidated affiliates for which we apply the
equity method of accounting. In addition, we provide management services at three fitness clubs located in colleges and universities in which
we have no equity interest.
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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 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.
Comparable Club Revenue
Increase (Decrease)
Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012(a)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(6.0 )%
(4.2 )%
(5.0 )%
(1.7 )%
(0.5 )%
1.5 %
3.0 %
3.4 %
4.5 %
2.1 %
1.0 %
(1.1 )%
Full-Year
(4.3)%
1.8%
1.6%
(a) Comparable club revenue for the third quarter of 2012 excludes $1.2 million of additional fees and other revenue realized in connection
with the termination of a long-term marketing arrangement with a third party in-club advertiser.
Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary
revenue increases (decreases).
Comparable club revenue generally trended downward from the first quarter of 2007 and through 2009; however, beginning in the first
quarter of 2010 and through 2011, the decreases began to improve modestly and the trend had turned positive in the second quarter of 2011
with full-year 2011 comparable club revenue posting gains of 1.8%. Comparable club revenue continued to remain positive in 2012 with
full-year comparable club revenue of 1.6%, however in the fourth quarter of 2012, we experienced a comparable club revenue decline of 1.1%.
The decline in the fourth quarter in part was due to the impact of Hurricane Sandy on our business, including decreases in personal training and
ancillary revenues and a net loss of members. In the year ended December 31, 2012, the membership base at our comparable clubs decreased
2.4% as compared to 2011 while 2011 comparable club memberships increased 4.9% compared to 2010. We experienced an overall member
loss of 12,000 during the fourth quarter of 2012, with full-year 2012 member loss of 13,000, representing a 2.5% decline in members.
Historical Club Count
Wholly-owned clubs operated at beginning of period
New clubs opened
Clubs closed or relocated
Wholly-owned clubs operated at end of period
Partly-owned clubs operated at end of period
Total clubs operated at end of period(1)
Year Ended
December 31,
2012
158
—
—
2011
158
2
(2)
158
2
158
2
160
160
40
2010
159
—
(1)
158
2
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(1)
Includes wholly-owned and partly-owned clubs. In addition, during these periods, we managed between three to four university fitness
clubs in which we did not have an equity interest.
Results of Operations
The following table sets forth certain operating data as a percentage of revenue for the periods indicated:
Revenues
Operating expenses:
Payroll and related
Club operating
General and administrative
Depreciation and amortization
Impairment of fixed assets
Operating income
Loss on extinguishment of debt
Interest expense
Equity in the earnings of investees and rental income
Income (loss) before provision (benefit) for corporate income taxes
Provision (benefit) for corporate income taxes
Net income (loss)
Year Ended December 31,
2012
100.0 %
2011
100.0%
2010
100.0%
37.9
37.4
5.0
10.3
0.7
8.7
0.2
5.2
(0.5 )
3.8
1.3
2.5 %
38.0
37.8
5.6
11.0
—
7.6
1.0
5.2
(0.5)
1.9
0.6
40.1
37.7
6.2
11.3
0.7
4.0
—
4.6
(0.5)
(0.1)
—
1.3%
(0.1)%
Year ended December 31, 2012 compared to year ended December 31, 2011
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
Membership dues
Joining fees
Membership revenue
Personal training revenue
Other ancillary club revenue
Ancillary club revenue
Fees and other revenue
Total revenue
Year Ended December 31,
2012
Revenue
% Revenue
Revenue
2011
% Revenue
% Variance
$ 366,044
11,595
377,639
65,641
29,897
95,538
5,804
76.4%
2.4%
78.8%
13.7%
6.3%
20.0%
1.2%
$ 364,536
6,824
371,360
62,394
28,297
90,691
4,890
78.1%
1.4%
79.5%
13.4%
6.1%
19.5%
1.0%
$ 478,981
100.0%
$ 466,941
100.0%
0.4%
69.9%
1.7%
5.2%
5.7%
5.3%
18.7%
2.6%
Total revenue increased 2.6% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Revenue for 2012
included a benefit from an acceleration of in-club advertising revenue which added approximately $1.2 million to fees and other revenue. For
the year ended December 31, 2012, revenue increased $4.4 million at the two clubs opened or acquired subsequent to December 31, 2010 (both
opened in the fourth quarter of 2011) and $7.1 million at our clubs opened or acquired prior to December 31, 2010. Revenue decreased
$640,000 at the two clubs that were closed subsequent to December 31, 2010.
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Revenue for 2012 was impacted by the effects of Hurricane Sandy on our business during the fourth quarter of 2012 as a result of lost
operating days. At the height of the storm, 131 of our 160 clubs were closed with 16 clubs that remained closed for over a week and two clubs
which still remain closed. While it is very difficult to estimate the impact of the storm given the prolonged disruption in most of our markets,
we estimate that revenue for 2012 was negatively impacted by approximately $1.0 million as a result of the hurricane.
Personal training revenue increased $3.2 million in the year ended December 31, 2012 compared to the year ended December 31, 2011.
This increase was primarily due to increased member interest in personal training sessions, increases in products offered and improvements in
the selling process.
Joining fees revenue in 2012 increased $4.8 million compared to 2011 due to the increasing rate of joining fees collected over the past
four years. Joining fees collected in the year ended December 31, 2012, 2011, 2010 and 2009 were $11.4 million, $12.9 million, $7.9 million,
and $4.0 million, respectively. Joining fees are recognized into revenue over the estimated average membership life
Fees and other revenue increased $914,000 in the year ended December 31, 2012 compared to the year ended December 31, 2011,
primarily due to an increase in in-club advertising revenue related to the acceleration of deferred revenue recognized on a terminated
arrangement.
Comparable club revenue increased 1.6% for the year ended December 31, 2012, excluding the $1.2 million accelerated in-club
advertising revenue recognized in the third quarter of 2012. There was a 0.8% increase due to an increase in average membership and a 1.8%
increase due to a collective increase in ancillary club revenue, initiation fees and other revenue. These increases were partially offset by a 1.0%
decrease in the average price of our dues and fees.
Operating Expenses
Operating expenses (in thousands) were comprised of the following for the periods indicated:
Payroll and related
Club operating
General and administrative
Depreciation and amortization
Impairment of fixed assets
Operating expenses
Year Ended December 31,
2012
2011
$
181,632
178,950
24,139
49,391
3,436
177,528
176,463
25,799
51,536
—
$ Variance
$
4,104
2,487
(1,660)
(2,145)
3,436
437,548
$
431,326
$
6,222
$
$
% Variance
2.3%
1.4%
(6.4)%
(4.2)%
100.0%
1.4%
Operating expenses for the year ended December 31, 2012 were impacted by a 0.5% increase in the total months of club operation from
1,886 to 1,896, the effects of which are included in the additional descriptions of changes in operating expenses below.
Payroll and related . This change was primarily impacted by the following factors:
• A $2.5 million payroll bonus payment was made during the fourth quarter of 2012 in connection with the special dividend payment in
December 2012. Certain option holders with vested in-the-money options as of December 11, 2012 were paid a dividend equivalent
cash bonus of $3.00 per option. No such charges were recorded in the year ended December 31, 2011.
• Payroll overhead costs increased by $1.1 million for the year ended December 31, 2012 compared to the year ended December 31,
2011. There was a $1.3 million increase in overhead costs primarily attributable to increases in full-time employment levels and
higher overhead salaries resulting from the hiring of several new senior management and corporate sales personnel.
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As a percentage of total revenue, payroll and related expenses decreased to 37.9% in the year ended December 31, 2012 from 38.0% in
the year ended December 31, 2011.
Club operating . This change was primarily impacted by the following factors:
• Rent and occupancy expenses increased $3.5 million in the year ended December 31, 2012 compared to the year ended December 31,
2011. Rent and occupancy expenses increased $565,000 at our two clubs that opened after December 31, 2010 and increased $2.7
million at our clubs that opened prior to December 31, 2010. Rent and occupancy expenses decreased $212,000 related to two clubs
that were closed after December 31, 2010, excluding $275,000 received in 2011 as an incentive payment from a landlord in
connection with a lease termination.
• The increase in rent and occupancy expenses were partially offset by lower credit and debit card transaction fees of $1.0 million
compared to the prior year due to changes to laws affecting the debit card processing fees that banks can charge.
As a percentage of total revenue, club operating expenses decreased slightly to 37.4% in the year ended December 31, 2012 from 37.8%
in the year ended December 31, 2011.
General and administrative . The decrease in general and administrative expenses for the year ended December 31, 2012 when
compared to the year ended December 31, 2011 was principally attributable to the cost reductions within various general and administrative
expense accounts including a reduction in general liability insurance, consulting and legal expenses, and office related procurement costs. As a
percentage of total revenue, general and administrative expenses decreased to 5.0% in the year ended December 31, 2012 from 5.6% in the year
ended December 31, 2011.
Depreciation and amortization . In the year ended December 31, 2012 compared to the year ended December 31, 2011, depreciation
and amortization decreased due to a decline in our depreciable fixed asset base. Contributing to this is our limited number of club openings
over the past five years. The Company has opened only two clubs over the past three years and the asset base at the remaining 158 clubs is
declining as certain clubs move beyond their original lease terms, and other fixed assets become fully amortized. As a percentage of total
revenue, depreciation and amortization expenses decreased to 10.3% in the year ended December 31, 2012 from 11.0% in year ended
December 31, 2011.
Impairment of fixed assets . In the year ended December 31, 2012, we recorded fixed asset impairment charges totaling $3.4 million,
comprised of a $239,000 impairment charge related to one underperforming club and $3.2 million of additional impairments related to the
write-down of fixed assets at four clubs that sustained severe damages from Hurricane Sandy. There were no fixed asset impairment charges in
the year ended December 31, 2011.
Loss on Extinguishment of Debt
During the year ended December 31, 2012, loss on extinguishment of debt was $1.0 million. The loss on extinguishment of debt was
comprised of a $464,000 write-off of net deferred financing costs and debt discount related to the August 22, 2012 debt repricing and a
write-off of $546,000 of net deferred financing costs and debt discount in connection with the August 28, 2012 voluntary prepayment of $15.0
million on our term loan facility.
During the year ended December 31, 2011, loss on extinguishment of debt was $4.9 million. The proceeds from the 2011 Senior Credit
Facility obtained on May 11, 2011 were used to repay the remaining outstanding principal amount of the 2007 Senior Credit Facility of $164.0
million and the remaining outstanding principal amount of the Senior Discount Notes of $138.45 million. We incurred $2.5 million of call
premium on the Senior Discount Notes together with the write-off of $2.4 million of net deferred financing costs related to the debt
extinguishment.
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Interest Expense
In the year ended December 31, 2012, interest expense was $24.6 million compared to $24.3 million in the year ended December 31,
2011. In 2012, we incurred additional interest expense of $3.0 million related to the repricing amendment in August 2012 and a further
amendment in November 2012 to allow for an additional borrowing under our 2011 Senior Credit Facility. This increase in interest expense
was partially offset by interest savings recognized from the lower interest rates resulting from the May 11, 2011 refinancing as well as a further
interest rate reduction in August 2012 combined with a lower average principal balance of debt outstanding for the majority of 2012.
Provision for Corporate Income Taxes
We recorded a provision for corporate income taxes of $6.3 million for the year ended December 31, 2012 compared to a provision of
$2.7 million for the year ended December 31, 2011. Our effective tax rate was 35% in the year ended December 31, 2012 compared to 30% in
the year ended December 31, 2011. The expected benefits from our captive insurance arrangement decreased our effective tax rate on our
pre-tax income in the year ended December 31, 2012 and 2011.
The results for the year ended December 31, 2012 and December 31, 2011 include error corrections that resulted in an increase in benefit
for corporate income taxes and a related increase in deferred tax assets in our consolidated statement of operations and consolidated balance
sheet, respectively. In the fourth quarter of 2012, we identified corrections related to temporary differences in fixed assets, intangible assets and
deferred revenue resulting in the recognition of an income tax benefit of $483,000. In the fourth quarter of 2011, we identified adjustments
related to the tax effect of net operating loss carry-forwards resulting in the recognition of an income tax benefit of $343,000. We do not
believe that these error corrections are material to the current or prior reporting periods.
As of December 31, 2012, we had net deferred tax assets of $34.2 million. Quarterly, we assess the weight of all available positive and
negative evidence to determine whether the net deferred tax asset is realizable. In 2011, the Company returned to profitability after sustaining
losses in 2009 and 2010. We have historically been a taxpayer and are in a three year cumulative income position as of December 31, 2012. In
addition, based on recent trends, we project future income sufficient to realize the deferred tax assets during the periods when the temporary tax
deductible differences reverse. With the exception of the deductions related to our captive insurance company for state taxes, state taxable
income has been and is projected to be the same as federal taxable income. Because we expect the captive insurance company to be
discontinued in 2014, the assessment of the realizability of the state deferred tax assets is consistent with the federal tax analysis above. We
have federal and state net operating loss carry-forwards, which we believe will be realized within the available carry-forward period, except for
a small net operating loss carry-forward in Rhode Island due to the short carry-forward period in that state. Accordingly, we concluded that it is
more likely than not that the deferred tax assets will be realized. If actual results do not meet our forecasts and we incur lower than expected
income or losses in 2013 and beyond, then a valuation allowance against the deferred tax assets may be required in the future. In 2013, we
expect our effective tax rate to approximate 36% to 39% and will be favorably impacted from tax benefits derived from the captive insurance
arrangement.
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Year ended December 31, 2011 compared to year ended December 31, 2010
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
Membership dues
Joining fees
Membership revenue
Personal training revenue
Other ancillary club revenue
Ancillary club revenue
Fees and other revenue
Total revenue
Year Ended December 31,
2011
Revenue
% Revenue
Revenue
2010
% Revenue
% Variance
$ 364,536
6,824
371,360
62,394
28,297
90,691
4,890
78.1%
1.4%
79.5%
13.4%
6.1%
19.5%
1.0%
$ 365,100
6,967
372,067
60,875
24,684
85,559
4,761
79.0%
1.5%
80.5%
13.2%
5.3%
18.5%
1.0%
$ 466,941
100.0%
$ 462,387
100.0%
(0.2)%
(2.1)%
(0.2)%
2.5%
14.6%
6.0%
2.7%
1.0%
Total revenue increased 1.0% in the year ended December 31, 2011 compared to the year ended December 31, 2010. For the year ended
December 31, 2011 compared to the year ended December 31, 2010, revenues increased $684,000 at the two clubs opened or acquired
subsequent to December 31, 2009 (both opened in the fourth quarter of 2011) and $8.4 million at our clubs opened or acquired prior to
December 31, 2009. Revenue decreased $2.4 million at the three clubs that were closed subsequent to December 31, 2009.
Personal training revenue increased $3.6 million in the year ended December 31, 2011 compared to the year ended December 31, 2010,
excluding $2.1 million related to unused and expired personal training sessions recognized in the year ended December 31, 2010 that related to
previous years. This increase was primarily due to increased member interest in personal training sessions, increases in products offered and
improvements in the selling process.
Joining fees collected in the year ended December 31, 2011 were $12.9 million compared to $7.9 million in the year ended December 31,
2010. However, because joining fees are recognized over estimated average membership life, joining fees revenue decreased due to the decline
in joining fees collected in 2009 and 2010 relative to fees collected in prior periods.
Comparable club revenue increased 1.8% for the year ended December 31, 2011 compared to the year ended December 31, 2010. There
was a 2.8% increase due to an increase in membership and a 1.7% increase due to a collective increase in ancillary club revenue, initiation fees
and other revenue. These increases were partially offset by a 2.7% decrease in the price of our dues and fees.
Operating Expenses
Operating expenses (in thousands) were comprised of the following for the periods indicated:
Payroll and related
Club operating
General and administrative
Depreciation and amortization
Impairment of fixed assets
Operating expenses
Year Ended December 31,
2011
2010
$
177,528
176,463
25,799
51,536
—
185,583
174,135
28,773
52,202
3,254
$ Variance
$
(8,055)
2,328
(2,974)
(666)
(3,254)
431,326
$
443,947
$
(12,621)
$
$
% Variance
(4.3)%
1.3%
(10.3)%
(1.3)%
(100.0)%
(2.8)%
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Operating expenses for the year ended December 31, 2011 were impacted by a 0.8% decrease in the total months of club operation from
1,902 to 1,886, the effects of which are included in the additional descriptions of changes in operating expenses below.
Payroll and related. This change was primarily impacted by the following factors:
• Payroll expense related to club staffing, excluding membership sales consultants, decreased $5.9 million from staffing efficiencies
realized in the year ended December 31, 2011 compared to 2010.
• Payroll expense related to our membership sales consultants decreased $2.9 million. The amount of membership sales consultant
commissions deferred over the prior two years had 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 sales consultant
commissions expensed in the year ended December 31, 2011, relating to deferrals established in prior periods. In the second quarter
of 2010, we began increasing joining fees collected and, as a result, in the third and fourth quarters of 2011, we began to see the effect
of the increased joining fees as an increase in membership sales consultant payroll expense. Also contributing to this decrease was an
increase in the amount of payroll costs deferred in the year ended December 31, 2011 compared to the year ended December 31, 2010
with the increase in joining fees collected.
• Payroll expense related to severance decreased $1.0 million in connection with employee reductions in the year ended December 31,
2010.
• Payroll expense related to our management incentive bonuses was $535,000 higher in the year ended December 31, 2011 compared to
2010. In 2011, the Company’s results exceeded bonus targets by a greater amount than in 2010, resulting in a higher amount of
incentive compensation paid to management in 2011 when compared to 2010.
• Personal training payroll expense increased $1.5 million due to the increase in personal training revenue as well as an increase in
payroll related to personal training promotions geared at attracting additional personal training clientele.
As a percentage of total revenue, payroll and related expenses decreased to 38.0% in the year ended December 31, 2011 from 40.1% in
the year ended December 31, 2010.
Club operating. This change was primarily impacted by the following factors:
• Rent and occupancy expenses increased $3.5 million in the year ended December 31, 2011 compared to the year ended December 31,
2010. Rent and occupancy expenses increased $853,000 at our two clubs that opened after January 1, 2010 and decreased $758,000 at
our three clubs that were closed after January 1, 2010. Offsetting these decreases was an increase of $3.3 million at our clubs that
opened prior to January 1, 2010.
• Utilities decreased $1.1 million in the year ended December 31, 2011 compared with December 31, 2010 due to better energy
management and lower energy supply rates.
As a percentage of total revenue, club operating expenses increased slightly to 37.8% in the year ended December 31, 2011 from 37.7%
in the year ended December 31, 2010.
General and administrative. The decrease in general and administrative expenses for the year ended December 31, 2011 when
compared to the year ended December 31, 2010 was principally attributable to a decrease in general liability insurance expense due to a further
reduction in claims activity and a related reduction in claims reserves as well as decreases in legal and related fees for various litigations.
As a percentage of total revenue, general and administrative expenses decreased to 5.6% in the year ended December 31, 2011 from 6.2%
in the year ended December 31, 2010.
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Depreciation and amortization. In the year ended December 31, 2011 compared to the year ended December 31, 2010, depreciation
and amortization decreased due to the closing of three clubs subsequent to December 31, 2009 as well as the Company’s decrease in capital
expenditures over the past few years.
As a percentage of total revenue, depreciation and amortization expenses decreased to 11.0% in the year ended December 31, 2011 from
11.3% in year ended December 31, 2010.
Impairment of fixed assets. In the year ended December 31, 2010, we recorded fixed asset impairment charges totaling $3.3 million,
representing $1.6 million of fixed assets at three underperforming clubs and $1.7 million related to the planned closure of one club prior to the
lease expiration date. There were no fixed asset impairment charges in the year ended December 31, 2011.
Loss on Extinguishment of Debt
During the year ended December 31, 2011, loss on extinguishment of debt was $4.9 million. The proceeds from the 2011 Senior Credit
Facility obtained on May 11, 2011 were used to repay the remaining outstanding principal amount of the 2007 Senior Credit Facility of $164.0
million and the remaining outstanding principal amount of the Senior Discount Notes of $138.45 million. We incurred $2.5 million of call
premium on the Senior Discount Notes together with the write-off of $2.4 million of net deferred financing costs related to the debt
extinguishment. There was no loss on extinguishment of debt charges recorded during the year ended December 31, 2010.
Provision (Benefit) for Corporate Income Taxes
We recorded a provision for corporate income taxes of $2.7 million for the year ended December 31, 2011 compared to a benefit of
($144,000) for the year ended December 31, 2010. Our effective tax rate was 30% in the year ended December 31, 2011 compared to 33% in
the year ended December 31, 2010. The expected benefits from our captive insurance arrangement decreased our effective tax rate on our
pre-tax income in the year ended December 31, 2011 and increased the benefit on the pre-tax loss in the year ended December 31, 2010.
The results for the year ended December 31, 2011 include the correction of an accounting error that resulted in an increase in benefit for
corporate income taxes and a related increase in deferred tax assets in our consolidated statement of operations and consolidated balance sheet,
respectively. This adjustment resulted in the recognition of an income tax benefit in 2011 of $343,000 that relates to calculation of state net
operating loss that arose in the year 2010. We do not believe that this error correction is material to the current or prior reporting periods.
Liquidity and Capital Resources
Historically, we have satisfied our liquidity needs through cash generated from operations and various borrowing arrangements. Principal
liquidity needs have included the acquisition and development of new clubs, debt service requirements and other capital expenditures necessary
to upgrade, expand and renovate existing clubs.
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2012 was $60.1 million compared to
$74.9 million for the year ended December 31, 2011, a decrease of 19.8%. Cash flow related to income taxes decreased operating cash flows as
2011 cash flows benefitted from a net tax refund of $6.6 million while in 2012 net taxes of $836,000 were paid. This decrease was also driven
by reductions in cash flows resulting from the timing of payments and collections made associated with prepaid expenses, accounts payable
and accrued expenses and deferred revenues.
Net cash provided by operating activities for the year ended December 31, 2011 was $74.9 million compared to $51.2 million for the year
ended December 31, 2010, an increase of 46.2% or $23.6 million. This increase was driven by an increase in earnings before the effects of
depreciation and fixed asset impairments. The
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increase in deferred revenue in 2011 generated a $6.5 million increase in cash flow as compared to 2010, which was driven by an increase in
joining fees collected. The decrease in prepaid expenses and other current assets generated a $6.0 million favorable cash flow variance to 2010
principally due to timing differences in rent payments at the end of 2011. The effect of income taxes increased cash flow by $6.6 million in
2011, as we had more income tax refunds, net of cash paid for taxes, in 2011 compared to 2010. These increases in cash flow were partially
offset by an $8.8 million increase in cash paid for interest, and a $4.2 million increase in deferred membership costs compared to 2010.
Investing Activities. Investing activities in the year ended December 31, 2012 consisted primarily of remodeling existing clubs, the
purchase of new fitness equipment and capital investment in information technology. Net cash used in investing activities decreased 27.2% to
$22.5 million in the year ended December 31, 2012 compared to the year ended December 31, 2011. The 2012 amount includes approximately
$17.2 million to continue to upgrade existing clubs and $1.6 million principally related to major renovations at clubs with recent lease renewals
and upgrading certain clubs for our UXF zones and our in-club entertainment system network. We also invested $2.9 million to enhance our
management information and communication systems and approximately $800,000 related to our warehouse and laundry facility.
