10-K 1 club-20141231x10k.htm 10-K CLUB-2014.12.31-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ
Annual Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
¨
Transition Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the transition period from
Commission file number: 001-36803
Town Sports International Holdings, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE
 
20-0640002
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
5 PENN PLAZA — 4TH FLOOR
NEW YORK, NEW YORK
 
10001
(Zip code)
(Address of principal executive offices)
 
 
(212) 246-6700
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
 
The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights
 
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  þ
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  þ
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  þ  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  þ  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.    þ
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  þ
  
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  þ
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 27, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $124.0 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, 2015, there were 24,358,013 shares of Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed not later than April 30, 2015, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.




TABLE OF CONTENTS
 
 
 
 
 
 
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Item 1B.
Item 2.
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Item 5.
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Item 7A.
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Item 9A.
Item 9B.
 
 
 
 
 
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Item 15.
 




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, potential club closures, High Value Low Price (“HVLP”) conversions, our strategic review process, legal contingencies and tax benefits and contingencies, future declarations and payments of dividends, 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 other 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”, “target”, “could” 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, among others, the level of market demand for our services, economic conditions affecting our business, the success of our HVLP strategy, the geographic concentration of our clubs, competitive pressure, the ability to achieve reductions in operating costs and to continue to integrate acquisitions, outsourcing of certain aspects of our business, environmental matters, the application of Federal and state tax laws and regulations, any security and privacy breaches involving customer data, the levels and terms of the Company’s indebtedness, 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 when 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.
PART I
Item 1.     Business
In this Annual Report, unless otherwise stated or the context otherwise indicates, references to “Town Sports”, “TSI”, “the Company”, “we”, “our” and similar references refer to Town Sports International Holdings, Inc. and its subsidiaries, references to “TSI Holdings” refers to Town Sports International Holdings, Inc., and references to “TSI, LLC” refer to Town Sports International, LLC, our wholly-owned operating subsidiary.
General
Based on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States (“U.S.”) and one of the largest fitness club owners and operators in the U.S. As of December 31, 2014, the Company, through its subsidiaries, operated 158 fitness clubs ("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, 2014, these clubs collectively served approximately 484,000 members. We owned and operated a total of 107 clubs under the “New York Sports Clubs” brand name within a 120-mile radius of New York City as of December 31, 2014, including 37 locations in Manhattan where we are the largest fitness club owner and operator. We owned and operated 30 clubs in the Boston region under our “Boston Sports Clubs” brand name, 13 clubs (two of which are partly-owned) in the Washington, D.C. region under our “Washington Sports Clubs” brand name and five clubs in the Philadelphia region under our “Philadelphia Sports Clubs” brand name as of December 31, 2014. In addition, we owned and operated three clubs in Switzerland as of December 31, 2014. 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 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. For many years, our target market was focused on the population that has annual income levels of between $50,000 and $150,000, or the "mid-value" segment of the market. In 2014, we began to expand our target market to include members that prefer a lower cost membership, and have introduced a new pricing strategy to most of our clubs called High Value Low Price ("HVLP"). Monthly dues at these clubs are offered at a reduced price and advertising cost is increased. The HVLP strategy offers the same current level of service and amenities but at a lower price point giving us an opportunity to recapture market share and compete against low cost gyms that have opened in our markets. We will offer only the Passport Membership at approximately 25 of our clubs. We believe our offerings are more compelling than other low cost operators because we include exciting group exercise classes, top of the line

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equipment, pools and courts with price of membership, when available. 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.
Traditionally, we have offered 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 offering access to a single home club during all operating hours except certain peak hours Monday through Thursday, otherwise a usage fee applies. We are in the process of introducing the HVLP strategy to most of our clubs, where certain membership types currently being offered will be discontinued and converted to new membership types, and our new offerings will be at a discounted price principally under month-to-month membership plans. All membership types are described in further detail in the Sales discussion that follows.
Over our 41-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 21,000 square feet, while our multi-recreational clubs average approximately 37,000 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.
As the fitness industry continues to see a rise in popularity of private studio offerings, we have used our extensive industry experience to offer our own private studio brand, BFX Studio. In 2014, we introduced our first BFX Studio with a soft opening in July and a grand opening in September. We currently plan to open three additional BFX Studio units in 2015. This three-dimension luxury studio brand takes advantage of the rise in consumer demand for studio experiences. BFX Studio includes three unique offerings: Ride Republic, which is indoor cycling, Private Sessions for personal training and Master Class for a variety of specialty group exercise classes. BFX Studio is staffed with high caliber instructors in each of the three core offerings and the studios are designed to appeal to all ages and all experience levels of metropolitan, active healthy lifestylers. This studio concept requires approximately 9,000 to 12,