For the year ending December 31, 2013, we currently plan to invest between $37.0 million and $42.0 million in capital expenditures. This
amount includes approximately $11.5 million to $17.0 million related to potential 2013 and 2014 club openings, inclusive of amounts for our
planned acquisition of the Fitcorp chain in Boston and planned renovations at these clubs as well as a separate single club acquisition in
Manhattan. The total capital expenditures also includes approximately $17.0 million to $18.0 million to continue to upgrade existing clubs and
$4.5 million to $5.0 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 $2.5 million to $3.0 million to enhance our management information and
communication systems. We expect these capital expenditures to be funded by cash flow provided by operations and available cash on hand.
Investing activities in the year ended December 31, 2011 consisted primarily of remodeling existing clubs and the purchase of new fitness
equipment. In the year ended December 31, 2011, we also began construction on two clubs, both of which opened in the fourth quarter of 2011.
There were no future clubs under construction in the year ended December 31, 2010. Net cash used in investing activities decreased 40.3% to
$30.9 million in the year ended December 31, 2011 compared to the year ended December 31, 2010. The 2011 amount includes approximately
$7.6 million related to the two club openings in the fourth quarter of 2011, approximately $16.8 million to continue to upgrade existing clubs
and $3.1 million principally related to major renovations at clubs with recent lease renewals and upgrading our in-club entertainment system
network. We also invested $3.4 million to enhance our management information and communication systems.
Financing Activities. Net cash used in financing activities increased $12.4 million for the year ended December 31, 2012 compared to
the year ended December 31, 2011. In the year ended December 31, 2012, we made principal payments of $36.0 million on the 2011 Term
Loan Facility, of which $15.0 million was related to a voluntary prepayment made in August 2012. In connection with the repricing
amendment in August 2012, we paid related financing costs of $2.7 million. On November 14, 2012, we made further amendments to the 2011
Senior Credit Facility to, among other things, allow for the borrowing of an incremental term loan of $60.0 million which was used together
with cash-on-hand to pay a special dividend in December 2012 of $70.3 million. The net proceeds from the incremental term loan were $59.7
million, net of an original issue discount (“OID) of 0.50% or $300,000. In connection with the execution of this additional amendment, we paid
additional financing costs of $640,000 related to a 0.25% amendment fee and incurred debt issuance costs of $125,000. We also received $2.4
million related to proceeds from stock option exercises in the year ended December 31, 2012 compared to $479,000 received in the year ended
December 31, 2011.
Net cash used in financing activities increased $33.6 million for the year ended December 31, 2011 compared to the year ended
December 31, 2010. In the year ended December 31, 2011, we made principal payments of $14.1 million on the 2007 Term Loan Facility and
in the year ended December 31, 2010, we made
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principal payments of $1.9 million with respect to that facility. On May 11, 2011, we refinanced our long-term debt. In connection with the
refinancing, we repaid the remaining principal amounts of the 2007 Term Loan Facility of $164.0 million and the Senior Discount Notes of
$138.5 million and received $297.0 million under the 2011 Term Loan Facility, net of the OID of $3.0 million. In connection with the
refinancing, we paid $8.1 million in debt issuance costs. In addition, in the year ended December 31, 2011, we repaid $8.3 million in principal
on the 2011 Term Loan Facility. We also received $479,000 related to proceeds from stock option exercises in the year ended December 31,
2011, while in the year ended December 31, 2010 we received $85,000.
2011 Senior Credit Facility
On May 11, 2011, TSI, LLC entered into a $350.0 million senior secured credit facility (“2011 Senior Credit Facility”). The 2011 Senior
Credit Facility consists of a $300.0 million term loan facility (“2011 Term Loan Facility”) and a $50.0 million revolving loan facility (“2011
Revolving Loan Facility”). The 2011 Term Loan Facility was issued at an OID of 1.0% or $3.0 million. The $3.0 million OID was recorded as
a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized as interest expense using the
effective interest method. On May 11, 2011, debt issuance costs related to the 2011 Senior Credit Facility were $8.1 million, of which $7.3
million are being amortized as interest expense, and are included in other assets in the accompanying consolidated balance sheets. The proceeds
from the 2011 Term Loan Facility were used to pay off amounts outstanding under our previously outstanding long-term debt facility (“2007
Senior Credit Facility”), to pay the redemption price for all of our outstanding 11% senior discount notes due in 2014 (“Senior Discount
Notes”), and to pay related fees and expenses. Unamortized loan costs of $1.6 million related to the 2007 Senior Credit Facility and the Senior
Discount Notes and $777,000 of costs related to the 2011 Senior Credit Facility were written off in the year ended December 31, 2011 and are
included as part of loss on extinguishment of debt in the accompanying consolidated statements of operations. None of the revolving facility
was drawn upon as of the closing date on May 11, 2011, but loans under the 2011 Revolving Loan Facility may be drawn from time to time
pursuant to the terms of the 2011 Senior Credit Facility. The 2011 Term Loan Facility matures on May 11, 2018, and the 2011 Revolving Loan
Facility matures on May 11, 2016. The borrowings under the 2011 Senior Credit Facility are guaranteed and secured by assets and pledges of
capital stock by the Company, TSI, LLC and the wholly-owned domestic subsidiaries of TSI, LLC.
On August 22, 2012, TSI, LLC entered into a First Amendment (the “First Amendment”) to the 2011 Senior Credit Facility. The First
Amendment reduced the then-current interest rates on the 2011 Term Loan Facility by 125 basis points by reducing the applicable margin on
the initial term loans from 4.50% to 3.50% for base rate loans and from 5.50% to 4.50% for Eurodollar loans and reduced the interest rate floor
on the initial term loans from 2.50% to 2.25% for base rate loans and from 1.50% to 1.25% for Eurodollar loans. The First Amendment also
converted the existing voluntary prepayment penalty provision from a “101 hard call” provision (which requires the payment of a 1% fee on the
amount of any term loans that are voluntarily prepaid), originally scheduled to end in May 2013, to a “101 soft call” provision (which requires
the payment of a 1% fee on the amount of any term loans repaid in connection with a refinancing or repricing transaction) ending in August
2013, and subsequently extended by the November 14, 2012 amendment to November 2013. All other principal provisions, including maturity
and covenants under our existing 2011 Senior Credit Facility remained unchanged in all material respects. The First Amendment was subject to
the consent of term loan lenders. Non-consenting term loan lenders with term loan principal outstanding totaling $13.8 million were replaced
with replacement term loan lenders in order to execute the First Amendment. In connection with the pay off of non-consenting term loan
lenders, during the year ended December 31, 2012, we recorded a loss on extinguishment of debt of $464,000 consisting of the write-offs of the
related portions of unamortized debt issuance costs and OID of $260,000 and $204,000, respectively. In addition, we recorded additional debt
discount of $2.7 million related to a 1.00% amendment fee paid to consenting lenders and recognized additional interest expense totaling $1.4
million related primarily to bank and legal related fees paid to third parties to execute the First Amendment.
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Subsequent to the effective date of the First Amendment, we made a voluntary prepayment of $15.0 million on the 2011 Term Loan
Facility. In connection with this voluntary prepayment, during the year ended December 31, 2012, we recorded loss on extinguishment of debt
of $546,000, consisting of the write-offs of the related portions of unamortized debt issuance costs and debt discount of $269,000 and
$277,000, respectively.
On November 16, 2012, TSI, LLC entered into a Second Amendment (the “Second Amendment”) to the 2011 Senior Credit Facility.
Under the Second Amendment, TSI, LLC borrowed an additional $60.0 million incremental term loan issued at an OID of 0.50% or $300,000.
The $300,000 OID was recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized
as interest expense using the effective interest method. The new borrowings were used, together with cash on hand, to pay a special cash
dividend to our stockholders, including an equivalent cash bonus payment to certain option holders, on December 11, 2012. In addition, the
Second Amendment provides for a waiver of any prepayment required to be paid using our excess cash flow for the period ended December 31,
2012, amends the restricted payments covenant to permit the payment of the dividend and cash bonus payments and permits adjustments to our
calculation of consolidated EBITDA with respect to the cash bonus payment and with respect to fees and expenses associated with certain
permitted transactions. In connection with the execution of the Second Amendment, we recorded additional debt discount of $639,000 related
to a 0.25% amendment fee, debt issuance costs of $125,000 and additional interest expense totaling $1.6 million related primarily to bank,
arrangement and legal fees paid to third parties.
As of December 31, 2012, the 2011 Term Loan Facility has a gross principal balance of $315.7 million and a balance of $310.3 million,
net of unamortized debt discount of $5.4 million which is comprised of the original issue discounts from the original debt issuance date of
May 11, 2011 and the additional debt discounts recorded in connection with the First and Second Amendments. The unamortized debt discount
balance is recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized as interest
expense using the effective interest method. As of December 31, 2012, the unamortized balance of debt issuance costs of $5.3 million is being
amortized as interest expense, and is included in other assets in the accompanying consolidated balance sheets.
As of December 31, 2012, there were no outstanding 2011 Revolving Loan Facility borrowings and outstanding letters of credit issued
totaled $6.1 million. The unutilized portion of the 2011 Revolving Loan Facility as of December 31, 2012 was $43.9 million.
Borrowings under the 2011 Term Loan Facility, at TSI, LLC’s option, bear interest at either the administrative agent’s base rate plus
3.5% or its Eurodollar rate plus 4.5%, each as defined in the 2011 Senior Credit Facility, as amended. The Eurodollar rate has a floor of 1.25%
and the base rate has a floor of 2.25% with respect to the outstanding term loans. As of December 31, 2012, the interest rate was 5.75%. TSI,
LLC is required to pay 0.25% of principal per quarter, in respect of such loans. If, as of the last day of any fiscal quarter of TSI Holdings, the
total leverage ratio, as defined, is greater than 2.75:1.00, TSI, LLC is required to pay 1.25% of principal. As of December 31, 2012, TSI, LLC
had a total leverage ratio of 3.00:1.00 and TSI, LLC will be required to make a principal payment of $3.9 million on March 31, 2013. As of
December 31, 2012, TSI LLC had made a total of $44.3 million in principal payments on the 2011 Term Loan Facility.
The terms of the 2011 Senior Credit Facility, as amended, provide for financial covenants which require TSI, LLC to maintain a total
leverage ratio, as defined, of no greater than 4.50:1.00 effective March 31, 2012 and thereafter; an interest expense coverage ratio of no less
than 2.00:1.00; and a covenant that limits capital expenditures to $40 million for the four quarters ending in any quarter during which the total
leverage ratio is greater than 3.00:1.00 and to $50 million for the four quarters ending in any quarter during which the ratio is less than or equal
to 3.00:1.00 but greater than 2.50:1.00. This covenant does not limit capital expenditures if the ratio is less than or equal to 2.50:1.00. TSI, LLC
was in compliance with these covenants as of December 31, 2012 with a total leverage ratio of 3.00:1.00 and an interest expense coverage ratio
of 4.22:1.00.
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TSI, LLC may prepay the 2011 Term Loan Facility and 2011 Revolving Loan Facility without premium or penalty in accordance with the
2011 Senior Credit Facility, as amended, except that a prepayment premium of 1.0% is payable for any prepayments made prior to
November 14, 2013 only in connection with a repricing transaction that reduces the effective yield of the initial term loans, otherwise the 1.0%
prepayment premium would not be applicable. Mandatory prepayments are required in certain circumstances relating to cash flow in excess of
certain expenditures, asset sales, insurance recovery and incurrence of certain other debt. The 2011 Senior Credit Facility contains provisions
that require excess cash flow payments, as defined, to be applied against outstanding 2011 Term Loan Facility balances. The excess cash flow
is calculated as of December 31 and paid on March 31. The applicable excess cash flow repayment percentage is applied to the excess cash
flow when determining the excess cash flow payment. Earnings, changes in working capital and capital expenditure levels all impact the
determination of any excess cash flows. The applicable excess cash flow repayment percentage is 75% when the total leverage ratio, as defined
in the 2011 Senior Credit Facility exceeds 3.00:1.00; 50% when the total leverage ratio is greater than 2.50:1.00 but less than or equal to
3.00:1.00; 25% when the total leverage ratio is greater than 2.00:1.00 but less than or equal to 2.50:1.00 and 0% when the total leverage ratio is
less than or equal to 2.00:1.00. The total leverage ratio as of December 31, 2011 was 3.07:1.00 which resulted in a excess cash flow principal
payment of $16.5 million that was paid with cash on hand on March 31, 2012. The calculation performed as of December 31, 2012 resulted in a
total leverage ratio of 3.00:1.00. However, pursuant to the terms of the Second Amendment, a waiver was provided on the prepayment required
to be paid using our excess cash flow for the year ended December 31, 2012.
Repayment of 2007 Senior Credit Facility
Contemporaneously with entry into the 2011 Senior Credit Facility, TSI, LLC repaid the outstanding principal amount of the 2007 Term
Loan Facility of $164.0 million. The 2007 Term Loan Facility was set to expire on the earlier of February 27, 2014, or August 1, 2013, if the
Senior Discount Notes were still outstanding. There were no outstanding amounts under the 2007 Revolving Loan Facility as of such date. The
2007 Term Loan Facility was repaid at face value plus accrued and unpaid interest of $447,000 and fees related to the letters of credit of
$27,000. The total cash paid in connection with this repayment was $164.5 million as of May 11, 2011 with no early repayment penalty. We
determined that the 2011 Senior Credit Facility was not substantially different than the 2007 Senior Credit Facility for certain lenders based on
the less than 10% difference in cash flows of the respective debt instruments. A portion of the transaction was therefore accounted for as a
modification of the 2007 Senior Credit Facility and a portion was accounted for as an extinguishment. As of May 11, 2011, we recorded
refinancing charges of approximately $634,000, representing the write-off of the remaining unamortized debt costs related to the 2007 Senior
Credit Facility, which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations for the year
ended December 31, 2011.
Redemption of Senior Discount Notes
A portion of the proceeds from the 2011 Senior Credit Facility were also used to pay the remaining principal amount on the Senior
Discount Notes of $138.5 million plus a call premium of 1.833% of the principal amount thereof totaling approximately $2.5 million and
accrued interest of $5.5 million. The accrued interest included interest through May 11, 2011 of $4.2 million, plus 30 days of additional interest
of $1.3 million, representing the interest charge during the 30 day notification period. We determined that the 2011 Senior Credit Facility was
substantially different than the Senior Discount Notes. As of May 11, 2011, we wrote-off unamortized deferred financing costs of
approximately $916,000 related to the redemption of the Senior Discount Notes, which is included in loss on extinguishment of debt in the
accompanying consolidated statements of operations for the year ended December 31, 2011.
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Financial Instruments
In our normal operations, we are exposed to market risks relating to fluctuations in interest rates. In order to minimize the possible
negative impact of such fluctuations on our cash flows we may enter into derivative financial instruments (“derivatives”), such as interest-rate
swaps. Any instruments are not entered into for trading purposes and we only use commonly traded instruments. Currently, we have used
derivatives solely relating to the variability of cash flows from interest rate fluctuations.
Effective July 13, 2011, we entered into an interest rate swap arrangement which effectively converted $150.0 million of our variable-rate
debt based on a one-month Eurodollar rate to a fixed rate of 1.983%, or a total fixed rate of 7.483%, on this $150,000 when including the
applicable 5.50% margin. In August 2012, we amended the terms of the 2011 Senior Credit Facility to, among other things, reduce the
applicable margin on Eurodollar rate loans from 5.50% to 4.50% and reduce the interest rate floor on Eurodollar rate loans from 1.50% to
1.25%. In conjunction with the First Amendment to the 2011 Senior Credit Facility in August 2012, the interest rate swap arrangement was
amended to reduce the one-month Eurodollar fixed rate from 1.983% to 1.783%, or a total fixed rate of 6.283% when including the applicable
4.50% margin on Eurodollar rate loans. On November 14, 2012, we further amended the terms of the 2011 Senior Credit Facility to, among
other things, allow for the borrowing of a $60 million incremental term loan. In connection with the Second Amendment to the 2011 Credit
Facility, we further amended the interest rate swap to increase the notional amount to $160 million and extend the maturity of the swap to from
July 13, 2014 to May 13, 2015. In addition, the one-month Eurodollar fixed rate was lowered from 1.783% to 1.693%, or a total of 6.193%
when including the applicable 4.50% margin on Eurodollar rate loans. As of the incremental term loan borrowing date, the interest rate swap
arrangement covered $160 million of our total variable rate debt of $315.7 million. As permitted by FASB Accounting Standards Codification
(“ASC”) 815, Derivatives and Hedging, we have designated this swap as a cash flow hedge, the effects of which have been reflected in our
consolidated financial statements as of and for the year ended December 31, 2012 and 2011. The objective of this hedge is to manage the
variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged.
When a derivative is executed and hedge accounting is appropriate, it is designated as a cash flow hedge at inception with re-designation
being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps are designated as cash flow hedges for accounting purposes since
they are being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt). On an ongoing
basis, we perform a quarterly assessment of the hedge effectiveness of the hedge relationship and measure and recognize any hedge
ineffectiveness in the consolidated statements of operations. For the year ended December 31, 2012, hedge ineffectiveness was evaluated using
the hypothetical derivative method, and the ineffective portion of the hedge was reported in our consolidated statements of operations. The
amount related to hedge ineffectiveness for the year ended December 31, 2012 was de minimis. There was no hedge ineffectiveness during the
year ended December 31, 2011.
Counterparties to our derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is
required, and there are no significant risk concentrations. We believe the risk of incurring losses on derivative contracts related to credit risk is
unlikely.
As of December 31, 2012, we were in compliance with our debt covenants in the 2011 Senior Credit Facility and given our operating
plans and expected performance for 2013, we expect we will continue to be in compliance during 2013. These covenants may limit TSI, LLC’s
ability to incur additional debt. As of December 31, 2012, permitted borrowing capacity of $50.0 million was not restricted by the covenants.
As of December 31, 2012, we had $37.8 million of cash and cash equivalents. Financial instruments that potentially subject us to
concentrations of credit risk consist of cash and cash equivalents. Although we deposit our cash with more than one financial institution, as of
December 31, 2012, $17.1 million was held at one financial institution. We have not experienced any losses on cash and cash equivalent
accounts to date and we do not believe that, based on the credit ratings of the aforementioned institutions, we are exposed to any significant
credit risk related to cash at this time.
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Consolidated Debt
As of December 31, 2012, our total principal amount of debt outstanding was $315.7 million. This substantial amount of debt could have
significant consequences, including:
• making it more difficult to satisfy our obligations;
• increasing our vulnerability to general adverse economic conditions;
• limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and
other general corporate requirements;
• requiring cash flow from operations for the payment of interest on our credit facility and the payment of principal pursuant to excess
cash flow requirements and reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions of
new clubs and general corporate requirements; and
• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.
We believe that we have, or will be able to, obtain or generate sufficient funds to finance our current operating and growth plans through
the end of 2013. Any material acceleration or expansion of our plans through newly constructed clubs or acquisitions (to the extent such
acquisitions include cash payments) may require us to pursue additional sources of financing prior to the end of 2013. There can be no
assurance that such financing will be available, or that it will be available on acceptable terms.
Contractual Obligations and Commitments
The aggregate long-term debt and operating lease obligations as of December 31, 2012 were as follows:
Contractual Obligations
Long-term debt
Interest payments on long-term debt(1)
Operating lease obligations(2)
$
Total
315,743
93,366
684,062
Payments Due by Period (in thousands)
Less than
1 Year
1-3 Years
3-5 Years
$
15,787
18,632
84,044
$
6,314 $
35,342
166,580
6,314
33,451
143,664
More than
5 Years
$ 287,328
5,941
289,774
Total contractual cash obligations
$ 1,093,171
$ 118,463
$ 208,236 $ 183,429
$ 583,043
Notes:
(1) Based on interest rates pursuant to the 2011 Term Loan Facility and the interest swap agreement as of December 31, 2012.
(2) Operating lease obligations include base rent only. Certain leases provide for additional rent based on real estate taxes, common area
maintenance and defined amounts based on the operating results of the lessee.
The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes (including
uncertain tax positions), insurance accruals and other accruals. We are unable to estimate the timing of payments for these items.
In recent years, we have typically operated with a working capital deficit. We had a working capital deficit of $7.8 million at
December 31, 2012, as compared with $18.1 million at December 31, 2011. Major components of our working capital deficit on the current
liability side are deferred revenues, accrued expenses (including,
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among others, accrued construction in progress and equipment, payroll and occupancy costs) and the current portion of long-term debt. These
current liabilities more than offset the main current assets, which consist of cash and cash equivalents, accounts receivable, prepaid expenses
and other current assets, and the current portion of deferred tax assets. Payments underlying the current liability for deferred revenue are
generally not held as cash and cash equivalents, but rather are used for our business needs, including financing and investing commitments,
which use contributes to the working capital deficit. The deferred revenue liability relates to dues and services paid-in-full in advance and
joining fees paid at the time of enrollment and totaled $37.1 million and $40.8 million at December 31, 2012 and 2011, respectively. Joining
fees received are deferred and amortized over the estimated average membership life of a club member. Prepaid dues are generally realized
over a period of up to twelve months, while fees for prepaid services normally are realized over a period of one to nine months. In periods
when we increase the number of clubs open and consequently increase the level of payments received in advance, we would expect to see
increased deferred revenue balances. By contrast, any decrease in demand for our services or reductions in joining fees collected would have
the effect of reducing deferred revenue balances, which would likely require us to rely more heavily on other sources of funding. In either case,
a significant portion of the deferred revenue is not expected to constitute a liability that must be funded with cash. At the time a member joins
our club, we incur enrollment costs, a portion of which are deferred over the estimated average membership life. These costs are recorded as a
long-term asset and as such do not offset the working capital deficit. We expect to record a working capital deficit in future periods and, as in
the past, will fund such deficit using cash flows from operations and borrowings under our 2011 Senior Credit Facility. We believe that these
sources will be sufficient to cover such deficit.
Recent Changes in or Recently Issued Accounting Standards
For details of applicable new accounting standards, please, see Note 4 — Recent Accounting Pronouncements to our consolidated
financial statements in this Annual Report.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Our most significant assumptions and estimates relate to estimated average membership life, the allocation and fair value ascribed to
fixed and intangible assets, the useful lives of long-term assets, recoverability and impairment of fixed and intangible assets, valuation of and
expense incurred in connection with stock options, valuation of interest-rate swap arrangements, legal contingencies, estimated self-insurance
reserves, and valuation of deferred income taxes.
Estimated average membership life. Our one-time member joining fees and a portion of related direct expenses, up to the amount of
deferred joining fees, are deferred and recognized on a straight-line basis in operations over the estimated average membership life of
27 months for both unrestricted and restricted student members. We monitor factors that might affect the estimated average membership life
including retention trends, attrition trends, membership sales volumes, membership composition, competition, and general economic
conditions, and adjust the estimate on a quarterly basis. The estimated average membership life was adjusted from 28 months to 27 months in
October 2012 for both our unrestricted and restricted student members. The estimated average membership life could increase or decrease in
future periods. Consequently, deferred initiation fees and direct expenses would increase or decrease accordingly.
Fixed and intangible assets. Fixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of
the assets, which are 30 years for building and improvements, five years for club equipment, furniture, fixtures, flooring and computer
equipment and three to five years for computer software.
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Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the lease. Expenditures for
maintenance and repairs are charged to operations as incurred. The cost and related accumulated depreciation, or amortization of assets retired
or sold, are removed from the respective accounts and any gain or loss is recognized in operations. The costs related to developing web
applications, developing web pages and installing developed applications on the web servers are capitalized and classified as computer
software. Web site hosting fees and maintenance costs are expensed as incurred.
Long-lived assets, such as fixed assets and intangible assets are reviewed for impairment when events or circumstances indicate that the
carrying value may not be recoverable. Estimated undiscounted expected future cash flows are used to determine if an asset group is impaired,
in which case the asset’s carrying value would be reduced to its fair value, calculated using discounted cash flows. Projected cash flows are
based on internal budgets and forecasts through the end of each respective lease. The most significant assumptions in those budgets and
forecasts relate to estimated membership and ancillary revenue, attrition rates, and maintenance capital expenditures, which are estimated at
approximately 3% of total revenues. Actual cash flows realized could differ from those estimated and could result in asset impairments in the
future. See Note 5 — Fixed Assets to our consolidated financial statements in this Annual Report.
Goodwill has been allocated to reporting units that closely reflect the regions served by our four trade names: New York Sports Clubs
(“NYSC”), Boston Sports Clubs (“BSC”), Washington Sports Clubs (“WSC”) and Philadelphia Sports Clubs (“PSC”), with certain more
remote clubs that do not benefit from a regional cluster being considered single reporting units (“Outlier Clubs”) and our three clubs located in
Switzerland (“SSC”). We have one Outlier Club with goodwill. The BSC, WSC and PSC regions do not have any goodwill as of December 31,
2012. The carrying value of goodwill was allocated to our reporting units pursuant to FASB guidance.
As of February 29, 2012 and February 28, 2011, we performed our annual impairment test of goodwill. These impairment tests supported
the recorded goodwill balances and as such no impairment of goodwill was required. The valuation of intangible assets requires assumptions
and estimates of many critical factors, including revenue and market growth, operating cash flows and discount rates. We may decide to
complete an interim evaluation of the goodwill by reporting unit due to the existence of a triggering event. The determination as to whether a
triggering event exists that would warrant an interim review of goodwill and whether a write-down of goodwill is necessary involves
significant judgment based on short-term and long-term projections of the Company.
Valuation of and expense incurred in connection with stock options. We recognize all share-based payments to employees in the
financial statements based on their fair values using an option-pricing model at the date of grant. We use a Black-Scholes option-pricing model
to calculate the fair value of options. This model requires various judgmental assumptions including volatility, forfeiture rate and expected
option life. If any of the assumptions used in the model change significantly, share-based compensation may differ materially in the future from
that recorded in the current period.
Valuation of interest-rate swap. In accordance with FASB fair value measurement guidance, we determine the fair value of our
interest-rate swap using observable current market information such as the prevailing Eurodollar interest rate and Eurodollar yield curve rates
and include consideration of counterparty credit risk. See Note 9 — Derivative Financial Instruments to our consolidated financial statements
in this Annual Report.
Legal contingencies. In accordance with FASB guidance, we determine whether to disclose and accrue for loss contingencies based on
an assessment of whether the risk of loss is remote, reasonably possible or probable. Our assessment is developed in consultation with our
outside counsel and other advisors and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions
involve judgments that are inherently subjective and can involve matters that are in litigation, which, by its nature are unpredictable. We
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believe that our assessment of the probability of loss contingencies is reasonable, but because of the subjectivity involved and the unpredictable
nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact the consolidated
financial statements.
Self-insurance reserves. We limit our exposure to casualty losses on insurance claims by maintaining liability coverage subject to
specific and aggregate liability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon a
number of factors including sales estimates for each insurance year, claim amounts, claim settlements and number of claims, our historical loss
experience and valuations provided by independent third-party consultants. To the extent that estimated self-insurance losses differ from actual
losses realized, our insurance reserves could differ significantly and may result in either higher or lower insurance expense in future periods. In
the past year, our actual loss experience has been better than expected overall.
Deferred income taxes. As of December 31, 2012, our net deferred tax assets totaled $34.2 million. These net assets represent
cumulative net “temporary differences” that will result in tax deductions in future years. Quarterly, we assess the weight of all positive and
negative evidence to determine whether the net deferred tax asset is realizable. In 2011, we returned to profitability after sustaining losses in
2009 and 2010. We have historically been a taxpayer and are in a three year cumulative income position as of December 31, 2012. In addition,
based on recent trends, we project future income sufficient to realize the deferred tax assets during the periods when the temporary tax
deductible differences reverse. With the exception of the deductions related to our captive insurance company for state taxes, taxable income
has been and is projected to be the same as federal taxable income. Because the captive insurance company will be discontinued in 2014, the
assessment of realizability of the state deferred tax assets is consistent with the federal tax analysis above. We have federal net operating loss
carry-forwards and some small net operating loss carry-forwards which we believe will be realized within the available carry-forward period,
except for a small state net operating loss forward in Rhode Island due to the short carry forward period in that state. Accordingly, we
concluded that it is more likely than not that the deferred tax assets will be realized. If actual results do not meet our forecasts and we incur
losses in 2013 and beyond, a valuation allowance against the deferred tax assets may be required in the future.
FASB guidance related to accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We recognize interest and penalties accrued related to unrecognized tax benefits in
income tax expense.
Inflation
Although we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had a material impact
on our results of operations or financial condition. Should there be continuing periods of high inflation in the future, our results of operations or
financial condition would be exposed to the effects of inflation, such as higher rents for our leases under escalation terms based on the
consumer price index and higher interest expense on the variable rate portion of our debt.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our debt is effectively at both fixed and variable rates so that we are exposed to market risks resulting from interest rate fluctuations. We
regularly evaluate our exposure to these risks and take measures to mitigate these risks on our consolidated financial results. We do not
participate in speculative derivative trading.
Borrowings for the 2011 Term Loan Facility are for one-month periods in the case of Eurodollar borrowings. Our exposure to market risk
for changes in interest rates relates to interest expense on variable rate debt. As of December 31, 2012, we had $315.7 million of outstanding
borrowings under our 2011 Term Loan Facility of which $160.0 million of this variable rate debt is hedged to a fixed rate under an interest rate
swap
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agreement. Changes in the fair value of the interest rate swap derivative instrument is recorded each period in accumulated other
comprehensive income (loss). Based on the amount of our variable rate debt and our interest rate swap agreement as of December 31, 2012, a
hypothetical 100 basis point interest increase would not have affected interest expense for the year ended December 31, 2012, as the variable
rate debt contains a Eurodollar floor of 1.25%.
For additional information concerning the terms of our 2011 Term Loan Facility, see Note 8 — Long-Term Debt to our consolidated
financial statements in this Annual Report.
Item 8.
Financial
Statements and Supplementary Data
Our Financial Statements appear following the signature page hereto, are incorporated herein by reference and are listed in the index
appearing under Item 15.
in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Changes
None
Item 9A. Co
ntrols
and Procedures
Evaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures that are designed to ensure that
the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and
communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances
of achieving the desired controls.
As of December 31, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, our disclosure controls and procedures were
effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and
maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework . Based on our management’s assessment using those criteria, our management concluded that, as of
December 31, 2012, we maintained effective internal control over financial reporting.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
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PricewaterhouseCoopers LLP, our independent registered public accounting firm that audited the financial statements included in this
Annual Report on Form 10-K, has issued its written attestation report on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2012, as stated in their report included following the signature page hereto, which is incorporated herein by
reference.
Changes in Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2012 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information
Item 9B.
Other
None.
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Item 10.
Directors,
Executive Officers and Corporate Governance
PART III
The information with respect to directors, executive officers and corporate governance of the Company is incorporated herein by
reference to the following sections of the Company’s definitive Proxy Statement relating to the Company’s 2013 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the Company’s fiscal year ended December 31, 2012 (the “Proxy Statement”):
“Matters to be Considered at Annual Meeting — Proposal One — Election of Directors,” “Corporate Governance and Board Matters —
Corporate Governance Documents,” “Corporate Governance and Board Matters — Committee Membership — Audit Committee,”
“Section 16(A) Beneficial Ownership Reporting Compliance,” “Executive Officers,” and “Deadline for Receipt of Stockholder Proposals.”
The following are the members of our Board of Directors and our Executive Officers:
Board of Directors:
Robert Giardina
Paul N. Arnold
Bruce C. Bruckmann
J. Rice Edmonds
John H. Flood III
Thomas J. Galligan III
Kevin McCall
Executive Officers:
Robert Giardina
Terry Kew
Paul Barron
Daniel Gallagher
David M. Kastin
Scott Milford
Item 11.
Executive
Compensation
Chief Executive Officer and President, Town Sports International
Holdings, Inc.
Former Chairman of the Board and Chief Executive Officer, Cort
Business Services, Inc.
Managing Director, Bruckmann, Rosser, Sherrill & Co., LP
Managing Director, Edmonds Capital, LLC
Chief Executive Officer, Synergy Global Outsourcing, LLC
Executive Chairman, Papa Gino’s Holdings Corp.
Chief Executive Officer and President, Paradigm Properties, LLC
Chief Executive Officer and President
Chief Operations Officer
Chief Information Officer
Chief Financial Officer
Senior Vice President — General Counsel and Corporate Secretary
Senior Vice President — Human Resources
The information with respect to executive compensation is incorporated herein by reference to the following sections of the Proxy
Statement: “Executive Compensation” and “Corporate Governance and Board Matters — Compensation Committee Interlocks and Insider
Participation.”
The information with respect to compensation of directors is incorporated herein by reference to the following section of the Proxy
Statement: “Corporate Governance and Board Matters — Directors’ Compensation for the 2012 Fiscal Year.”
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Table of Contents
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance to employees as of December 31, 2012:
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
(c)
1,310,818
—
1,310,818
$
$
5.21
—
5.21
529,611
—
529,611
The information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to
the following section of the Proxy Statement: “Ownership of Securities.”
Item 13. Ce
rtain
Relationships and Related Transactions, and Director Independence
The information with respect to certain relationships and related transactions and director independence is incorporated herein by
reference to the following sections of the Proxy Statement: “Certain Relationships and Related Transactions” and “Corporate Governance and
Board Matters — Director Independence.”
Item 14. Pri
ncipal
Accountant Fees and Services
The information with respect to principal accountant fees and services is incorporated herein by reference to the following section of the
Proxy Statement: “Matters to be Considered at Annual Meeting — Proposal Two — Ratification of Independent Registered Public Accounting
Firm.”
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PART IV
Item 15.
Exhibits
And Financial Statements
(a) Financial Statements
(1) Financial statements filed as part of this report:
Consolidated Annual Financial Statements of Town Sports International Holdings, Inc:
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets at December 31, 2012 and 2011
Consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010
Consolidated statements of comprehensive income for the years ended December 31, 2012, 2011 and 2010
Consolidated statements of stockholders’ (deficit) equity for the years ended December 31, 2012, 2011 and 2010
Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010
Notes to consolidated financial statements
(2) Financial Statements Schedules:
Page
Numbe
r
F-2
F-3
F-4
F-5
F-6
F-7
F-8
The schedules have been omitted because they are not applicable or the required information has been included in the financial statements
or notes thereto.
(3) Exhibits. See Item 15(b) below.
(b) Exhibits required by Item 601 of Regulation S-K
The information required by this item is incorporated herein by reference from the Index to Exhibits immediately following page F-38 of
this Annual Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on February 25, 2013.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
T OWN S PORTS I NTERNATIONAL H OLDINGS , I NC .
By:
/s/ R OBERT G IARDINA
Chief Executive Officer
(principal executive officer)
By:
By:
By:
By:
By:
By:
By:
By:
Signature
/s/ R OBERT G IARDINA
Robert Giardina
/s/ D ANIEL G ALLAGHER
Daniel Gallagher
/s/ P AUL A RNOLD
Paul Arnold
/s/ B RUCE B RUCKMANN
Bruce Bruckmann
/s/ J. R ICE E DMONDS
J. Rice Edmonds
/s/ J OHN H. F LOOD III
John H. Flood III
/s/ T HOMAS J. G ALLIGAN III
Thomas J. Galligan III
/s/ K EVIN M C C ALL
Kevin McCall
Title
Date
Chief Executive Officer (principal executive officer), President
and Director
February 25, 2013
Chief Financial Officer (principal financial and accounting
officer)
February 25, 2013
Director
Director
Director
Director
Director
Director
62
February 25, 2013
February 25, 2013
February 25, 2013
February 25, 2013
February 25, 2013
February 25, 2013
Table of Contents
INDEX TO FINANCIAL STATEMENTS
Consolidated Annual Financial Statements of Town Sports International Holdings, Inc.:
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets at December 31, 2012 and 2011
Consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010
Consolidated statements of comprehensive income for the years ended December 31, 2012, 2011 and 2010
Consolidated statements of stockholders’ (deficit) equity for the years ended December 31, 2012, 2011 and 2010
Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010
Notes to consolidated financial statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Town Sports International Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive
income, stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Town Sports International
Holdings, Inc. and its subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility
is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ P RICEWATERHOUSE C OOPERS LLP
New York, New York
February 25, 2013
F-2
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2012 and 2011
(All figures in thousands except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventory
Deferred tax assets, net
Prepaid corporate income taxes
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Goodwill
Deferred tax assets, net
Deferred membership costs
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued expenses
Accrued interest
Dividends payable
Deferred revenue
Total current liabilities
Long-term debt
Dividends payable
Deferred lease liabilities
Deferred revenue
Other liabilities
Total liabilities
Contingencies (Note 14)
Stockholders’ (deficit) equity:
Common stock, $.001 par value; issued and outstanding 23,813,106 and 23,040,881 shares at December
31, 2012 and December 31, 2011, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained (deficit) earnings
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity
See notes to consolidated financial statements.
F-3
2012
2011
$
37,758
6,508
438
24,897
550
9,866
80,017
256,871
32,824
9,296
10,811
14,091
$ 403,910
$
15,787
7,467
27,053
89
305
37,138
87,839
294,552
799
61,732
3,889
10,595
459,406
24
(16,326)
1,226
(40,420)
(55,496)
$
47,880
5,857
290
20,218
73
10,599
84,917
286,041
32,799
19,782
10,117
15,886
$ 449,542
$
25,507
9,180
26,575
950
—
40,822
103,034
263,487
—
65,119
5,338
12,210
449,188
23
(19,934)
1,251
19,014
354
$ 403,910
$ 449,542
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2012, 2011 and 2010
(All figures in thousands except share and per share data)
2012
2011
2010
Revenues:
Club operations
Fees and other
Operating Expenses:
Payroll and related
Club operating
General and administrative
Depreciation and amortization
Impairment of fixed assets
Operating income
Loss on extinguishment of debt
Interest expense
Interest income
Equity in the earnings of investees and rental income
Income (loss) before provision (benefit) for corporate income taxes
Provision (benefit) for corporate income taxes
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average number of shares used in calculating earnings (loss)
per share:
Basic
Diluted
Dividends declared per common share
$
$
$
$
$
473,177
5,804
478,981
181,632
178,950
24,139
49,391
3,436
437,548
41,433
1,010
24,640
(43)
(2,461)
18,287
6,321
11,966
0.51
0.50
23,436,393
24,114,540
3.00
$
$
$
$
$
462,051
4,890
466,941
177,528
176,463
25,799
51,536
—
431,326
35,615
4,865
24,274
(147 )
(2,391 )
9,014
2,699
6,315
0.28
0.27
22,828,031
23,423,797
—
$
$
$
$
$
457,626
4,761
462,387
185,583
174,135
28,773
52,202
3,254
443,947
18,440
—
21,158
(145)
(2,139)
(434)
(144)
(290)
(0.01)
(0.01)
22,634,233
22,634,233
—
See notes to consolidated financial statements.
F-4
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2012, 2011 and 2010
(All figures in thousands)
Statement of Comprehensive Income:
Net income (loss)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments, net of tax
Interest rate swap, net of tax
Total other comprehensive (loss) income, net of tax
Total comprehensive income
2012
2011
2010
$ 11,966
$ 6,315
$ (290)
95
(120 )
(25 )
(129)
(741)
(870)
794
—
794
$ 11,941
$ 5,445
$ 504
See notes to consolidated financial statements.
F-5
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Years Ended December 31, 2012, 2011 and 2010
(All figures in thousands except share and per share data)
Common Stock
($.001 par)
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Stockholders’
(Deficit) Equity
Balance at December 31,
2009
Stock option exercises
Common stock grants
Cancellation of options
Forfeiture of restricted stock
Compensation related to
stock options and restricted
stock grants
Tax shortfall from stock
option exercises
Net loss
Foreign currency translation
adjustment
Balance at December 31,
2010
Stock option exercises
Common stock grants
Restricted stock grants
Cancellation of options
Forfeiture of restricted stock
Compensation related to
stock options and restricted
stock grants
Net income
Derivative financial
instruments
Foreign currency translation
adjustment
Balance at December 31,
2011
Stock option exercises
Common stock grants
Restricted stock grants
Cancellation of options
Forfeiture of restricted stock
Compensation related to
stock options and restricted
stock grants
Cash dividends declared on
common stock
Net income
Derivative financial
instruments
Foreign currency translation
adjustment
$
22,603,199
40,243
26,708
—
(2,500 )
—
—
—
—
22,667,650
164,435
27,297
188,999
—
(7,500 )
—
—
—
—
23,040,881
534,514
12,502
251,500
—
(26,291 )
—
—
—
—
—
23
—
—
—
—
—
—
—
—
23
—
—
—
—
—
—
—
—
—
23
1
—
—
—
—
—
—
—
—
—
$
$
(22,572)
85
85
(621)
—
1,251
(16)
—
—
(21,788)
479
151
—
(37)
—
1,261
—
—
—
(19,934)
2,351
116
—
(49)
—
1,190
—
—
—
—
$
$
12,989
—
—
—
—
1,327
—
—
—
—
—
—
—
794
2,121
—
—
—
—
—
—
—
(741)
(129)
1,251
—
—
—
—
—
—
—
—
—
—
(290 )
—
12,699
—
—
—
—
—
—
6,315
—
—
19,014
—
—
—
—
—
—
(71,400 )
11,966
(120)
95
—
—
(8,233)
85
85
(621)
—
1,251
(16)
(290)
794
(6,945)
479
151
—
(37)
—
1,261
6,315
(741)
(129)
354
2,352
116
—
(49)
—
1,190
(71,400)
11,966
(120)
95
Balance at December 31,
23,813,106
$
24
$
(16,326)
$
1,226
$
(40,420 )
$
(55,496)
2012
See notes to consolidated financial statements.
F-6
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2012, 2011 and 2010
(All figures in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
2012
2011
2010
$
11,966
$
6,315
$
(290)
Depreciation and amortization
Impairment of fixed assets
Loss on extinguishment of debt
Call premium on redemption of Senior Discount Notes
Amortization of debt discount
Amortization of debt issuance costs
Noncash rental expense, net of non-cash rental income
Share-based compensation expense
Decrease in deferred tax asset
Net change in certain operating assets and liabilities
(Increase) decrease in deferred membership costs
Landlord contributions to tenant improvements
Decrease in insurance reserves
Other
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Cash dividends paid
Proceeds from incremental term loan, net of original issue discount
Proceeds from replacement 2011 Term Loan Facility lenders
Principal payments to non-consenting 2011 Term Loan Facility lenders
Principal payments on 2011 Term Loan Facility
Term loan amendment related financing costs
Proceeds from stock option exercises
Proceeds from 2011 Senior Credit Facility, net of original issue discount
Debt issuance costs
Repayment of 2007 Term Loan Facility
Repayment of Senior Discount Notes
Net cash used in financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents end of period
Summary of the change in certain operating assets and liabilities:
Increase in accounts receivable
(Increase) decrease in inventory
(Increase) decrease in prepaid expenses and other current assets
(Decrease) increase in accounts payable, accrued expenses and accrued interest
Change in prepaid corporate income taxes and corporate income taxes payable
49,391
3,436
1,010
—
517
1,135
(4,037)
1,306
5,865
(8,864)
(694)
1,345
(2,071)
(252)
48,087
60,053
(22,490)
(22,490)
(70,296)
59,700
13,796
(13,796)
(36,007)
(3,346)
2,352
—
(125)
—
—
(47,722)
37
(10,122)
47,880
51,536
—
4,865
(2,538)
244
1,127
(3,663)
1,412
1,886
19,129
(4,183)
711
(1,679)
(277)
68,570
74,885
(30,907)
(30,907)
—
—
—
—
(8,250)
—
479
297,000
(8,065)
(178,063)
(138,450)
(35,349)
448
9,077
38,803
52,202
3,254
—
—
—
1,011
(5,552)
1,336
8,643
(8,243)
145
100
(1,119)
(249)
51,528
51,238
(22,035)
(22,035)
—
—
—
—
—
—
85
—
—
(1,850)
—
(1,765)
607
28,045
10,758
$
$
37,758
$
47,880
$
38,803
(645) $
(148)
(329)
(3,094)
(427)
(591)
(74)
3,493
864
7,320
$
(951)
9
(2,532)
(419)
(6,016)
(Decrease) increase in deferred revenue
Net change in certain working capital components
(4,221)
8,117
1,666
$
(8,864) $
19,129
$
(8,243)
See notes to consolidated financial statements.
F-7
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
(In thousands except share and per share data)
1.
Basis of Presentation
As of December 31, 2012, Town Sports International Holdings, Inc. (the “Company” or “TSI Holdings”), through its wholly-owned
subsidiary, Town Sports International, LLC (“TSI, LLC”), operated 160 fitness clubs (“clubs”) comprised of 108 clubs in the New York
metropolitan market under the “New York Sports Clubs” brand name, 25 clubs in the Boston market under the “Boston Sports Clubs” brand
name, 18 clubs (two of which are partly-owned) in the Washington, D.C. market under the “Washington Sports Clubs” brand name, six clubs
in the Philadelphia market under the “Philadelphia Sports Clubs” brand name and three clubs in Switzerland. The Company’s operating
segments are New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs, Washington Sports Clubs and Swiss Sports Clubs. The
Company has determined that our operating segments have similar economic characteristics and meet the criteria which permit them to be
aggregated into one reportable segment.
2. Correction of Accounting Errors
The Company has revised its March 31, 2012, December 31, 2011 and December 31, 2010 consolidated balance sheets to correct a
classification error by reflecting a portion of deferred tax assets, from noncurrent to current assets.
March 31, 2012
December 31, 2011
December 31, 2010
As
Previously
Filed
As
Revised
Difference
As
Previously
Filed
As
Revised
Difference
As
Previously
Filed
As
Revised
Difference
Current deferred tax
assets, net
$
Total current assets $
— $
60,230 $
20,609 $
80,839 $
20,609
$
— $
20,218 $
20,218
20,609
$
64,699 $
84,917 $
20,218
$
$
— $
64,833 $
9,776 $
9,776
74,609 $
9,776
Noncurrent deferred
tax assets, net
Total assets
37,603 $
$
16,994 $
$ 433,285 $ 433,285 $
(20,609)
$
40,000 $
19,782 $
(20,218)
—
$ 449,542 $ 449,542 $
—
41,883 $
$
$ 464,166 $ 464,166 $
32,107 $
(9,776)
—
The above adjustments were not considered material individually or in the aggregate to previously issued financial statements. However,
because of the significance of these adjustments, the Company revised the respective balance sheets. These revisions had no impact on the
Company’s total assets, results of operations or cash flows.
The results for the year ended December 31, 2012 include the correction of temporary differences that resulted in an increase in benefit
for corporate income taxes and a related increase in deferred tax assets in the Company’s consolidated statement of operations and consolidated
balance sheet, respectively. In the fourth quarter of 2012, the Company identified corrections related to temporary differences in fixed assets,
intangible assets and deferred revenue resulting in the recognition of an income tax benefit of $483. The Company does not believe that this
error correction is material to the current or prior reporting periods.
3.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of TSI Holdings and all wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
F-8
Table of Contents
Revenue Recognition
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company generally receives one-time non-refundable joining fees and monthly dues from its members. The Company’s members
have the option to join on a month-to-month basis or to commit to a one-year membership. Month-to-month members can cancel their
membership at any time with 30 days notice. Membership dues for members who pay annual dues upfront are amortized on a straight-line basis
over a 12-month period commencing with the first month of the new member contract. Membership dues for members who pay monthly are
recognized in the period in which access to the club is provided.
Joining fees and related direct and incremental expenses of membership acquisition, which include sales commissions, bonuses and
related taxes and benefits, which are direct and incremental costs related to the sale of new memberships, are currently deferred and recognized,
on a straight-line basis, in operations over the estimated average membership life. Deferred membership costs were $10,811 and $10,117 at
December 31, 2012 and 2011, respectively.
In May 2011, the Company implemented a combined rate lock guarantee and maintenance fee of $29.00, increased to $39.00 in July
2012, to which all members agree at the time of enrollment. This fee is collected annually starting in January 2012 for all members joining after
May 2011. This fee in part, is in lieu of possible future dues increases for these members. The rate lock guarantee and maintenance fee is
recognized into membership revenue over the subsequent 12 month period following collection.
The Company tracks the estimated average membership life of restricted members separately from unrestricted members. Until the fourth
quarter of 2011, there was a lack of sufficient historical data to statistically determine an estimated average membership life for the restricted
members and, therefore, the Company was using the same estimated average membership life for this population as that of its unrestricted
members through the third quarter of 2011. The restricted membership base currently includes student memberships introduced in April 2010,
teacher memberships introduced in April 2011 and first responder memberships introduced as a one-time promotional offer in September 2011.
The table below summarizes the estimated average membership life of restricted student members and unrestricted members that were in effect
for each quarter during the past three year period from 2010 through 2012.
Period
Three months ended
March 31
Three months ended June 30
Three months ended
September 30
Three months ended
December 31
Estimated Average Membership Life of
an Unrestricted Member
2012
2011
2010
Estimated Average Membership Life of
a Restricted Student Member
2011
2012
2010
28 months
28 months
27 months
27 months
28 months
25 months
25 months
27 months
27 months
27 months
N/A
25 months
28 months
28 months
27 months
28 months
28 months
27 months
27 months
29 months
27 months
27 months
24 months
27 months
If the estimated average membership life for regular members had remained at 28 months for the three months ended December 31, 2012,
the impact would have been a decrease in revenue and net income of approximately $241 and $35, respectively. If the estimated average
membership life for restricted student members had remained at 28 months for the three months ended December 31, 2012, the impact would
have been a decrease in revenue and net income of approximately $21 and $11, respectively. The Company monitors factors that might affect
the estimated average membership life including retention trends, attrition trends, membership sales volumes, membership composition,
competition, and general economic conditions, and adjusts the estimate on a quarterly basis.
Dues that are received in advance are recognized on a pro-rata basis over the periods in which services are to be provided. Revenues from
ancillary services, such as personal training sessions, are recognized as services
F-9
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
are performed. Unused personal training sessions expire after a set, disclosed period of time after purchase and are not refundable or
redeemable by the member for cash. The State of New York has informed the Company that it is considering whether the Company is required
to remit the amount collected for unused, expired personal training sessions to the State of New York as unclaimed property. As of
December 31, 2012 the Company had approximately $13,442 of unused and expired personal training sessions. We have not recognized any
revenue from these sessions and have recorded the amounts as deferred revenue. The Company does not believe that these amounts are subject
to the escheatment or abandoned property laws of any jurisdiction, including the State of New York. However, it is possible that one or more of
these jurisdictions may not agree with the Company’s position and may claim that the Company must remit all or a portion of these amounts to
such jurisdiction. In 2010, for three of our jurisdictions, the Company concluded, based on opinions from outside counsel, that monies held by
a company for unused and expired personal training sessions are not escheatable. As a result, the Company removed approximately $2,697
from deferred revenue, of which approximately $570 related to expired sessions that would have been recognized the year ended December 31,
2010, and recorded such amount as personal training revenue in the fourth quarter of 2010.
In addition to the prepaid personal training sessions that are described above, in 2011 the Company introduced a new personal training
membership product which it further expanded in 2012. The personal training membership product consists of single or multi-session packages
ranging from one, four, or eight sessions per month. These sessions provided by the membership product are at a discount to our stand-alone
session pricing and the sessions offered by the membership product must be used in each respective month they are issued. Members who
purchase this product commit to a six month period and revenue is recognized ratably over the six month commitment period.
Our membership base is under four basic types of memberships plans that have various levels of facility privileges. We have a Passport
Membership which allows members to use any club at any time, a Core Membership which allows members unlimited use of a single “home
club” with access to use other non-home clubs for an additional usage fee, a Gold Membership (no longer offered) allows unlimited access to a
home club and use of non-home clubs during off-peak hours with access during peak hours but for a usage fee, a Restricted Membership which
is generally sold to students and teachers and provides for access to all clubs except during the peak hours of 4:30pm to 7:30pm, Monday
through Thursday. Restricted members have access to our facilities during peak hours, but a usage fee is charged. Usage fees are recorded to
membership revenue in the month the usage occurs. Total usage fees recorded were $2,166 and $2,035 for the years ended December 31, 2012
and 2011, respectively.
Management fees earned for services rendered are recognized at the time the related services are performed.
When a revenue agreement involves multiple elements, such as sales of both memberships and services in one arrangement or potentially
multiple arrangements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and
recognized when the revenue recognition criteria for each element is met.
The Company recognizes revenue from merchandise sales upon delivery to the member.
In connection with advance receipts of fees or dues, the Company was required to maintain bonds totaling $3,425 and $3,590 as of
December 31, 2012 and 2011, respectively, pursuant to various state consumer protection laws.
F-10
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising and Club Pre-opening Costs
Advertising costs and club pre-opening costs are charged to operations during the period in which they are incurred, except for production
costs related to television and radio advertisements, which are expensed when the related commercials are first aired. Total advertising costs
incurred by the Company for the years ended December 31, 2012, 2011 and 2010 totaled $6,158, $5,999 and $6,690, respectively and are
included in Club operating expenses.
Cash and Cash Equivalents
The Company considers all highly liquid instruments which have original maturities of three months or less when acquired to be cash
equivalents. The carrying amounts reported in the balance sheets for cash and cash equivalents approximate fair value. The Company owns and
operates a captive insurance company in the State of New York. Under the insurance laws of the State of New York, this captive insurance
company is required to maintain a cash balance of at least $250. At December 31, 2012 and 2011, $274 and $272, respectively, of cash related
to this wholly-owned subsidiary was included in cash and cash equivalents.
Deferred Lease Liabilities, Non-cash Rental Expense and Additional Rent
The Company recognizes rental expense for leases with scheduled rent increases and inclusive of rental concessions, on the straight-line
basis over the life of the lease beginning upon the commencement date of the lease. Rent concessions, primarily received in the form of free
rental periods, are also deferred and amortized on a straight-line basis over the life of the lease.
The Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In
addition to base rent, the facility leases generally provide for additional rent to cover common area maintenance charges incurred and to pass
along increases in real estate taxes. The Company accrues for any unpaid common area maintenance charges and real estate taxes on a
club-by-club basis.
Upon entering into certain leases, the Company receives construction allowances from the landlord. These construction allowances are
recorded as deferred lease liability credits on the consolidated balance sheet when the requirements for these allowances are met as stated in the
respective lease and are amortized as a reduction of rent expense over the term of the lease. Amortization of deferred construction allowances
were $2,955 and $2,791 as of December 31, 2012 and December 31, 2011, respectively.
Certain leases provide for contingent rent based upon defined formulas of revenue, cash flows or operating results for the respective
facilities. These contingent rent payments typically call for additional rent payments calculated as a percentage of the respective club’s revenue
or a percentage of revenue in excess of defined break-points during a specified year. The Company records contingent rent expense over the
related contingent rental period at the time the respective contingent targets are probable of being met.
Lease termination penalties are recognized using the undiscounted cash flow method. The Company did not incur any lease termination
penalties in the years ended December 31, 2012, 2011 or 2010.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of amounts due from the Company’s membership base and was $9,757 and $8,297 at December 31, 2012
and 2011, respectively, before the allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of the Company’s members to make required payments. The Company considers factors such as: historical
collection experience, the age of the receivable balance and general economic conditions that may affect a member’s ability to pay.
F-11
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following are the changes in the allowance for doubtful accounts for the years December 31, 2012, 2011 and 2010:
December 31, 2012
December 31, 2011
December 31, 2010
Inventory
Balance Beginning
of the Year
$
$
$
2,440
2,565
2,410
Additions
$
$
$
9,711
6,698
5,923
$
$
$
Write-offs Net of
Recoveries
(8,902)
(6,823)
(5,768)
Balance at
End of Year
3,249
$
2,440
$
2,565
$
Inventory consists of supplies, headsets for the club entertainment system and clothing for sale to members. Inventories are valued at the
lower of cost or market by the first-in, first-out method.
Fixed Assets
Fixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which are 30 years
for building and improvements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computer
software. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease.
Payroll costs directly related to the construction or expansion of the Company’s club base are capitalized with leasehold improvements.
Expenditures for maintenance and repairs are charged to operations as incurred. The cost and related accumulated depreciation of assets retired
or sold is removed from the respective accounts and any gain or loss is recognized in operations. The costs related to developing web
applications, developing web pages and installing developed applications on the web servers are capitalized and classified as computer
software. Web site hosting fees and maintenance costs are expensed as incurred.
Intangible Assets and Debt Issuance Costs
Intangible assets historically consisted of membership lists, a beneficial lease and covenants-not-to-compete. These assets are stated at
cost and amortized by the straight-line method over their estimated lives. Membership lists are amortized over the estimated average
membership life, or 24 to 30 months historically, and covenants-not-to-compete are amortized over the contractual life, generally one to five
years. The beneficial lease is amortized over the remaining life of the underlying club lease. Intangible assets were fully amortized as of
December 31, 2011.
Debt issuance costs are classified within other assets and are being amortized as additional interest expense over the life of the underlying
debt, five to seven years, using the interest method. Amortization of debt issue costs was $1,135, $1,127 and $1,011, for the years ended
December 31, 2012, 2011 and 2010, respectively.
Accounting for the Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as fixed assets and intangible assets are reviewed for impairment when events or circumstances indicate that their
carrying value may not be recoverable. Estimated undiscounted expected future cash flows are used to determine if an asset is impaired in
which case the asset’s carrying value would be reduced to fair value calculated using discounted cash flows, which is based on internal budgets
and forecasts through the end of each respective lease. The most significant assumptions in those budgets and forecasts relate to estimated
membership and ancillary revenue, attrition rates, and maintenance capital expenditures, which are estimated at approximately 3% of total
revenues.
F-12
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill represents the excess of consideration paid over the fair value of the net identifiable business assets acquired in the acquisition
of a club or group of clubs. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-20, Intangibles
— Goodwill and Other, requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and
written down when impaired. The Company’s impairment review process compares the fair value of the reporting unit in which the goodwill
resides to its carrying value.
Goodwill impairment testing is a two-step process. Prior to performing this two-step process, companies also have the option to apply a
qualitative approach to assess goodwill for impairment pursuant to updated accounting rules issued by the FASB in September 2011 and
adopted by the Company beginning with its annual impairment test on February 29, 2012. Under the new rules, an entity has the option to first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity
determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step
impairment test is unnecessary. Companies that do not elect to perform the qualitative approach may proceed directly to the two-step process.
Step 1 involves comparing the fair value of the Company’s reporting units to their carrying amounts. If the fair value of the reporting unit is
greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step
must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value
of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step 1.
The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is
less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. The Company performs this analysis
annually as of the last day of February.
Insurance
The Company obtains insurance coverage for significant exposures as well as those risks required to be insured by law or contract. The
Company retains a portion of risk internally related to general liability losses. Where the Company retains risk, provisions are recorded based
upon the Company’s estimates of its ultimate exposure for claims. The provisions are estimated using actuarial analysis based on claims
experience, an estimate of claims incurred but not yet reported and other relevant factors. In this connection, under the provision of the
deductible agreement related to the payment and administration of the Company’s insurance claims, we are required to maintain irrevocable
letters of credit, totaling $2,803 as of December 31, 2012.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
The most significant assumptions and estimates relate to the allocation and fair value ascribed to assets acquired in connection with the
acquisition of clubs under the purchase method of accounting, the useful lives of long-term assets, recoverability and impairment of fixed and
intangible assets, deferred income tax valuation, valuation of and expense incurred in connection with stock options, valuation of interest-rate
swap arrangements, insurance reserves, legal contingencies and the estimated average membership life.
F-13
Table of Contents
Income Taxes
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined on the basis of the difference between
the financial statement and tax basis of assets and liabilities (“temporary differences”) at enacted tax rates in effect for the years in which the
temporary differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely
than not to be realized. FASB guidance related to accounting for uncertain tax positions prescribes a recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in income tax expense. In December 2009, the Company decided that the cumulative earnings of the Swiss clubs
could be invested in the U.S. Accordingly, in accordance with ASC 740-30, Income Taxes, the Company has recognized deferred tax liabilities
since 2009 in relation to the U.S. taxes on the total cumulative earnings of the Swiss clubs.
Statements of Cash Flows
Supplemental disclosure of cash flow information:
Cash paid
Interest (net of amounts capitalized)
Income taxes
Noncash investing and financing activities
2012
Year Ended December 31,
2011
2010
$ 23,738
924
$
$ 28,953
$
617
$ 20,157
3,311
$
Acquisition of fixed assets included in accounts payable and accrued expenses
$
2,797
$
1,645
$
4,392
See Note 8 for additional noncash financing activities.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources, including changes in the fair value of the Company’s derivative financial
instrument and foreign currency translation adjustments. The Company presents accumulated other comprehensive income in its consolidated
statements of comprehensive income.
The Company uses a derivative financial instrument, to limit exposure to changes in interest rates on the Company’s existing term loan
facility. The derivative financial instrument is recorded at fair value on the balance sheet and changes in the fair value are either recognized in
accumulated other comprehensive income (a component of shareholders’ equity) or net income depending on the nature of the underlying
exposure, whether the hedge is formally designated as a hedge, and if designated, the extent to which the hedge is effective. The Company’s
derivative financial instrument has been designated as a cash flow hedge. See Note 9 — Derivative Financial Instruments for more information
on the Company’s risk management program and derivatives.
At December 31, 2012, the Company owned three Swiss clubs, which use the Swiss Franc, their local currency, as their functional
currency. Assets and liabilities are translated into U.S. dollars at year-end exchange rates, while income and expense items are translated into
U.S. dollars at the average exchange rate for the period.
F-14
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For all periods presented foreign exchange transaction gains and losses were not material. Adjustments resulting from the translation of foreign
functional currency financial statements into U.S. dollars are included in the currency translation adjustment in the consolidated statements of
stockholders’ (deficit) equity and the consolidated statements of comprehensive income. The effect of foreign exchange translation adjustments
was $95, $(129) and $794 for the years ended December 31, 2012, 2011 and 2010, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and the
interest rate swap. Although the Company deposits its cash with more than one financial institution, as of December 31, 2012, $17,068 of the
cash balance of $37,758 was held at one financial institution. The Company has not experienced any losses on cash and cash equivalent
accounts to date, and the Company believes that, based on the credit ratings of these financial institutions, it is not exposed to any significant
credit risk related to cash at this time.
The counterparty to the Company’s interest rate swap is a major banking institution with a credit rating of investment grade or better and
no collateral is required, and there are no significant risk concentrations. The Company believes the risk of incurring losses on derivative
contracts related to credit risk is unlikely.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income applicable to common stockholders by the weighted average numbers
of shares of common stock outstanding during the period. Diluted earnings per share is computed similarly to basic earnings per share, except
that the denominator is increased for the assumed exercise of dilutive stock options and unvested restricted stock calculated using the treasury
stock method.
The following table summarizes the weighted average common shares for basic and diluted earnings per share (“EPS”) computations.
Weighted average number of common share outstanding —
basic
Effect of dilutive share-based awards
Weighted average number of common shares outstanding
— diluted
Earnings (loss) per share:
Basic
Diluted
2012
For The Year Ended December 31,
2011
23,436,393
678,147
22,828,031
595,766
2010
22,634,233
—
24,114,540
23,423,797
22,634,233
$
$
0.51
0.50
$
$
0.28
0.27
$
$
(0.01)
(0.01)
For the years ended December 31, 2012, 2011 and 2010, we did not include options to purchase 306,904, 672,589 and 2,164,485 shares
of the Company’s common stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than
the average market price and their inclusion would be anti-dilutive.
For the year ended December 31, 2010, there was no effect of diluted stock options on the calculation of diluted earnings per share as the
Company had a net loss for that period.
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”).
ASC 718 requires that the cost resulting from all share-based payment transactions be treated as compensation and recognized in the
consolidated financial statements. We record share-based payment awards at fair value on the grant date of the awards, based on the estimated
number of awards that are expected to vest. The fair value of stock options is determined using the Black-Scholes option-pricing model. The
fair value of the restricted stock awards is based on the closing price of the Company’s common stock on the date of the grant.
In December 2007, the SEC issued guidance regarding the use of a “simplified” method, as discussed in previous guidance, in developing
an estimate of expected term of “plain vanilla” share options. In particular, the staff indicated in the previous guidance that it will accept a
company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates
of expected term. At the time this was issued, the staff believed that more detailed external information about employee exercise behavior (e.g.,
employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies.
Therefore, the staff stated that it would not expect a company to use the simplified method for share option grants after December 31, 2007.
The staff understood that such detailed information about employee exercise behavior may not be widely available by December 31, 2007.
Accordingly, the staff would continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The
Company continued to use the simplified method for share options and warrants as all options issued since the Company’s Initial Public
Offering (“IPO”) in June of 2006 can be considered “plain vanilla” options and through the year ended December 31, 2011. Beginning in 2012,
based on the passage of time, the Company now has sufficient historical exercise data to provide a reasonable basis upon which to estimate the
expected term of stock options, therefore the “simplified method” to determine the expected term is no longer used.
On December 11, 2012, adjustments were made to certain stock options which were modified in order to maintain the intrinsic value of
the options in connection with the Company’s special dividend payment of $3.00 per share paid on December 11, 2012. The modifications in
most cases reduced the exercise price of the options and in certain other cases also increased the number of options. The option modification
impacted 67 plan participants. The existing terms and conditions of the options were not modified. The modification of these options resulted
in incremental compensation expense of $148 which was recognized on the modification date for options that were modified which have been
fully expensed as of the modification date. Additional incremental compensation expense of approximately $609 will be recognized ratably
over the remaining vesting periods related to unvested options that were modified. The incremental compensation expense was determined by
measuring the fair market value, using the Black-Scholes methodology, of the modified options immediately before and immediately after the
dividend payment transaction.
The fair value of the option awards for the periods presented below was determined using a Black-Scholes methodology using the
following weighted average assumptions:
Common
2010 Grants
2011 Grants
2012 option modification incremental expense
Risk-Free
Interest
Rate
2.0%
2.6%
0.4%
Expected
Life
6 years
6 years
3 years
Expected
Volatility
81 %
79 %
50 %
Expected
Dividend
Yield
—
—
—
Fair Value
at Date of
Grant
$
$
2.03
2.74
—
F-16
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average expected option term for 2010 and 2011 reflects the application of the simplified method set out in the FASB ASC
718-10-S99, topic 14 issued by the Securities and Exchange Commission (“SEC”), which defines the term as the average of the contractual
term of the options and the weighted average vesting period for all option tranches. The weighted average expected option term for 2012 is
based on actual past historical data of employee exercise behavior and vesting data. Expected volatility percentages for grant years 2010, 2011
and 2012 were based on the daily historical volatility of the Company’s stock price. The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury implied yield at the time of grant.
4. Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”) issued updated guidance allowing the use of a qualitative approach to
test indefinite-lived intangible assets for impairment. The updated guidance permits companies to first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is
concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the
indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. The updated guidance is
effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.
This update is not expected to have an impact on the Company’s financial statements since the Company currently does not have any indefinite
lived intangible assets.
In September 2011, the FASB issued updated guidance allowing the use of a qualitative approach to test goodwill for impairment. The
updated guidance permits companies to first perform a qualitative assessment to determine whether it is more likely than not that the fair value
of one of their reporting units is less than its carrying value. If the Company concludes that this is the case, it is then necessary to perform the
currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The updated
guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with
early adoption permitted. The Company adopted this amended guidance for the fiscal year beginning January 1, 2012, and applied the guidance
for the Company’s annual goodwill impairment test performed on February 29, 2012. The Company’s qualitative assessment pursuant to the
amended guidance indicated that it is more likely than not that the fair value of the Company’s goodwill reporting units are greater than their
carrying amounts and therefore the two-step quantitative goodwill impairment test was not performed.
In June 2011, the FASB amended its authoritative guidance on the presentation of comprehensive income. Under the amendment, an
entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This amendment,
therefore, eliminates the currently available option to present the components of other comprehensive income as part of the statement of
changes in stockholders’ equity. The amendment does not change the items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income. The Company adopted this amended guidance for the fiscal year
beginning January 1, 2012 and has elected to present two separate but consecutive statements, consisting of a statement of income followed by
a statement of comprehensive income. As this guidance relates to presentation only, the adoption of this guidance did not have any other effect
on the Company’s financial statements. The new guidance was applied retrospectively.
F-17
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5. Fixed Assets
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fixed assets as of December 31, 2012 and 2011 are shown at cost, less accumulated depreciation and amortization and are summarized
below:
Leasehold improvements
Club equipment
Furniture, fixtures and computer equipment
Computer software
Building and improvements
Land
Construction in progress
Less: Accumulated depreciation and amortization
$
December 31,
2012
496,692
98,306
54,585
18,056
4,995
986
5,978
679,598
(422,727 )
$
2011
499,907
96,014
52,092
15,261
4,995
986
4,793
674,048
(388,007)
$
256,871
$
286,041
Depreciation and leasehold amortization expense for the years ended December 31, 2012, 2011 and 2010, was $49,391, $51,491 and
$52,097, respectively.
Fixed assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that related carrying
amounts may not be recoverable from undiscounted cash flows in accordance with FASB released guidance. The Company’s long-lived assets
and liabilities are grouped at the individual club level which is the lowest level for which there are identifiable cash flows. To the extent that
estimated future undiscounted net cash flows attributable to the assets are less than the carrying amount, an impairment charge equal to the
difference between the carrying value of such asset and its fair value, calculated using discounted cash flows, is recognized. In the year ended
December 31, 2012, the Company tested nine underperforming clubs and recorded an impairment loss of $239 on leasehold improvements and
furniture and fixtures at one of these clubs that experienced decreased profitability and sales levels below expectations and were therefore
written down to their fair values of zero. The eight other clubs tested that did not have impairment charges had an aggregate of $19,577 of net
leasehold improvements and furniture and fixtures remaining as of December 31, 2012. The Company will continue to monitor the results and
changes in expectations of these clubs closely in the year ending December 31, 2013 to determine if fixed asset impairment is necessary. In
addition, during the fourth quarter of 2012, the Company recorded additional impairment charges totaling $3,197 related to the write-off of
fixed assets at four clubs that sustained severe damages in the aftermath of Hurricane Sandy. In the year ended December 31, 2011, the
Company did not record any fixed asset impairment charges. In the year ended December 31, 2010, the Company recorded a total of $3,254 of
fixed asset impairment charges comprised of a total of $1,570 of impairment charges related to three clubs and $1,684 of impairment charges
related to the planned closure of a club prior to its lease expiration date.
The fair values of fixed assets evaluated for impairment were calculated using Level 3 inputs using discounted cash flows, which are
based on internal budgets and forecasts through the end of each respective lease. The most significant assumptions in those budgets and
forecasts relate to estimated membership and ancillary revenue, attrition rates, and maintenance capital expenditures, which are estimated at
approximately 3% of total revenues. The measurement of fair value is in accordance with FASB guidance released in February 2008, which
established a framework in generally accepted accounting principles for measuring fair value and expanding disclosures about fair value
measurements. The standard established a hierarchy of inputs employed to determine fair value measurements, with three levels. Level 1 inputs
are quoted prices in active markets for
F-18
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
identical assets and liabilities, are considered to be the most reliable evidence of fair value and should be used whenever available. Level 2
inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets
that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities.
The following table presents the long-lived assets measured at fair value on a nonrecurring basis for the period ended December 31, 2012:
Fair Value
of Assets
(Liabilities)
Quoted Prices in Active
Markets for Identical
Items (Level 1)
Basis of Fair Value Measurements
Significant Other
Observable
Inputs (Level 2)
Significant Unobservable
Inputs (Level 3)
Fixed assets
$
3,436
$
—
$
—
$
3,436
6. Goodwill and Intangible Assets
Goodwill has been allocated to reporting units that closely reflect the regions served by the Company’s four trade names: New York
Sports Clubs (“NYSC”), Boston Sports Clubs (“BSC”), Washington Sports Clubs (“WSC”) and Philadelphia Sports Clubs (“PSC”), with
certain more remote clubs that do not benefit from a regional cluster being considered single reporting units (“Outlier Clubs”) and the
Company’s three clubs located in Switzerland being considered a single reporting unit (“SSC”). The Company has one Outlier Club with
goodwill. As of December 31, 2012, the BSC, WSC and PSC regions did not have goodwill balances.
The Company’s annual goodwill impairment tests are performed on the last day of February, or more frequently, should circumstances
change which would indicate the fair value of goodwill is below its carrying amount.
On January 1, 2012, the Company adopted guidance issued by the FASB allowing the use of a qualitative approach to test goodwill for
impairment and performed its annual impairment test as of February 29, 2012 pursuant to the new guidance. Under the new rules, an entity has
the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then
performing the two-step impairment test is unnecessary. In assessing the qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount, the Company assessed relevant events and circumstances that may impact the
fair value and the carrying amount of its reporting units. The identification of relevant events and circumstances and how these may impact a
reporting units’ fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the
identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Company specific
events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or
negatively and the magnitude of any such impact. Based upon the Company’s qualitative impairment analysis as of February 29, 2012, the
Company concluded that there was no requirement to perform the two-step quantitative goodwill impairment test. The key qualitative factors
that led to this conclusion were (i) the excess amount or “cushion” between each of the reporting unit’s fair value and carrying value as
indicated on the Company’s most recent quantitative assessment on February 28, 2011; (ii) the significant increase in the share price and
market capitalization of the Company since the prior year goodwill impairment analysis; and (iii) the overall positive financial performance of
the reporting units for the twelve months ended February 29, 2012 as compared to the twelve months ended February 28, 2011, and related
improvements in the five year plan.
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Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s prior year impairment test as of February 29, 2011 supported the recorded goodwill balances and as such no impairment
of goodwill was required. The valuation of reporting units requires assumptions and estimates of many critical factors, including revenue and
market growth, operating cash flows and discount rates.
For the February 28, 2011 impairment test, fair value was determined by using a weighted combination of two market-based approaches
(weighted 25% each) and an income approach (weighted 50%), as this combination was deemed to be the most indicative of the Company’s
fair value in an orderly transaction between market participants. Under the market-based approaches, the Company utilized information
regarding the Company, the Company’s industry as well as publicly available industry information to determine earnings multiples and sales
multiples that are used to value the Company’s reporting units. Under the income approach, the Company determined fair value based on
estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level
of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit
is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins,
discount rates and future market conditions, among others.
Solely for purposes of establishing inputs for the fair value calculations described above related to goodwill impairment testing, the
Company made the following assumptions. The Company developed long-range financial forecasts (five years or longer) for all reporting units.
The Company used discount rates ranging between 12.1% and 18.2%, compounded annual revenue growth ranging from (0.7%) to 5.4% and
terminal growth rates ranging between 1% and 3%. These assumptions are calculated separately for each reporting unit.
If the Company’s assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved, the
Company may be required to record additional goodwill impairment charges in future periods, whether in connection with the Company’s next
annual impairment testing as of February 28, 2013 or subsequent to that, if any such change constitutes a triggering event outside the quarter
when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would
result. There were no events triggering a review of goodwill as of December 31, 2012. The February 29, 2012 qualitative impairment analysis
supported the recorded goodwill balances and as such no impairment of goodwill was required. As of February 28, 2011, the estimated fair
value of NYSC was 49% greater than book value and the estimated fair value of SSC was 79% greater than book value.
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Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of goodwill from January 1, 2011 through December 31, 2012 are detailed in the charts below.
Balance as of January 1, 2011
Goodwill
Accumulated impairment of goodwill
Balance as of December 31, 2011
Goodwill
Accumulated impairment of goodwill
Changes due to foreign currency exchange rate
fluctuations
Balance as of December 31, 2012
Goodwill
Accumulated impairment of goodwill
Changes due to foreign currency exchange rate
fluctuations
NYSC
BSC
SSC
Outlier Clubs
Total
$ 31,403
—
$
15,766
(15,766)
$ 1,254
—
$
3,982
(3,845)
$
52,405
(19,611)
31,403
31,403
—
31,403
—
31,403
31,403
—
—
$ 31,403
$
—
1,254
137
32,794
15,766
(15,766)
—
—
—
15,766
(15,766)
—
—
1,254
—
1,254
5
1,259
1,259
—
25
$ 1,284
$
3,982
(3,845)
137
—
137
3,982
(3,845)
—
137
52,405
(19,611)
32,794
5
32,799
52,410
(19,611)
25
$
32,824
As of December 31, 2011, intangible assets consisting of covenants-not-to-compete were fully amortized with a gross carrying amount of
$1,508 and accumulated amortization of $1,508. Amortization expense of intangible assets for the years ended December 31, 2011 and 2010
was $44 and $105, respectively.
7. Accrued Expenses
Accrued expenses as of December 31, 2012 and 2011 consisted of the following:
Accrued payroll
Accrued construction in progress and equipment
Accrued occupancy costs
Accrued insurance claims
Accrued other
$
December 31,
2012
9,249
2,797
6,743
2,619
5,645
$
2011
9,773
1,471
5,656
3,673
6,002
8.
Long-Term Debt
Long-term debt as of December 31, 2012 and 2011 consisted of the following:
$ 27,053
$ 26,575
2011 Term Loan Facility
Less: Unamortized discount
Less: Current portion due within one year
Long-term portion
December 31,
2012
$ 315,743
(5,404 )
(15,787 )
2011
$ 291,750
(2,756)
(25,507)
$ 294,552
$ 263,487
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The aggregate long-term debt obligations maturing during the next five years and thereafter are as follows:
Year Ending December 31,
2013
2014
2015
2016
2017
Thereafter
Amount Due
$
15,787
3,157
3,157
3,157
3,157
287,328
$ 315,743
The payment obligations disclosed in the above table are determined based on forecasted earnings and debt levels which factors into the
calculation of a leverage ratio, as defined in the current credit agreement, which is used to determine the required principal payments on debt.
We have assumed a leverage ratio of less than 2.75:1.00 for periods 2014 and thereafter. Changes in the forecast can affect the amount of
principal payments required to be paid in a given period.
2011 Senior Credit Facility
On May 11, 2011, TSI, LLC entered into a $350,000 senior secured credit facility (“2011 Senior Credit Facility”). The 2011 Senior
Credit Facility consists of a $300,000 term loan facility (“2011 Term Loan Facility”) and a $50,000 revolving loan facility (“2011 Revolving
Loan Facility”). The 2011 Term Loan Facility was issued at an original issue discount (“OID”) of 1.0% or $3,000. The $3,000 OID was
recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized as interest expense
using the effective interest method. On May 11, 2011, debt issuance costs related to the 2011 Senior Credit Facility were $8,065, of which
$7,288 are being amortized as interest expense, and are included in other assets in the accompanying consolidated balance sheets. The proceeds
from the 2011 Term Loan Facility were used to pay off amounts outstanding under the Company’s previously outstanding long-term debt
facility (“2007 Senior Credit Facility”), to pay the redemption price for all of the Company’s outstanding 11% senior discount notes due in
2014 (“Senior Discount Notes”), and to pay related fees and expenses. Unamortized loan costs of $1,550 related to the 2007 Senior Credit
Facility and the Senior Discount Notes and $777 of costs related to the 2011 Senior Credit Facility were written off in the year ended
December 31, 2011 and are included as part of loss on extinguishment of debt in the accompanying consolidated statements of operations.
None of the revolving facility was drawn upon as of the closing date on May 11, 2011, but loans under the 2011 Revolving Loan Facility may
be drawn from time to time pursuant to the terms of the 2011 Senior Credit Facility. The 2011 Term Loan Facility matures on May 11, 2018,
and the 2011 Revolving Loan Facility matures on May 11, 2016. The borrowings under the 2011 Senior Credit Facility are guaranteed and
secured by assets and pledges of capital stock by the Company, TSI, LLC and the wholly-owned domestic subsidiaries of TSI, LLC.
On August 22, 2012, TSI, LLC entered into a First Amendment (the “First Amendment”) to the 2011 Senior Credit Facility. The First
Amendment reduced the then-current interest rates on the 2011 Term Loan Facility by 125 basis points by reducing the applicable margin on
the initial term loans from 4.50% to 3.50% for base rate loans and from 5.50% to 4.50% for Eurodollar loans and reduced the interest rate floor
on the initial term loans from 2.50% to 2.25% for base rate loans and from 1.50% to 1.25% for Eurodollar loans. The First Amendment also
converted the existing voluntary prepayment penalty provision from a “101 hard call” provision (which requires the payment of a 1% fee on the
amount of any term loans that are voluntarily prepaid), originally scheduled to end in May 2013, to a “101 soft call” provision (which requires
the payment of a 1% fee on the amount of any term loans repaid in connection with a refinancing or repricing transaction) ending in August
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Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2013, and subsequently extended by the November 14, 2012 amendment to November 2013. All other principal provisions, including maturity
and covenants under the Company’s existing 2011 Senior Credit Facility remained unchanged in all material respects. The First Amendment
was subject to the consent of term loan lenders. Non-consenting term loan lenders with term loan principal outstanding totaling $13,796 were
replaced with replacement term loan lenders in order to execute the First Amendment. In connection with the pay off of non-consenting term
loan lenders, during the year ended December 31, 2012, the Company recorded a loss on extinguishment of debt of $464 consisting of the
write-offs of the related portions of unamortized debt issuance costs and OID of $260 and $204, respectively. In addition, the Company
recorded additional debt discount of $2,707 related to a 1.00% amendment fee paid to consenting lenders and recognized additional interest
expense totaling $1,390 related primarily to bank and legal related fees paid to third parties to execute the First Amendment.
Subsequent to the effective date of the First Amendment, the Company made a voluntary prepayment of $15,000 on the 2011 Term Loan
Facility. In connection with this voluntary prepayment, during the year ended December 31, 2012, the Company recorded loss on
extinguishment of debt of $546, consisting of the write-offs of the related portions of unamortized debt issuance costs and debt discount of
$269 and $277, respectively.
On November 16, 2012, TSI, LLC entered into a Second Amendment (the “Second Amendment”) to the 2011 Senior Credit Facility.
Under the Second Amendment, TSI, LLC borrowed an additional $60,000 incremental term loan issued at an OID of 0.50% or $300. The $300
OID was recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized as interest
expense using the effective interest method. The new borrowings were used, together with cash on hand, to pay a special cash dividend to the
Company’s stockholders, including an equivalent cash bonus payment to certain option holders, on December 11, 2012. In addition, the Second
Amendment provides for a waiver of any prepayment required to be paid using the Company’s excess cash flow for the period ended
December 31, 2012, amends the restricted payments covenant to permit the payment of the dividend and cash bonus payments and permits
adjustments to the Company’s calculation of consolidated EBITDA with respect to the cash bonus payment and with respect to fees and
expenses associated with certain permitted transactions. In connection with the execution of the Second Amendment, the Company recorded
additional debt discount of $639 related to a 0.25% amendment fee, debt issuance costs of $125 and additional interest expense totaling $1,569
related primarily to bank, arrangement and legal fees paid to third parties.
As of December 31, 2012, the 2011 Term Loan Facility has a gross principal balance of $315,743 and a balance of $310,339, net of
unamortized debt discount of $5,404 which is comprised of the original issue discounts from the original debt issuance date of May 11, 2011
and the additional debt discounts recorded in connection with the First and Second Amendments. The unamortized debt discount balance is
recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized as interest expense
using the effective interest method. As of December 31, 2012, the unamortized balance of debt issuance costs of $5,257 is being amortized as
interest expense, and is included in other assets in the accompanying consolidated balance sheets.
As of December 31, 2012, there were no outstanding 2011 Revolving Loan Facility borrowings and outstanding letters of credit issued
totaled $6,091. The unutilized portion of the 2011 Revolving Loan Facility as of December 31, 2012 was $43,909.
Borrowings under the 2011 Term Loan Facility, at TSI, LLC’s option, bear interest at either the administrative agent’s base rate plus
3.5% or its Eurodollar rate plus 4.5%, each as defined in the 2011 Senior Credit Facility, as amended. The Eurodollar rate has a floor of 1.25%
and the base rate has a floor of 2.25% with respect to the outstanding term loans. As of December 31, 2012, the interest rate was 5.75%. TSI,
LLC is required to pay 0.25% of principal per quarter, in respect of such loans. If, as of the last day of any fiscal quarter
F-23
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of TSI Holdings, the total leverage ratio, as defined, is greater than 2.75:1.00, TSI, LLC is required to pay 1.25% of principal. As of
December 31, 2012, TSI, LLC had a total leverage ratio of 3.00:1.00 and TSI, LLC will be required to make a principal payment of $3,947 on
March 31, 2013. As of December 31, 2012, TSI LLC had made a total of $44,257 in principal payments on the 2011 Term Loan Facility.
The terms of the 2011 Senior Credit Facility, as amended, provide for financial covenants which require TSI, LLC to maintain a total
leverage ratio, as defined, of no greater than 4.50:1.00 effective March 31, 2012 and thereafter; an interest expense coverage ratio of no less
than 2.00:1.00; and a covenant that limits capital expenditures to $40,000 for the four quarters ending in any quarter during which the total
leverage ratio is greater than 3.00:1.00 and to $50,000 for the four quarters ending in any quarter during which the ratio is less than or equal to
3.00:1.00 but greater than 2.50:1.00. This covenant does not limit capital expenditures if the ratio is less than or equal to 2.50:1.00. TSI, LLC
was in compliance with these covenants as of December 31, 2012 with a total leverage ratio of 3.00:1.00 and an interest expense coverage ratio
of 4.22:1.00.
TSI, LLC may prepay the 2011 Term Loan Facility and 2011 Revolving Loan Facility without premium or penalty in accordance with the
2011 Senior Credit Facility, as amended, except that a prepayment premium of 1.0% is payable for any prepayments made prior to
November 14, 2013 only in connection with a repricing transaction that reduces the effective yield of the initial term loans, otherwise the 1.0%
prepayment premium would not be applicable. Mandatory prepayments are required in certain circumstances relating to cash flow in excess of
certain expenditures, asset sales, insurance recovery and incurrence of certain other debt. The 2011 Senior Credit Facility contains provisions
that require excess cash flow payments, as defined, to be applied against outstanding 2011 Term Loan Facility balances. The excess cash flow
is calculated as of December 31 and paid on March 31. The applicable excess cash flow repayment percentage is applied to the excess cash
flow when determining the excess cash flow payment. Earnings, changes in working capital and capital expenditure levels all impact the
determination of any excess cash flows. The applicable excess cash flow repayment percentage is 75% when the total leverage ratio, as defined
in the 2011 Senior Credit Facility exceeds 3.00:1.00; 50% when the total leverage ratio is greater than 2.50:1.00 but less than or equal to
3.00:1.00; 25% when the total leverage ratio is greater than 2.00:1.00 but less than or equal to 2.50:1.00 and 0% when the total leverage ratio is
less than or equal to 2.00:1.00. The total leverage ratio as of December 31, 2011 was 3.07:1.00 which resulted in a excess cash flow principal
payment of $16,507 that was paid with cash on hand on March 31, 2012. The calculation performed as of December 31, 2012 resulted in a total
leverage ratio of 3.00:1.00. However, pursuant to the terms of the Second Amendment, a waiver was provided on the prepayment required to
be paid using the Company’s excess cash flow for the year ended December 31, 2012.
Repayment of 2007 Senior Credit Facility
Contemporaneously with entry into the 2011 Senior Credit Facility, TSI, LLC repaid the outstanding principal amount of the 2007 Term
Loan Facility of $164,001. The 2007 Term Loan Facility was set to expire on the earlier of February 27, 2014, or August 1, 2013, if the Senior
Discount Notes were still outstanding. There were no outstanding amounts under the 2007 Revolving Loan Facility as of such date. The 2007
Term Loan Facility was repaid at face value plus accrued and unpaid interest of $447 and fees related to the letters of credit of $27. The total
cash paid in connection with this repayment was $164,475 as of May 11, 2011 with no early repayment penalty. The Company determined that
the 2011 Senior Credit Facility was not substantially different than the 2007 Senior Credit Facility for certain lenders based on the less than
10% difference in cash flows of the respective debt instruments. A portion of the transaction was therefore accounted for as a modification of
the 2007 Senior Credit Facility and a portion was accounted for as an extinguishment. As of May 11, 2011, the Company recorded refinancing
charges of approximately $634, representing the write-off of the remaining unamortized debt costs related to the 2007 Senior Credit Facility,
which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations.
F-24
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Redemption of Senior Discount Notes
A portion of the proceeds from the 2011 Senior Credit Facility were also used to pay the remaining principal amount on the Senior
Discount Notes of $138,450 plus a call premium of 1.833% of the principal amount thereof totaling approximately $2,538 and accrued interest
of $5,457. The accrued interest included interest through May 11, 2011 of $4,188, plus 30 days of additional interest of $1,269, representing
the interest charge during the 30 day notification period. The Company determined that the 2011 Senior Credit Facility was substantially
different than the Senior Discount Notes. As of May 11, 2011, the Company wrote-off unamortized deferred financing costs of approximately
$916 related to the redemption of the Senior Discount Notes, which is included in loss on extinguishment of debt in the accompanying
consolidated statements of operations for the year ended December 31, 2011.
Fair Market Value
Based on quoted market prices, the 2011 Term Loan Facility had a fair value of approximately $322,058 and $288,833 at December 31,
2012 and 2011, respectively, and is classified within level 2 of the fair value hierarchy.
For the fair market value of the Company’s interest rate swap instrument refer to Note 9 — Derivative Financial Instruments.
Interest Expense
The Company’s interest expense and capitalized interest related to funds borrowed to finance club facilities under construction for the
years ended December 31, 2012, 2011 and 2010 were as follows:
Interest costs expensed
Interest costs capitalized
2012
$ 24,640
—
Year Ended December 31,
2011
$ 24,274
176
2010
$ 21,158
16
Total interest expense and amounts capitalized
$ 24,640
$ 24,450
$ 21,174
9. Derivative Financial Instruments
In its normal operations, the Company is exposed to market risks relating to fluctuations in interest rates. In order to minimize the
possible negative impact of such fluctuations on the Company’s cash flows the Company may enter into derivative financial instruments
(“derivatives”), such as interest-rate swaps. Any instruments are not entered into for trading purposes and the Company only uses commonly
traded instruments. Currently, the Company has used derivatives solely relating to the variability of cash flows from interest rate fluctuations.
Effective July 13, 2011, the Company entered into an interest rate swap arrangement which effectively converted $150,000 of its
variable-rate debt based on a one-month Eurodollar rate to a fixed rate of 1.983%, or a total fixed rate of 7.483%, on this $150,000 when
including the applicable 5.50% margin. In August 2012, the Company amended the terms of the 2011 Senior Credit Facility to, among other
things, reduce the applicable margin on Eurodollar rate loans from 5.50% to 4.50% and reduce the interest rate floor on Eurodollar rate loans
from 1.50% to 1.25%. In conjunction with the First Amendment to the 2011 Senior Credit Facility in August 2012, the interest rate swap
arrangement was amended to reduce the one-month Eurodollar fixed rate from 1.983% to 1.783%, or a total fixed rate of 6.283% when
including the applicable 4.50% margin on Eurodollar rate loans. On November 14, 2012, the Company further amended the terms of the 2011
Senior Credit Facility to,
F-25
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
among other things, allow for the borrowing of a $60,000 incremental term loan. In connection with the Second Amendment to the 2011 Credit
Facility, the Company further amended the interest rate swap to increase the notional amount to $160,000 and extend the maturity of the swap
to from July 13, 2014 to May 13, 2015. In addition, the one-month Eurodollar fixed rate was lowered from 1.783% to 1.693%, or a total of
6.193% when including the applicable 4.50% margin on Eurodollar rate loans. As of the incremental term loan borrowing date, the interest rate
swap arrangement covered $160,000 of the Company’s total variable rate debt of $315,743. As permitted by FASB Accounting Standards
Codification (“ASC”) 815, Derivatives and Hedging, the Company has designated this swap as a cash flow hedge, the effects of which have
been reflected in the Company’s consolidated financial statements as of and for the year ended December 31, 2012 and 2011. The objective of
this hedge is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being
hedged.
When a derivative is executed and hedge accounting is appropriate, it is designated as a cash flow hedge at inception with re-designation
being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps are designated as cash flow hedges for accounting purposes since
they are being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt). On an ongoing
basis, the Company performs a quarterly assessment of the hedge effectiveness of the hedge relationship and measures and recognizes any
hedge ineffectiveness in the consolidated statements of operations. For the year ended December 31, 2012, hedge ineffectiveness was evaluated
using the hypothetical derivative method, and the ineffective portion of the hedge was reported in the Company’s consolidated statements of
income. The amount related to hedge ineffectiveness for the year ended December 31, 2012 was de minimis. There was no hedge
ineffectiveness during the year ended December 31, 2011.
Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
•
•
•
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in
active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable .
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value.
The fair value for the Company’s interest rate swap is determined using observable current market information such as the prevailing
Eurodollar interest rate and Eurodollar yield curve rates and include consideration of counterparty credit risk. The following table presents the
aggregate fair value of the Company’s derivative financial instrument:
Fair Value Measurements Using:
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
Interest rate swap liability as of December 31,
2012
$
1,523
$
—
$
1,523
$
—
F-26
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The swap contract liability of $1,523 was recorded as a component of other liabilities with the offset to accumulated other comprehensive
income ($861, net of taxes) on the accompanying consolidated balance sheet as of December 31, 2012.
The Company does not expect that any derivative losses included in accumulated other comprehensive income at December 31, 2012 will
be reclassified into earnings within the next 12 months.
10. Leases
The Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In
addition to base rent, the facility leases generally provide for additional rent based on operating results, increases in real estate taxes and other
costs. Certain leases provide for additional rent based upon defined formulas of revenue, cash flow or operating results of the respective
facilities. Under the provisions of certain of these leases, the Company is required to maintain irrevocable letters of credit, which amounted to
$2,188 as of December 31, 2012.
The leases expire at various times through November 30, 2029 and certain leases may be extended at the Company’s option. Escalation
terms on these leases generally include fixed rent escalations, escalations based on an inflation index such as CPI, and fair market value
adjustments. In the next five years, or the period from January 1, 2013 through December 31, 2017, the Company has leases for 11 club
locations that are due to expire without any renewal options, one of which is due to expire in 2013, and 46 club locations that are due to expire
with renewal options. In 2013, we expect to close or relocate a total of three clubs.
Future minimum rental payments under non-cancelable operating leases are as follows:
Year Ending December 31,
2013
2014
2015
2016
2017
Aggregate thereafter
Minimum
Annual Rent
al
$
84,044
84,779
81,801
76,857
66,807
289,774
Rent expense, including the effect of deferred lease liabilities, for the years ended December 31, 2012, 2011 and 2010 was $117,229,
$112,055 and $111,150, respectively. Such amounts include non-base rent items of $23,291, $20,788 and $20,869, respectively.
The Company, as landlord, leases space to third party tenants under non-cancelable operating leases and licenses. In addition to base rent,
certain leases provide for additional rent based on increases in real estate taxes, indexation, utilities and defined amounts based on the operating
results of the lessee. The leases expire at various times through March 31, 2028. Future minimum rentals receivable under noncancelable leases
are as follows:
Year Ending December 31,
2013
2014
2015
2016
2017
Aggregate thereafter
F-27
Minimum
Annual Rental
$
4,056
3,265
2,906
2,616
2,322
30,940
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rental income, including non-cash rental income, for the years ended December 31, 2012, 2011 and 2010 was $4,363, $4,612 and
$4,718, respectively. Such amounts include additional rental charges above the base rent of $59, $488 and $544, respectively. We own the
building at one of our club locations which houses a rental tenant that generated $1,968 of rental income for each of the years ended
December 31, 2012, 2011 and 2010.
11. Stockholders’ (Deficit) Equity
a. Capitalization
The Company’s certificate of incorporation adopted in connection with the IPO provides for 105,000,000 shares of capital stock,
consisting of 5,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”) and 100,000,000 shares of Common
Stock, par value $0.001 per share (the “Common Stock”).
b. Common Stock Options
The outstanding Common Stock options as of December 31, 2012 vest in full at various dates between January 1, 2013 and April 30,
2015. The vesting of certain grants will be accelerated in the event that certain defined events occur including the sale of the Company. The
term of each grant is generally ten years.
As of December 31, 2012, 2011 and 2010, a total of 982,464, 1,180,004 and 908,857 Common Stock options were exercisable,
respectively.
At December 31, 2012, the Company had 53,520 and 1,257,298 stock options outstanding under its 2004 Stock Option Plan and 2006
Stock Incentive Plan, respectively.
The Company recognizes stock option expense equal to the grant date fair value of a stock option on a straight-line basis over the
requisite service period, which is generally the vesting period, net of estimated forfeitures. The total compensation expense related to options,
classified within payroll and related on the consolidated statements of operations, related to these plans was $657, $1,122, and $1,220 for the
years ended December 31, 2012, 2011 and 2010, respectively, and the related tax benefit was $286, $418 and $531 for the years ended
December 31, 2012, 2011 and 2010, respectively. The total compensation expense of $657 for the year ended December 31, 2012 includes
$148 related to incremental compensation expense recognized in connection with the modification of stock options described below.
In connection with the Company’s special dividend payment of $3.00 per share paid on December 11, 2012, stock option holders with
vested in-the-money options (those with exercise prices less than $12.39) were paid an equivalent cash bonus of $3.00 per each vested
in-the-money option. The total aggregate cash bonus paid on December 11, 2012 was approximately $2,496 and was recorded as payroll and
related expense in the consolidated statements of operations for the year ended December 31, 2012. Additionally, on December 11, 2012,
adjustments were made to certain stock options which were modified in order to maintain the intrinsic value of the options in connection with
the Company’s special dividend payment. The modifications in most cases reduced the exercise price of the options and in certain other cases
also increased the number of options. The option modifications impacted 67 plan participants. The existing terms and conditions of the options
were not modified. The modification of these options resulted in incremental compensation expense of $148 which was recognized on the
modification date for options that were modified which have been fully expensed as of the modification date. Additional incremental
compensation expense of approximately $609 will be recognized ratably over the remaining vesting periods related to unvested options that
were modified. The incremental compensation expense was determined by measuring the fair market value, using the Black-Scholes
methodology, of the modified options immediately before and immediately after the dividend payment transaction.
F-28
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s 2006 Stock Incentive Plan, as amended and restated (the “2006 Plan”), authorizes the Company to issue up to 3,000,000
shares of Common Stock to employees, non-employee directors and consultants pursuant to awards of stock options, stock appreciation rights,
restricted stock, in payment of performance shares or other stock-based awards. An amendment to the 2006 Plan to increase the aggregate
number of shares issuable under the plan by 500,000 shares to 3,000,000 shares was unanimously adopted by the Board of Directors on
March 1, 2011, and approved by stockholders at the Annual Meeting of Stockholders on May 12, 2011. Under the 2006 Plan, stock options
must be granted at a price not less than the fair market value of the stock on the date the option is granted, generally are not subject to
re-pricing, and will not be exercisable more than ten years after the date of grant. As of December 31, 2012, there were 529,611 shares
available to be issued under the 2006 Plan.
The following table summarizes the stock option activity for the years ended December 31, 2010, 2011 and 2012:
Balance at January 1, 2010
Granted
Exercised
Cancelled
Forfeited
Balance at December 31, 2010
Granted
Exercised
Cancelled
Forfeited
Balance at December 31, 2011
Option Modifications
Exercised
Cancelled
Forfeited
Balance at December 31, 2012
F-29
Common
2,283,673
429,500
(40,243 )
(236,184 )
(196,489 )
2,240,257
7,500
(164,435 )
(15,034 )
(59,582 )
2,008,706
25,764
(534,514 )
(18,090 )
(171,048 )
1,310,818
Weighted
Average
Exercise
Price
$
6.23
2.88
2.12
10.62
6.24
5.20
4.18
2.91
11.40
2.58
5.40
1.35
4.40
15.28
2.60
$
5.21
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes stock option information as of December 31, 2012:
Common
2003 grants
2004 amended and repriced 2003
grants
2005 grants
2006 grants
2007 grants
2008 grants
2009 grants
2010 grants
2011 grants
Total Grants
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life
Number
Outstanding
Weighted-
Average
Exercise
Price
Number
Exercisable
Weighted-
Average
Exercise
Price
4,480
9 months
$
10.29
4,480
$
10.29
23,140
9,100
180,000
126,500
262,371
312,633
385,094
7,500
7 months
28 months
37 months
55 months
67 months
83 months
92 months
97 months
5.89
4.19
11.20
14.96
5.38
1.74
1.89
1.93
23,140
1,960
180,000
126,500
262,371
196,888
185,250
1,875
5.89
6.54
11.20
14.96
5.38
2.18
2.85
4.18
1,310,818
72 months
$
5.21
982,464
$
6.60
The Company did not grant any stock options during the year ended December 31, 2012.
Options granted under the 2004 Stock Option Plan generally qualify as “incentive stock options” under the U.S. Internal Revenue Code.
Options granted under the 2006 Stock Option Plans generally qualify as “non-qualified stock options” under the U.S. Internal Revenue Code.
The exercise price of a stock option is generally equal to the fair market value of the Company’s Common Stock on the option grant date.
The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following weighted
average fair values as follows as of December 31, 2012:
Outstanding at December 31, 2012
Vested at December 31, 2012
Exercisable at December 31, 2012
Number of
Shares
Weighted-
Average
Exercise
Price
1,310,818
982,464
982,464
$
$
$
5.21
6.60
6.60
Weighted-
Average
Remaining
Contractual
Term
(years)
6.0
5.5
5.5
Aggregate
Intrinsic
Value
(thousands)
$
$
$
7,900
4,748
4,748
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the fair value of the
Company’s common stock at December 31, 2012 of $10.66 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on December 31, 2012. The intrinsic value is
based on the fair market value of the Company’s stock and therefore changes as the fair market value of the stock price changes. The total
intrinsic value of options exercised was $3,895 for the year ended December 31, 2012.
As of December 31, 2012, a total of $204 unrecognized compensation cost related to stock options is expected to be recognized over a
weighted-average period of 1.5 years. In addition, incremental compensation expense of $609 related to the modification of unvested option
awards on December 11, 2012 will be ratably recognized over the remaining future vesting periods of those awards.
F-30
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
c. Common Stock Grants
Restricted Stock Grants
The following restricted stock grants were issued to employees of the Company during the year ended December 31, 2012.
Date
April 27, 2012
May 18, 2012
October 30, 2012
Total
Number
of Shares
8,000
75,000
168,500
251,500
Share
Price
$ 13.01
$ 11.46
$ 12.64
Grant Date
Fair Value
104
$
859
2,130
$
3,093
The following table summarizes the restricted stock activity for the year ended December 31, 2012.
Balance as of December 31, 2011
Granted
Vested
Forfeited
Balance as of December 31, 2012
Number
of Shares
186,249
251,500
(43,846 )
(26,291 )
Weighted
Average
Grant Date
Fair Value
7.39
$
12.30
7.28
7.98
367,612
$
10.72
The fair value of restricted stock is based on the closing stock price of an unrestricted share of the Company’s common stock on the grant
date and is amortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period,
net of estimated forfeitures. The total compensation expense, classified within payroll and related on the consolidated statements of operations,
related to restricted stock grants was $533 and $138 for the years ended December 31, 2012 and 2011, respectively, and the related tax benefit
was $232 and $52 for the years ended December 31, 2012 and 2011, respectively. The shares contain vesting restrictions and vest 25% per year
over four years on the anniversary date of the grants. The Company granted restricted stock awards totaling 188,999 shares with an aggregate
grant date fair value of $1,377 in the year ended December 31, 2011. There were no restricted stock grants issued in the year ended
December 31, 2010.
The total unrecognized compensation expense of $3,182 is expected to be recognized through October 30, 2016.
Non-Restricted Stock Grants
The below table indicates the non-restricted common stock grants issued to the Company’s Board of Directors during the year ended
December 31, 2012. The total fair value of the shares issued was expensed upon the grant dates.
Date
January 18, 2012
May 10, 2012
Total
Number of
Shares
10,835
1,667
12,502
Share
Price
$ 8.69
$ 12.99
Grant Date
Fair Value
94
$
22
$
116
F-31
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
d. Common Stock Repurchases
The Company did not repurchase Common Stock during the years ended December 31, 2012, 2011 and 2010.
e. Dividends
On November 16, 2012, the board of directors of the Company declared a special cash dividend of $3.00 per share, payable on
December 11, 2012 to common stock holders of record at the close of business on November 30, 2012. The aggregate amount of the dividends
payable was approximately $71,400 based upon shares of common stock outstanding as of the record date of November 30, 2012.
Pursuant to the 2006 Plan, holders of unvested restricted shares as of December 11, 2012 qualify to receive the $3.00 dividend on each
future vesting date, subject to continued employment through the vesting date. As of December 31, 2012, the total dividends payable on
unvested restricted shares was $1,104, of which $305 is classified as the current portion of the dividends payable expected to be paid in 2013
and $799 classified as long-term which is expected to be paid in the vesting periods in 2014 through 2016.
12. Revenue from Club Operations
Revenues from club operations for the years ended December 31, 2012, 2011 and 2010 are summarized below:
Membership dues
Joining fees
Personal training revenue
Other ancillary club revenue(1)(2)
Total club revenue
Fees and other revenue(2)
Total revenue
2012
$ 366,044
11,595
65,641
29,897
Years Ended December 31,
2011
$ 364,536
6,824
62,394
28,297
473,177
5,804
462,051
4,890
2010
$ 365,100
6,967
60,875
24,684
457,626
4,761
$ 478,981
$ 466,941
$ 462,387
(1) Other ancillary club revenue primarily consists of Small Group Training, Sports Clubs for Kids and racquet sports.
(2) As previously disclosed, member usage fees historically recorded in other ancillary club revenue were reclassified to membership dues
for the years ended December 31, 2011 and 2010 in the amount of $2,035 and $1,671, respectively.
(3) Fees and other revenue primarily consist of rental income, marketing revenue and management fees.
F-32
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Corporate Income Taxes
The provision for income taxes for the years ended December 31, 2012, 2011 and 2010 consisted of the following:
Current
Deferred
Current
Deferred
Current
Deferred
Year Ended December 31, 2012
State and
Local
Federal
250
$
6,041
Foreign
172
$
—
79
(221)
Total
501
$
5,820
$ 6,291
$
172
(142)
$ 6,321
Year Ended December 31, 2011
State and
Local
Foreign
541
$
—
187
(377)
Total
728
$
1,971
Federal
$ —
2,348
$ 2,348
$
541
(190)
$ 2,699
$
$
$
$
Year Ended December 31, 2010
State and
Local
Federal
$ (7,819)
8,536
Foreign
$
179
1
$
(479 )
(562 )
Total
$ (8,119)
7,975
$
717
$
180
$
(1,041 )
$
(144)
The components of deferred tax assets, net consist of the following items:
Deferred tax assets
Deferred lease liabilities
Deferred revenue
Deferred compensation expense incurred in connection with stock options
Federal and state net operating loss carry-forwards
Accruals, reserves and other
Deferred tax liabilities
Fixed assets and intangible assets
Deferred costs
Undistributed foreign earnings and other
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net
F-33
December 31,
2012
2011
$ 13,494
11,545
1,919
23,868
6,497
$ 57,323
$ 18,045
4,669
333
$ 23,047
$ 14,592
10,937
2,211
28,396
7,106
$ 63,242
$ 18,707
4,353
100
$ 23,160
34,276
(83 )
40,082
(82)
$ 34,193
$ 40,000
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2012, the Company has net deferred tax assets of $34,193. Quarterly, the Company assesses the weight of all
positive and negative evidence to determine whether the net deferred tax asset is realizable. In 2011, the Company returned to profitability after
sustaining losses in 2009 and 2010. The Company has historically been a taxpayer and is in a three year cumulative income position as of
December 31, 2012. In addition, the Company, based on recent trends, projects future income sufficient to realize the deferred tax assets during
the periods when the temporary tax deductible differences reverse. With the exception of the deductions related to our captive insurance
company for state taxes, state taxable income has been and is projected to be the same as federal taxable income. Because the Company expects
the captive insurance company to be discontinued in 2014, the assessment of the realizability of the state deferred tax assets is consistent with
the federal tax analysis above. The Company has federal and state net operating loss carry-forwards which the Company believes will be
realized within the available carry-forward period, except for a small state net operating loss carry-forward in Rhode Island due to the short
carry-forward period in that state. Accordingly, the Company concluded that it is more likely than not that the deferred tax assets will be
realized. If actual results do not meet the Company’s forecasts and the Company incurs losses in 2013 and beyond, a valuation allowance
against the deferred tax assets may be required in the future.
As of December 31, 2012, the Company has a federal net operating loss carry-forward of $39,141. Pursuant to ASC 718-740-25-10, the
Company has not recorded the tax benefit and related deferred tax asset for the windfall portion of stock compensation tax deductions that
either create a net operating loss carry-forward or increase a net operating loss carry-forward. As such, the amount of net operating loss
carry-forwards for which a tax benefit would be recorded to additional paid-in capital when the tax benefit is realized is approximately $3,099
as of December 31, 2012.
As of December 31, 2012, Federal wage credit carry-forwards of $3,369, pre-apportioned state net operating loss carry-forwards of
$527,543 and post-apportioned state net operating loss carry-forwards of $36,880. Such amounts expire between December 31, 2014 and
December 31, 2032. The Company has concluded that it is more likely than not that the net deferred tax asset balance as of December 31, 2012
will be realized with the exception of the aforementioned Rhode Island net operating loss.
The Company’s foreign pre-tax earnings related to the Swiss entity were $846, $910 and $767 for the years ended December 31, 2012,
2011 and 2010, respectively, and the related current tax provisions were $172, $541 and $179, respectively. In 2011, the Company repatriated
Swiss earnings through 2010. In connection with this dividend, the Company will be entitled to claim a foreign tax credit of $1,541 for federal
income tax purposes which, due to the net operating loss carry-forward, is reflected as a deferred tax asset. In accordance with ASC 740-30, the
Company had recognized a deferred tax liability of $333 for the incremental U.S. tax cost on the total cumulative undistributed earnings of the
Swiss clubs for the period through December 31, 2012.
The results for the year ended December 31, 2012 and December 31, 2011 include error corrections that resulted in an increase in benefit
for corporate income taxes and a related increase in deferred tax assets in the Company’s consolidated statement of operations and consolidated
balance sheet, respectively. In the fourth quarter of 2012, the Company identified corrections related to temporary differences in fixed assets,
intangible assets and deferred revenue resulting in the recognition of an income tax benefit of $483. In the fourth quarter of 2011, the Company
identified adjustments related to the tax effect of net operating loss carry-forwards resulting in the recognition of an income tax benefit of $343.
The Company does not believe that these error corrections are material to the current or prior reporting periods.
F-34
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The differences between the United States Federal statutory income tax rate and the Company’s effective tax rate were as follows for the
years ended December 31, 2012, 2011 and 2010:
Federal statutory tax rate
State and local income taxes, net of federal tax benefit
Change in state effective income tax rate
State tax benefit related to insurance premiums
State tax valuation allowance
Correction of an error
Other permanent differences
2012
Years Ended December 31,
2011
2010
35%
8
(2)
(7)
—
(3)
4
35%
35 %
8
4
(11 )
—
(4 )
(2 )
30 %
(35)%
(9)
118
(310)
100
80
23
(33)%
The 2012, 2011 and 2010 effective tax rate of 35%, 30%, and 33%, respectively, on the Company’s pre-tax income was primarily
impacted by state tax benefits related to insurance premiums and interest paid to the captive insurance company.
As of December 31, 2012, $751 represented the amount of unrecognized tax benefits that, if recognized, would affect the Company’s
effective tax rate in any future periods. For each of the years ended December 31, 2012, 2011 and 2010, interest expense on unrecognized tax
benefits was $53. The Company recognizes both interest accrued related to unrecognized tax benefits and penalties in income tax expenses.
The Company had accruals for interest or penalties as of December 31, 2012 and 2011 of $302 and $249, respectively. In 2013, $751 of
unrecognized tax benefits could be realized by the Company since the income tax returns may no longer be subject to audit during 2013.
The Company files federal income tax returns, a foreign jurisdiction return and multiple state and local jurisdiction tax returns. The
Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service for years 2009 and prior.
The following state and local jurisdictions are currently examining the Company’s respective returns for the years indicated: New York
State (2006, 2007, 2008, and 2009), New York City (2006, 2007, and 2008). The Company does not currently believe that it is reasonably
possible that the reserve for uncertain tax positions will significantly change within the next twelve months; however, it is difficult to predict
the final outcome or timing of resolution of any particular matter.
14. Contingencies
On or about March 1, 2005, in an action styled Sarah Cruz, et al v. Town Sports International, d/b/a New York Sports Club , plaintiffs
commenced a purported class action against TSI, LLC in the Supreme Court, New York County, seeking unpaid wages and alleging that TSI,
LLC violated various overtime provisions of the New York State Labor Law with respect to the payment of wages to certain trainers and
assistant fitness managers. On or about June 18, 2007, the same plaintiffs commenced a second purported class action against TSI, LLC in the
Supreme Court of the State of New York, New York County, seeking unpaid wages and alleging that TSI, LLC violated various wage payment
and overtime provisions of the New York State Labor Law with respect to the payment of wages to all New York purported hourly employees.
On September 17, 2010, TSI, LLC made motions to dismiss the class action allegations of both lawsuits for plaintiffs’ failure to timely file
motions to certify the class actions. The court granted the motions on January 29, 2013, dismissing the class action allegations in both lawsuits.
F-35
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On September 22, 2009, in an action styled Town Sports International, LLC v. Ajilon Solutions, a division of Ajilon Professional Staffing
LLC (Supreme Court of the State of New York, New York County, 602911-09), TSI, LLC brought an action in the Supreme Court of the State
of New York, New York County, against Ajilon for, among other things, breach of contract seeking, among other things, money damages, in
connection with Ajilon’s failure to design and deliver to TSI, LLC a new sports club enterprise management system known as GIMS.
Subsequently, on October 14, 2009, Ajilon brought a counterclaim against TSI, LLC alleging breach of contract, asserting, among other things,
failure to pay outstanding invoices in the aggregate amount of approximately $2,900. Following a jury trial, a jury verdict was rendered on
January 28, 2013, that awarded TSI, LLC damages against Ajilon in the amount of approximately $3,400 and also awarded Ajilon damages
against TSI, LLC in the amount of approximately $214. After the Court granted Ajilon’s motion to set aside the part of the jury verdict that had
rejected the bulk of Ajilon’s counterclaim, the Court increased the award of damages against TSI, LLC from approximately $214 to
approximately $2,900. The result is a net amount owed to TSI, LLC in the amount of approximately $400. TSI, LLC is considering its legal
alternatives, including appealing the Court’s decision.
On February 7, 2007, in an action styled White Plains Plaza Realty, LLC v. TSI, LLC et al ., the landlord of one of TSI, LLC’s former
health and fitness clubs filed a lawsuit in state court against it and two of its health club subsidiaries alleging, among other things, breach of
lease in connection with the decision to close the club located in a building owned by the plaintiff and leased to a subsidiary of TSI, LLC, and
take additional space in the nearby facility leased by another subsidiary of TSI, LLC. The trial court granted the landlord damages against its
tenant in the amount of approximately $700, including interest and costs (“Initial Award”). TSI, LLC was held to be jointly liable with the
tenant for the amount of approximately $488, under a limited guarantee of the tenant’s lease obligations. The landlord subsequently appealed
the trial court’s award of damages, and on December 21, 2010, the appellate court reversed, in part, the trial court’s decision and ordered the
case remanded to the trial court for an assessment of additional damages, of approximately $750 plus interest and costs (the “Additional
Award”). On February 7, 2011, the landlord moved for re-argument of the appellate court’s decision, seeking additional damages plus
attorneys’ fees. On April 8, 2011, the appellate court denied the landlord’s motion. On August 29, 2011, the Additional Award (amounting to
approximately $900), was entered against the tenant, who has recorded a liability. TSI, LLC does not believe it is probable that TSI, LLC will
be held liable to pay for any amount of the Additional Award. Separately, TSI, LLC is party to an agreement with a third-party developer,
which by its terms provides indemnification for the full amount of any liability of any nature arising out of the lease described above, including
attorneys’ fees incurred to enforce the indemnity. In connection with the Initial Award (and in furtherance of the indemnification agreement),
TSI, LLC and the developer have entered into an agreement pursuant to which the developer has agreed to pay the amount of the Initial Award
in installments over time. The indemnification agreement also covers the Additional Award, and therefore the Tenant has recorded a receivable
related to the indemnification. The developer to date has not paid the amount of the Additional Award to the landlord, and the landlord has
commenced a special proceeding in the Supreme Court of the State of New York, Westchester County, to collect the Additional Award directly
from the developer. A motion to dismiss the special proceeding made by the developer was denied by the court on March 13, 2012. Discovery
in the special proceeding is ongoing.
On or about October 4, 2012, in an action styled James Labbe, et al. v. Town Sports International, LLC , plaintiff commenced a purported
class action in New York State court on behalf of personal trainers employed in New York State. Labbe is seeking unpaid wages and damages
from TSI, LLC and alleges violations of various provisions of the New York State labor law with respect to payment of wages and TSI, LLC’s
notification and record-keeping obligations. On December 18, 2012, TSI, LLC filed a motion to stay the class action pending a decision on
class certification in the Cruz case and to dismiss the Labbe action if the Cruz case is certified. On January 29, 2013, Labbe responded to the
motion to stay and filed a cross-motion to consolidate the Labbe case with the Cruz case. These motions have been effectively mooted by the
dismissal of the class claims in Cruz. While it is not possible to estimate the likelihood of an unfavorable outcome or a range of loss in the case
of an unfavorable outcome to TSI, LLC at this time, TSI, LLC intends to contest this case vigorously.
F-36
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition to the litigation discussed above, we are involved in various other lawsuits, claims and proceedings incidental to the ordinary
course of business, including personal injury and employee relations claims. The results of litigation are inherently unpredictable. Any claims
against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and
result in diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot be predicted with certainty.
15. Employee Benefit Plan
The Company maintains a 401(k) defined contribution plan and is subject to the provisions of the Employee Retirement Income Security
Act of 1974 (“ERISA”). The Plan provides for the Company to make discretionary contributions. The Plan was amended, effective January 1,
2001, to provide for an employer matching contribution in an amount equal to 25% of the participant’s contribution with a limit of five hundred
dollars per individual, per annum. Employer matching contributions totaling $222 and $225 were made in March 2012 and March 2011,
respectively, for the Plan years ended December 31, 2011 and 2010, respectively. The Company expects to make an employer matching
contribution of approximately $224 in March 2013 for the Plan year ended December 31, 2012.
16. Selected Quarterly Financial Data (Unaudited)
Net revenue
Operating income
Net income (loss)
Earnings (loss) per share(a)
Basic
Diluted
Net revenue
Operating income
Net income (loss)
Earnings (loss) per share(a)
Basic
Diluted
First
Quarter
Second
Quarter
2012
$ 122,912
11,629
3,850
$ 122,241
13,796
5,417
Third
Quarter
(b)
$ 119,612
11,660
3,152
Fourth
Quarter
(c)
$ 114,216
4,348
(453)
$
$
0.17
0.16
$
$
0.23
0.23
$
$
0.13
0.13
$
$
(0.02)
(0.02)
First
Quarter
$ 116,705
6,929
1,533
2011
Second
Quarter
(d)
$ 118,285
10,518
(410)
Third
Quarter
$ 116,138
8,575
1,942
Fourth
Quarter
(e)
$ 115,813
9,593
3,250
$
$
0.07
0.07
$
$
(0.02)
(0.02)
$
$
0.09
0.08
$
$
0.14
0.14
(a) Basic and diluted earnings per share are computed independently for each quarter presented. Accordingly, the sum of the quarterly
earnings per share may not agree with the calculated full year earnings per share.
(b) Net income and earnings per share for the third quarter of 2012 include $530 and ($0.02), respectively comprised of the following: $575
loss on extinguishment of debt, net of tax in connection with the Company’s debt refinancing in August 2012; $848, net of tax, of
incremental interest expense in connection with the Company’s debt refinancing in August 2012; $182 of a discrete income tax benefit;
and additional fees and revenue of $711, net of tax, realized in connection with the termination of a long-term marketing arrangement
with a third party in-club advertiser.
F-37
Table of Contents
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(c) Net loss and loss per share for the fourth quarter of 2012 include $4,277 and $(0.18), respectively, comprised of the following: $1,883,
net of tax, of fixed asset impairments related to the write-offs of fixed assets for four clubs that sustained damages from Hurricane Sandy;
$924, net of tax, of incremental interest expense in connection with the Company’s additional borrowing under the 2011 Senior Credit
Facility in November 2012; $1,470 payroll bonus expense, net of tax in connection with the payment of a $3.00 cash bonus to eligible
stock option holders; $340 of additional general and administrative expenses and incremental share based compensation expense, net of
tax from fees incurred in connection with the Company’s special dividend payment and stock option modifications; and $340 of discrete
income tax benefits related primarily to corrections of temporary differences related to depreciation and amortization on the Company’s
fixed assets and intangible assets.
(d) Net loss and loss per share for the second quarter of 2011 include $4,173 and ($0.18), respectively comprised of the following: $2,769
loss on extinguishment of debt, net of tax in connection with the Company’s debt refinancing in May 2011; $855, net of tax, of
incremental interest expense in connection with the Company’s debt refinancing in May 2011; and $549 of discrete income tax charges.
(e) Net income and earnings per share for the fourth quarter of 2011 include $343 and $0.01, respectively, for the correction of an
accounting error that resulted in an increase in benefit for corporate income taxes. Refer to note 13, Corporate Income Taxes, for further
details.
17. Subsequent Event
On February 14, 2013, the Company announced that it had entered into an agreement to acquire the assets of Fitcorp, the owner and
operator of five health clubs and operator of four managed clubs in the Boston market. On February 15, 2013, the Company announced that it
entered into an agreement to acquire the assets of the West End Sports Club, a single club operating on the west side of Manhattan. The
Company expects to record an aggregate purchase price of approximately $5,000 related to these acquisitions. These transactions are subject to
various closing conditions, and the parties expect, subject to the satisfaction of the conditions, the transactions to be completed two months or
less from the announcement dates.
F-38
Table of Contents
The following is a list of all exhibits filed or incorporated by reference as part of this Report:
Exhibit Index
Exhibit
No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Description of Exhibit
Amended and Restated Certificate of Incorporation of Town Sports International Holdings, Inc. (the “Registrant”) (incorporated
by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
Second Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K, filed on May 19, 2008).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on
Form S-1, File No. 333-126428 (the “S-1 Registration Statement”)).
Registration Rights Agreement, dated as of February 4, 2004, by and among Town Sports International Holdings, Inc., Town
Sports International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. the individuals and entities listed on the BRS Co-Investor
Signature Pages thereto, Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR Capital Partners, L.P.,
and Farallon Capital Institutional Partners II, L.P., Canterbury Detroit Partners, L.P., Canterbury Mezzanine Capital, L.P.,
Rosewood Capital, L.P., Rosewood Capital IV, L.P., Rosewood Capital IV Associates, L.P., CapitalSource Holdings LLC, Keith
Alessi, Paul Arnold, and certain stockholders of the Company listed on the Executive Signature Pages thereto (incorporated by
reference to Exhibit 10.5 of the S-4 Registration Statement).
Amendment No. 1 to the Registration Rights Agreement dated as of March 23, 2006 (incorporated by reference to Exhibit 10.21
of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”)).
Amendment No. 2 to the Registration Rights Agreement dated as of May 30, 2006 (incorporated by reference to Exhibit 10.9.1
of the S-1 Registration Statement).
Credit Agreement, dated as of May 11, 2011, among Town Sports International, LLC, the Registrant, as a Guarantor, the lenders
party thereto, Deutsche Bank Trust Company Americas, as Administrative Agent, and Keybanc National Association, as
Documentation Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May
11, 2011).
Subsidiaries Guaranty, dated as of May 11, 2011, among each of the Guarantors party thereto, and Deutsche Bank Trust
Company Americas, as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on
Form 8-K filed on May 11, 2011).
Pledge Agreement dated as of May 11, 2011 among the Town Sports International, LLC, the Registrant each of the Pledgors
party thereto, and Deutsche Bank Trust Company Americas, as Collateral Agent (incorporated by reference to Exhibit 10.3 of
the Company’s Current Report on Form 8-K filed on May 11, 2011).
Security Agreement dated as of May 11, 2011 among the Town Sports International, LLC, the Registrant, each of the Assignors
party thereto, and Deutsche Bank Trust Company Americas, as Collateral Agent (incorporated by reference to Exhibit 10.4 of
the Company’s Current Report on Form 8-K filed on May 11, 2011).
Interest Rate Swap Agreement, dated July 8, 2011, between Town Sports International, LLC and Deutsche Bank
AG.(incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended
September 30, 2011).
First Amendment, dated as of August 22, 2012, to the Credit Agreement, dated as of May 11, 2011, among Town Sports
International, LLC, Town Sports International Holdings, Inc., the lenders party thereto, Deutsche Bank Trust Company
Americas, as Administrative Agent, and Keybanc National Association, as Documentation Agent (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated August 22, 2012).
Table of Contents
Exhibit
No.
10.10
10.11
10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18
*10.19
*10.20
*10.21
*10.22
*10.23
*10.24
*10.25
*10.26
Description of Exhibit
Revised Interest Rate Swap Agreement, dated August 27, 2012, between Town Sports International, LLC and Deutsche Bank
AG. (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the period ended
September 30, 2012).
Revised Interest Rate Swap Agreement, dated November 20, 2012, between Town Sports International, LLC and Deutsche
Bank AG.
Second Amendment, dated as of November 14, 2012, to the Credit Agreement, dated as of May 11, 2011, among Town Sports
International, LLC, Town Sports International Holdings, Inc., the lenders party thereto, Deutsche Bank Trust Company
Americas, as Administrative Agent, and Keybanc National Association, as Documentation Agent (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated November 16, 2012).
2004 Common Stock Option Plan (incorporated by reference to Exhibit 10.7 of the S-4 Registration Statement).
Amendment No. 1 to the Registrant’s 2004 Common Stock Option Plan (incorporated by reference to Exhibit 10.2 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
Amended and Restated 2006 Stock Incentive Plan (incorporated herein by reference to Appendix A of the Company’s
definitive Proxy Statement on Schedule 14A filed on March 29, 2011).
Form of Incentive Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.1 of
the Registrant’s Current Report on Form 8-K filed August 8, 2006).
Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2
of the Registrant’s Current Report on Form 8-K filed August 8, 2006).
Form of the Non-Qualified Stock Option Agreement for Non-Employee Directors pursuant to the 2006 Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed April 2, 2007).
Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.3
of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
Form of Restricted Stock Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
Amended and Restated 2006 Annual Performance Bonus Plan (incorporated by reference to Appendix A of the Registrant’s
definitive Proxy Statement on Schedule 14A filed on March 30, 2010).
Amended and Restated Non-Employee Director Compensation Plan Summary Effective May 25, 2011 (incorporated by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011).
Amended and Restated Non-Employee Director Compensation Plan Summary Effective January 1, 2013.
Offer Letter to David M. Kastin, Senior Vice President — General Counsel, dated July 23, 2007 (incorporated by reference to
Exhibit 10.35 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).
Amendment to Offer Letter to David M. Kastin, dated December 23, 2008 (incorporated by reference to Exhibit 10.35 of the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).
Offer Letter, dated March 18, 2010, between the Registrant and Robert Giardina (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2010).
Table of Contents
Exhibit
No.
*10.27
*10.28
*10.29
*10.30
*10.31
*10.32
*10.33
21
23.1
31.1
31.2
32.1
32.2
**101.INS
**101.SCH
**101.CAL
**101.DEF
**101.LAB
**101.PRE
Description of Exhibit
Form of Executive Severance Agreement between the Registrant and each of Daniel Gallagher, Martin Annese and
David Kastin (incorporated by reference to Exhibit 10.38 of the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2007).
Form of Amendment to Executive Severance Agreement between the Registrant and each of Daniel Gallagher, Martin
Annese and David Kastin (incorporated by reference to Exhibit 10.39 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2008).
Form of Amended and Restated Executive Severance Agreement between the Registrant and each of Robert Giardina,
Paul Barron, Scott Milford and Terry Kew (incorporated by reference to Exhibit 10.28 of the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2009).
Amendment dated March 1, 2011 to Executive Severance Agreement between the Registrant and Robert Giardina
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended
March 31, 2011).
Offer Letter, dated March 9, 2012, between the Registrant and Terry Kew — Chief Operating Officer (incorporated by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2012).
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.25 of the S-1
Registration Statement).
Form of 2012 Bonus Letter between the Registrant and each of Robert Giardina, Daniel Gallagher, Terry Kew, David
Kastin, Scott Milford and Paul Barron.
Subsidiaries of the Registrant.
Consent of PricewaterhouseCoopers LLP.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
XBRL Instance Document.
XBRL Taxonomy Extension Schema.
XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
XBRL Taxonomy Extension Label Linkbase.
XBRL Taxonomy Extension Presentation Linkbase.
* Management contract or compensatory plan or arrangement.
** Furnished herewith.
Exhibit 10.11
Deutsche Bank AG New York
60 Wall Street
New York, NY 10005
+1 212-250-2500
Revised as of November 20, 2012
July 8, 2011
Town Sports International, LLC
Dan Gallagher
(212) 246-8422
Global No. N1539871N (previously N1317383N)
Interest Rate Swap Transaction - This confirmation supersedes and replaces all prior communication between
the parties hereto with respect to the Transaction described below
Deutsche Bank
Date:
To:
Attention:
Facsimile no.:
Our Reference:
Re:
Ladies and Gentlemen:
The purpose of this letter agreement is to set forth the terms and conditions of the Transaction entered into between Deutsche Bank AG
(“DBAG”) and Town Sports International, LLC (“Counterparty”) on the Trade Date specified below (the “Transaction”). This letter agreement
constitutes a “Confirmation” as referred to in the Agreement specified below.
The definitions and provisions contained in the 2006 ISDA Definitions (the “Definitions”) as published by the International Swaps and
Derivatives Association, Inc. are incorporated by reference herein. In the event of any inconsistency between the Definitions and this
Confirmation, this Confirmation will govern.
For the purpose of this Confirmation, all references in the Definitions or the Agreement to a “Swap Transaction” shall be deemed to be
references to this Transaction.
1. This Confirmation, together with the Agreement, evidences a complete and binding agreement between DBAG (“Party A”) and
Counterparty (“Party B”) as to the terms of the Transaction to which this Confirmation relates. This Confirmation, together with all other
documents referring to the ISDA Master Agreement (Multicurrency-Cross Border) as amended from time to time (the “ISDA Form”) (each a
“Confirmation”) confirming Transactions (each a “Transaction”) entered into between us (notwithstanding anything to the contrary in a
Confirmation), shall supplement, form a part of, and be subject to an agreement in the form of the ISDA Form as if Party A and Party B had
executed an agreement on the Trade Date of the first such Transaction between us in such form with any amendments thereto mentioned in this
Confirmation, with the Schedule thereto (i) specifying only that (a) the governing law is the laws of the State of New York, provided, that such
choice of law shall be superseded by any choice of law provision specified in the Agreement upon its execution, and (b) the Termination
Currency is U.S. Dollars and (ii) incorporating the addition to the definition of “Indemnifiable Tax” contained in (page 48 of) the ISDA “User’s
Guide to the 1992 ISDA Master Agreements” (the “Agreement”). In the event of any inconsistency between the terms of this Confirmation,
and the terms of the Agreement, this Confirmation will prevail for the purpose of the Transaction.
Chairman of the Supervisory Board: Paul Achleitner
Management Board: Jurgen Fitschen (Co-Chairman), Anshuman Jain (Co-Chairman), Stefan Krause, Stephan Leithner, Stuart Lewis, Rainer
Neske, Henry Ritchotte Deutsche Bank Aktiengesellschaft domiciled in Frankfurt am Main; HRB No 30 000, Frankfurt am Main, Local Court,
VAT ID No DE114103379; www.db com
2. The terms of the particular Transaction to which this Confirmation relates are as follows:
Notional Amount:
Trade Date:
Effective Date:
Termination Date:
Fixed Amounts:
Fixed Rate Payer:
Fixed Rate Payer Period End Dates:
Fixed Rate Payer Payment Dates:
Fixed Rate:
Fixed Rate Day Count Fraction:
Fixed Rate Payer Business Days:
USD 160,000,000.00
July 1, 2011
July 13, 2011
May 13, 2015 , subject to adjustment in accordance with the Modified
Following Business Day Convention
Counterparty
The 13th Business Day of each month of each year through and
including the Termination Date, subject to adjustment in accordance
with the Modified Following Business Day Convention
The 13th Business Day of each month of each year through and
including the Termination Date, subject to adjustment in accordance
with the Modified Following Business Day Convention
1.693%
Actual/360
New York, London
Fixed Rate Payer Business Day Convention:
Modified Following
Floating Amounts:
Floating Rate Payer:
Floating Rate Payer Period End Dates:
Floating Rate Payer Payment Dates:
Floating Rate Option:
Designated Maturity:
Spread:
Floating Rate Day Count Fraction:
Reset Dates:
Compounding:
Business Days:
N1539871N
DBAG
The 13th Business Day of each month of each year through and
including the Termination Date, subject to adjustment in accordance
with the Modified Following Business Day Convention
The 13th Business Day of each month of each year through and
including the Termination Date, subject to adjustment in accordance
with the Modified Following Business Day Convention
The greater of 1.25% or USD-LIBOR-BBA
1 month
None
Actual/360
The first Business Day in each Calculation Period.
Inapplicable
New York and London
2
3. Additional Provision
A) CROSS DEFAULT
The “Cross Default” provisions of Section 5(a)(vi) of the ISDA Form will apply to DBAG and Counterparty; provided however , that,
Section 5(a)(vi)(1) is amended by deleting in the seventh line thereof the words “, or becoming capable at such time of being declared,”;
provided further , that, with respect to Section 5(a)(vi)(2), “Cross Default” shall not include any default that: (A) is the result of mistake,
administrative or back office error, wire transfer difficulties or an error, omission or problem of an administrative or operational nature, and
such default is cured within three (3) Local Business Days of such party’s receipt of written notice of its default; or (B) was caused solely
because such party was precluded from performing its obligations under the relevant Specified Indebtedness, or was unable to so perform,
using reasonable means, directly or through the office of the party through which it was acting for purposes of the relevant Specified
Indebtedness, by reason of force majeure, act of state, illegality or impossibility and such default was cured within three (3) Local Business
Days of the termination of such force majeure, act of state, illegality or impossibility; provided, however , in either case the party availing itself
of such provision to excuse a default for the grace period so provided had, in the case of a payment default, the necessary funds on hand to
effect any such payment that is excused for the grace period specified above.
“Threshold Amount” means in relation to Counterparty, USD 10,000,000 and in relation to DBAG, 3 percent of the ordinary shareholders’
funds of DBAG appearing as such on its most recently published audited accounts.
B) ADDITIONAL TERMINATION EVENTS
Each of the following shall constitute an Additional Termination Event:
1. Counterparty’s obligations to DBAG under this Agreement:
(i) cease to be secured pursuant to the Security Documents (as such term is defined in the Credit Agreement) at any time for any reason;
or
(ii) cease to be equally and ratably secured with Counterparty’s obligations to the Lender (as such term is defined in the Credit
Agreement) under the Credit Agreement pursuant to the relevant Security Documents at any time for any reason; or
(iii) cease to be guaranteed by the Subsidiary Guarantors (as such term is defined in the Credit Agreement) at any time for any reason.
For the purpose of the foregoing Termination Events, the Affected Party shall be Counterparty.
2. Any collateral under Credit Support Documents is released at any time when DBAG, or an Affiliate of DBAG is not a party to the
Credit Agreement, unless such release will not have a material adverse effect on DBAG in respect of this Agreement or the release of
such collateral was provided for pursuant to the terms of the Credit Agreement in effect when DBAG or an Affiliate of DBAG was a
party to such Credit Agreement or DBAG shall have consented in writing prior to such release (such consent not to be unreasonably
withheld).
As used herein and throughout this Agreement, “Credit Agreement” means that USD 300,000,000 Credit and Guarantee Agreement dated as of
May 11, 2011 among Town Sports International Holdings, Inc., Town Sports International, LLC, as the Borrower, Various Lenders and
Deutsche Bank Trust Company Americas, as Administrative Agent, Deutsche Bank Securities Inc. and Keybank National Association, as Joint
Lead Arrangers and Joint Book Running Managers, and Keybank National Association as Syndication Agent as may be amended, modified,
restated or replaced from time to time.
N1539871N
3
C) CREDIT SUPPORT DOCUMENTS / PROVIDER
Credit Support Document : The Security Documents referenced in the Credit Agreement and herein shall be deemed to be Credit Support
Documents, with respect to the Counterparty for the purposes of this Agreement.
Credit Support Provider : The Subsidiary Guarantors as defined in the Credit Agreement and herein shall be deemed to be Credit Support
Providers, with respect to the Counterparty for the purposes of this Agreement.
D) AGREEMENT TO DELIVER DOCUMENTS
For the purpose of Section 4(a)(ii) of this Agreement, Party B agrees to deliver true and complete copies of all documents delivered to the
Lenders under the Credit Agreement if DBAG or an Affiliate of DBAG is not a party to such Credit Agreement. This delivery obligation will
be covered by the representation of Party B as described in Section 3(d).
E) SET-OFF
Section 6(f) of the Agreement is deleted in its entirety and replaced with the following:
“(f) Upon the designation of any Early Termination Date, the party that is not the Defaulting Party or Affected Party (“X”) may, without prior
notice to the Defaulting or Affected Party (“Y”), set off any sum or obligation (whether or not arising under this Agreement, whether matured
or unmatured, whether or not contingent and irrespective of the currency, place of payment or booking office of the sum or obligation) owed by
Y to X (the “X Set Off Amount”) against any sum or obligation (whether or not arising under this Agreement, whether matured or unmatured,
whether or not contingent and irrespective of the currency, place of payment or booking office of the sum or obligation) owed by X to Y (the
“Y Set Off Amount”). X will give notice to the other party of any set off effected under this Section 6(f).
For this purpose, either the X Set Off Amount or the Y Set Off Amount (or the relevant portion of such set off amounts) may be converted by
X into the currency in which the other set off amount is denominated at the rate of exchange at which X would be able, acting in a reasonable
manner and in good faith, to purchase the relevant amount of such currency.
If a sum or obligation is unascertained, X may in good faith estimate that obligation and set-off in respect of the estimate, subject to the
relevant party accounting to the other when the obligation is ascertained.
Nothing in this Section 6(f) will be effective to create a charge or other security interest. This Section 6(f) will be without prejudice and in
addition to any right of set-off, combination of accounts, lien or other rights to which any party is at any time otherwise entitled (whether by
operation of law, contract or otherwise).”
F) General Conditions to Payment.
Without limiting the rights of a Non-defaulting Party under Section 6, if an Event of Default with respect to a party has occurred and is
continuing and consequently the Non-defaulting Party does not make a scheduled payment or delivery by reason of the condition specified in
Section 2(a)(iii)(1), the Non-defaulting Party shall have the right to suspend performance (including payments and deliveries) under any
Transaction; provided that the Non-defaulting Party shall provide written notice to the Defaulting Party within five (5) Local Business Day of
its exercising its right to suspend performance under Section 2(a)(iii); and provided that in no event shall any such suspension continue for
longer than ninety (90) Local Business Days with respect to such Transaction unless an Early Termination Date shall have been declared and
notice provided to the Defaulting Party thereof.
N1539871N
4
G) Illegality. The parties agree that for the avoidance of doubt, for purposes of Section 5(b)(i) of the Agreement, “any applicable law” shall
include the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, any rules and regulations promulgated thereunder and any
similar law or regulation, without regard to Section 739 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 or any
similar legal certainty provision in any legislation enacted, or rule or regulation promulgated, on or after the date hereof, and the consequences
specified in the Agreement, including without limitation, the consequences specified in Section 6 of the Agreement, shall apply to any Illegality
arising from any such act, rule or regulation.
H) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: In connection with Section 739 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 or any similar legal certainty provision in any legislation enacted, or rule or regulation
promulgated, on or after the Trade Date, the parties hereby specifically reserve the right to terminate, renegotiate, modify, amend or
supplement the Transaction to the extent that the enactment of the Dodd-Frank Wall Street Transparency and Accountability Act of 2010 or
any similar legislation, rule or regulation (the “ Applicable Act ”), or any requirement under the Applicable Act or an amendment made by the
Applicable Act, constitutes a Termination Event or other similar event under the Transaction that would give rise to such a right to terminate,
renegotiate, modify, amend or supplement the Transaction in accordance with its terms.
I) No Waiver of Rights.
(i) Without limiting Section 9(d) or (f) of the Agreement, the parties hereby agree that no payment or delivery by a party made pursuant
this Confirmation shall be presumed to preclude such party’s right to challenge the determination of the amount of such payment or
delivery obligation at a later date or be deemed to be a waiver of any Event of Default or Termination Event that exists as of the date of
any such payment or delivery and no failure of a party to invoke any dispute resolution procedures that may otherwise be available to
such party in connection with any such payment or delivery shall be deemed to constitute a waiver of such party’s right to assert that the
demand for such payment or delivery constitutes a breach of this Agreement or to constitute a waiver of such party’s right to bring a suit
or proceeding in respect thereof.”
(ii) Section 9(f) of this Agreement shall be amended by the addition of the following at the end of the provision:
“(1) Failure by a party to expressly reserve any right, power or privilege it has under this Agreement, and/or (2) continued performance
by a party of its obligations or enjoyment of any rights under this Agreement shall not in any way undermine or prejudice the
effectiveness of this Section.”
4. Account Details:
Account Details for DBAG:
USD DBAG Payment Instructions:
Account With:
SWIFT Code:
Favor Of:
Account Number:
Account Details for Counterparty:
Payment Instructions:
N1539871N
DB Trust Co. Americas, New York
BKTRUS33
Deutsche Bank AG, New York
01 473 969
Please provide
5
5. Offices:
The Office for DBAG for this Transaction is New York, New York
The Office of Counterparty for this Transaction New York, New York
6. Calculation Agent:
7. Representations
DBAG, provided that if an Event of Default or a Potential Event of
Default has occurred and is continuing with respect to DBAG, the
Calculation Agent shall be a recognized dealer in the relevant
derivatives market designated by Counterparty. The Calculation
Agent shall act in good faith and in a commercially reasonable
manner. The Calculation Agent shall, upon request by
Counterparty, provide a written explanation of any calculation,
determination or adjustment made by it including, where
applicable, a description of the methodology and the basis for such
calculation, determination or adjustment in reasonable detail.
Each party will be deemed to represent to the other party on the date on which it enters into this Transaction that (absent a written agreement
between the parties that expressly imposes affirmative obligations to the contrary for this Transaction):
(A) Non-Reliance . It is acting for its own account, and it has made its own independent decisions to enter into this Transaction and as to
whether this Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed
necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into
this Transaction; it being understood that information and explanations related to the terms and conditions of this Transaction shall not be
considered investment advice or a recommendation to enter into this Transaction. No communication (written or oral) received from the other
party shall be deemed to be an assurance or guarantee as to the expected results of this Transaction.
(B) Assessment and Understanding . It is capable of assessing the merits of and understanding (on its own behalf or through independent
professional advice), and understands and accepts, the terms, conditions and risks of this Transaction. It is also capable of assuming, and
assumes, the risks of this Transaction.
(C) Status of Parties . The other party is not acting as a fiduciary for, or an adviser to it in respect of this Transaction.
(D) Eligible Contract Participant . It is an “eligible contract participant” within the meaning of the Commodity Exchange Act,
Section 1a(12).
8. Tax Matters
(A) Payer Tax Representations . For the purpose of Section 3(e) of the Agreement, each of Party A and Party B makes the following
representation:
It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant
Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e),
6(d)(ii) or 6(e) of the Agreement) to be made by it
N1539871N
6
to the other party under the Agreement. In making this representation, it may rely on (i) the accuracy of any representation made by the
other party pursuant to Section 3(f) of the Agreement; (ii) the satisfaction of the agreement of the other party contained in Section 4(a)(i)
or 4(a)(iii) of the Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i)
or 4(a)(iii) of the Agreement; and (iii) the satisfaction of the agreement of the other party contained in Section 4(d) of the Agreement,
provided that it shall not be a breach of this representation where reliance is placed on clause (ii) and the other party does not deliver a
form or document under Section 4(a)(iii) of the Agreement by reason of material prejudice to its legal or commercial position.
(B) Payee Tax Representations . For the purpose of Section 3(f) of the Agreement, Party A and Party B will make the following
representation specified below.
(i) Party A. It is a “foreign person” (as that term is used in Section 1.6041-4(a)(4) of the United States Treasury Regulations) for U.S.
federal income tax purposes, and each payment received or to be received by it will be effectively connected with its conduct of a trade or
business in the United States.
(ii) Party B. It is a “U.S. person” (as that term is used in Section 1.1441-4(a)(3)(ii) of the United States Treasury Regulations) for U.S.
federal income tax purposes (or, if Party B is disregarded entity for U.S. federal income tax purposes, its beneficial owner is).
(C) Tax Forms. For the purposes of Section 4(a)(i) and (ii) of the Agreement, each party agrees to deliver the following documents, as
applicable:
Party required to deliver document
Party A
Party B
Form/Document/Certificate
Internal Revenue Service Form W-8ECI.
Internal Revenue Service Form W-9.
Date by which to be delivered
Upon execution and delivery of this Confirmation, promptly upon reasonable demand by Party B; and
promptly upon learning that any such form previously provided by Party A has become obsolete or incorrect.
Upon execution and delivery of this Confirmation, promptly upon reasonable demand by Party A; and
promptly upon learning that any such form previously provided by Party B has become obsolete or incorrect.
9. Please confirm that the foregoing correctly sets forth the terms of our agreement by having an authorized officer sign this Confirmation and
return it via facsimile or e-mail to:
Attention: Derivative Documentation
Telephone: 44 20 7547 4755
Facsimile: 44 20 7545 9761
E-mail: Derivative.Documentation@db.com
N1539871N
7
This message will be the only form of Confirmation dispatched by us. If you wish to exchange hard copy forms of this Confirmation, please
contact us.
Yours sincerely,
Deutsche Bank AG
By: /s/ Jon Abela
Name: Jon Abela
Authorized Signatory
/s/ Paul Carter
By:
Name: Paul Carter
Authorized Signatory
Confirmed as of the date first written above:
Town Sports International LLC
/s/ Kieran Sikso
By:
Name: Kieran Sikso
VP Finance
Title:
N1539871N
8
Exhibit 10.23
Amended and Restated
Non-Employee Director Compensation Plan
1. The following non-employee Board members will receive the following annual retainer:
(a) The non-executive chairman of the Board will receive a $100,000 annual retainer;
(b) Each non-employee Board member (other than the non-executive chairman of the Board) will receive a $60,000 annual retainer;
(c) The chairman of the Audit Committee will receive an additional $15,000 annual retainer;
(d) The chairman of the Compensation Committee will receive an additional $7,500 annual retainer; and
(e) Each chairman of each Committee of the Board (other than the chairman of the Audit Committee and the chairman of the
Compensation Committee) will receive an additional $6,000 annual retainer.
2. The annual retainer amounts set forth above shall be payable quarterly in arrears on the fifth business day prior to the end of each calendar
quarter. For each year, any such Board member may elect (by giving written notice to the Company on or before the first business day of the
applicable calendar year) to receive such annual retainer in the form of shares of Common Stock of the Company, payable quarterly in arrears
on the fifth business day prior to the end of each calendar quarter under the Town Sports International Holdings, Inc. 2006 Stock Incentive
Plan, as amended (the “ Plan ”) (with the value of such shares of Common Stock being the Fair Market Value (as defined in the Plan) thereof
on the fifth business day before the end of each calendar quarter). Notwithstanding the preceding sentence, any Board member who has so
elected to receive such annual retainer in the form of shares of Common Stock of the Company may revoke such election for the balance of
such calendar year by giving written notice to the Company at any time when such Board member is otherwise eligible to purchase and sell
shares of Common Stock of the Company pursuant to the Company’s then existing trading policies and procedures with respect to such
purchases and sales. This annual retainer will be pro-rated for any partial year.
4. Each non-employee Board member will receive an annual award of Common Stock on the third Wednesday of each calendar year as
follows, with each award being fully vested as of the award date, and will otherwise be subject to the terms of the Plan:
(a) Chairman of the Board: Shares with a Fair Market Value (as defined in the Plan) of $45,000 on the award date
(b) Other non-employee Board member: Shares with a Fair Market Value (as defined in the Plan) of $40,000 on the award date
Additional grants may be made from time to time.
5. Each new non-employee Board member joining the Board will receive an initial award of shares of Common Stock with a Fair Market Value
(as defined in the Plan) of $40,000 on the award date, which shares shall be fully vested as of the award date. Each new non-employee Board
member will be eligible in the following year to receive the annual award of Common Stock referred to in Section 4 above.
6. No member of the Board will receive any fees for attending any meetings of the Board or its committees.
7. Each non-employee Board member and each member of a Board committee will be reimbursed for any out-of-pocket expenses reasonably
incurred by him or her in connection with services provided in such capacity.
8. Each non-employee Board member shall be required to hold shares of Common Stock with a Fair Market Value (as defined in the Plan)
equal to four (4) times the amount of the annual cash retainer payable to directors as set forth in Section 1(b) above. All shares of Common
Stock bought by the director or an immediate family member residing in the same household, all shares held in trust for the benefit of the
director or his or her family, and all shares granted under the Company’s equity compensation plans shall count towards the satisfaction of
these requirements.
Each non-employee Board member shall be required to attain such ownership within five years of joining the Board, or in the case of
directors serving as of January 1, 2013, by January 1, 2018, and to continue to meet such requirements as of every December 31 of each
successive year. If, following the fifth anniversary of joining the Board (or January 1, 2018 in the case of directors serving as of January 1,
2013), the Fair Market Value (as defined in the Plan) of the Common Stock decreases such that the director is no longer in compliance with
these requirements, the director shall not be required to acquire any additional shares of Common Stock.
In the event that a director fails to comply with these share ownership requirements, he or she shall be required to tender his or her
resignation from the Board, in which case the Board shall, in its discretion, determine whether or not to accept such resignation.
PRIVILEGED AND CONFIDENTIAL DRAFT
Exhibit 10.33
[Name of Participant]
To:
From: Bob Giardina
Date: December , 2012
Re:
2012 Bonus Payments
Congratulations! The Compensation Committee of the Board of Directors has preliminarily approved the bonuses under the Amended
and Restated Town Sports International Holdings, Inc. 2006 Annual Performance Bonus Plan (the “Plan”) for 2012 and has approved the
Company’s payment of a portion of the preliminary bonus amount in December 2012, subject to the conditions described in this letter
agreement. The remaining portion (if any) of your earned bonus for 2012 will be paid after the Committee certifies the extent to which the
performance goals have been attained in a manner consistent with the Plan. If you sign below, you will be paid 50% of your 2012 target bonus
as currently forecasted.
However, if you are no longer employed by the Company for any reason on the date on which the remaining payments are made (or if no
payment is due, the date of such certification by the Committee) , you will be required to repay to the Company the amount of the bonus
previously paid within 5 days of your departure. In addition, if it is ultimately determined by the Compensation Committee that the Company’s
performance goals or your individual performance goals were not satisfied in a manner that would have led to the payment of this preliminary
bonus, you will be required to repay any excess amount paid within 5 days of being notified in writing. (Payments that are required to be repaid
pursuant to this paragraph are referred to in this letter agreement as “overpayments”)
By signing below, you acknowledge and agree that (i) you understand the implications of receiving this payment in 2012, (ii) the
Company may deduct, but only to the extent and in a manner permitted by applicable law, any overpayment from future wages owed to you
and (iii) in the event that the Company incurs legal fees and costs in order to recoup any overpayments, you will be required to reimburse the
Company for such amounts.
Please return this letter, signed, to Nitin Ajmera ( nitin.ajmera@town-sports.com ) no later than noon on Wednesday, December 26, 2012.
We thank you for your contributions in 2012 and look forward to another productive and successful year! Happy Holidays.
Acknowledged and Agreed
[Name of Participant]
Compan
y
Parent
Town Sports International, LLC
Subsidiaries
TSI 217 Broadway, LLC
TSI Alexandria, LLC
TSI Alexandria West, LLC
TSI Allston, LLC
TSI Andover, LLC
TSI Ardmore, LLC
TSI Arthro-Fitness Services, LLC
TSI Astoria, LLC
TSI Battery Park, LLC
TSI Bay Ridge 86th Street, LLC
TSI Bayridge, LLC
TSI Bensonhurst, LLC
TSI Bethesda, LLC
TSI Boylston, LLC
TSI Broadway, LLC
TSI Brooklyn Belt, LLC
TSI Brunswick, LLC
TSI Bulfinch, LLC
TSI Butler, LLC
TSI Carmel, LLC
TSI Cash Management, LLC
TSI Central Square, LLC
TSI Cherry Hill, LLC
TSI Chevy Chase, LLC
TSI Clarendon, LLC
TSI Clifton, LLC
TSI Cobble Hill, LLC
TSI Colonia, LLC
TSI Columbia Heights, LLC
TSI Commack, LLC
TSI Connecticut Avenue, LLC
TSI Court Street, LLC
TSI Croton, LLC
TSI Danbury, LLC
TSI Davis Square, LLC
TSI Deer Park, LLC
TSI Dobbs Ferry, LLC
TSI Downtown Crossing, LLC
TSI Dupont Circle, Inc.
TSI Dupont II, Inc.
TSI East Brunswick, LLC
TSI East Meadow, LLC
TSI East 23, LLC
TSI East 31, LLC
TSI East 34, LLC
TSI East 36, LLC
TSI East 41, LLC
State of
Incorporation
Doing Business
As
NY
n/a
Exhibit 21
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
New York Sports Club
Washington Sports Club
Washington Sports Club
Boston Sports Club
Boston Sports Club
Philadelphia Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
n/a
Boston Sports Club
Philadelphia Sports Club
Washington Sports Club
Washington Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
n/a
n/a
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Compan
y
TSI East 48, LLC
TSI East 51, LLC
TSI East 59, LLC
TSI East 76, LLC
TSI East 86, LLC
TSI East 91, LLC
TSI Englewood, LLC
TSI F Street, LLC
TSI Fairfax, LLC
TSI Fenway, LLC
TSI First Avenue, LLC
TSI Forest Hills, LLC
TSI Fort Lee, LLC
TSI Framingham, LLC
TSI Franklin (MA), LLC
TSI Franklin Park, LLC
TSI Freehold, LLC
TSI Gallery Place, LLC
TSI Garden City, LLC
TSI Garnerville, LLC
TSI Georgetown, LLC
TSI Germantown, LLC
TSI Glendale, LLC
TSI Glover, LLC
TSI Grand Central, LLC
TSI Great Neck, LLC
TSI Greenwich, LLC
TSI Hartsdale, LLC
TSI Hawthorne, LLC
TSI Herald, LLC
TSI Hicksville, LLC
TSI Highpoint, LLC
TSI Hoboken, LLC
TSI Hoboken North, LLC
TSI Holdings (CIP), LLC
TSI Holdings (DC), LLC
TSI Holdings (IP), LLC
TSI Holdings (MA), LLC
TSI Holdings (MD), LLC
TSI Holdings (NJ), LLC
TSI Holdings (PA), LLC
TSI Holdings (VA), LLC
TSI Huntington, LLC
TSI Insurance, Inc.
TSI International, Inc.
TSI Irving Place, LLC
TSI Jamaica Estates, LLC
TSI Jersey City, LLC
TSI K Street, LLC
TSI Larchmont, LLC
TSI Lexington (MA), LLC
TSI Lincoln, LLC
State of
Incorporation
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
NY
DE
DE
DE
DE
DE
DE
DE
DE
Doing Business
As
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
Washington Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
Washington Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Philadelphia Sports Club
New York Sports Club
New York Sports Club
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
New York Sports Club
n/a
n/a
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
Compan
y
TSI Livingston, LLC
TSI Long Beach, LLC
TSI Lynnfield, LLC
TSI M Street, LLC
TSI Mahwah, LLC
TSI Mamaroneck, LLC
TSI Market Street, LLC
TSI Marlboro, LLC
TSI Matawan, LLC
TSI Mercer Street, LLC
TSI Midwood, LLC
TSI Montclair, LLC
TSI Morris Park, LLC
TSI Murray Hill, LLC
TSI Nanuet, LLC
TSI Natick, LLC
TSI New Rochelle, LLC
TSI Newark, LLC
TSI Newbury Street, LLC
TSI Newton, LLC
TSI No Sweat, LLC
TSI North Bethesda, LLC
TSI Norwalk, LLC
TSI Oceanside, LLC
TSI Old Bridge, LLC
TSI Parsippany, LLC
TSI Plainsboro, LLC
TSI Port Jefferson, LLC
TSI Princeton, LLC
TSI Princeton North, LLC
TSI Providence Downtown, LLC
TSI Providence Eastside, LLC
TSI Radnor, LLC
TSI Ramsey, LLC
TSI Reade Street, LLC
TSI Rego Park, LLC
TSI Ridgewood, LLC
TSI Rodin Place, LLC
TSI Scarsdale, LLC
TSI Seaport, LLC
TSI Sheridan, LLC
TSI Silver Spring, LLC
TSI Smithtown, LLC
TSI Society Hill, LLC
TSI Soho, LLC
TSI Somers, LLC
TSI Somerset, LLC
TSI South Bethesda, LLC
TSI South End, LLC
TSI South Park Slope, LLC
TSI South Station, LLC
TSI Springfield, LLC
State of
Incorporation
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
Doing Business
As
New York Sports Club
New York Sports Club
Boston Sports Club
Washington Sports Club
New York Sports Club
New York Sports Club
Philadelphia Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
Boston Sports Club
No Sweat
Washington Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
Boston Sports Club
Philadelphia Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Philadelphia Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
Philadelphia Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
Boston Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
Compan
y
TSI Stamford Downtown, LLC
TSI Stamford Post, LLC
TSI Stamford Rinks, LLC
TSI Staten Island, LLC
TSI Sterling, LLC
TSI Sunnyside, LLC
TSI Syosset, LLC
TSI University Management, LLC
TSI Varick Street, LLC
TSI Wall Street, LLC
TSI Waltham, LLC
TSI Washington, Inc.
TSI Water Street, LLC
TSI Watertown, LLC
TSI Wellesley, LLC
TSI Wellington Circle, LLC
TSI West 14, LLC
TSI West 16, LLC
TSI West 23, LLC
TSI West 38, LLC
TSI West 41, LLC
TSI West 44, LLC
TSI West 48, LLC
TSI West 52, LLC
TSI West 73, LLC
TSI West 76, LLC
TSI West 80, LLC
TSI West 94, LLC
TSI West 115th Street, LLC
TSI West 125, LLC
TSI West 145th Street, LLC
TSI West Caldwell, LLC
TSI West Hartford, LLC
TSI West Newton, LLC
TSI West Nyack, LLC
TSI West Springfield, LLC
TSI Westborough, LLC
TSI Westport, LLC
TSI Westwood, LLC
TSI Weymouth, LLC
TSI White Plains City Center, LLC
TSI White Plains, LLC
TSI Whitestone, LLC
TSI Williamsburg, LLC
TSI Woburn, LLC
TSI Woodmere, LLC
State of
Incorporation
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
Doing Business
As
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Washington Sports Club
New York Sports Club
New York Sports Club
n/a
New York Sports Club
New York Sports Club
Boston Sports Club
Washington Sports Club
New York Sports Club
Boston Sports Club
Boston Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
Washington Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
New York Sports Club
Boston Sports Club
New York Sports Club
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-135048, 333-151965 and
333-175884) and Form S-3 (No. 333-167377) of Town Sports International Holdings, Inc. of our report dated February 25, 2013 relating to the
financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ P RICEWATERHOUSE C OOPERS LLP
New York, New York
February 25, 2013
CERTIFICATIONS
Exhibit 31.1
I, Robert Giardina, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2012 of Town Sports International Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 25, 2013
By: /s/ Robert Giardina
Robert Giardina
Chief Executive Officer
CERTIFICATIONS
Exhibit 31.2
I, Daniel Gallagher, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2012 of Town Sports International Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 25, 2013
By: /s/ Daniel Gallagher
Daniel Gallagher
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Town Sports International Holdings, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2012 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert Giardina, certify, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
February 25, 2013
/s/ Robert Giardina
Robert Giardina
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Town Sports International Holdings, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2012 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel Gallagher, certify, pursuant
to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
February 25, 2013
/s/ Daniel Gallagher
Daniel Gallagher
Chief Financial Officer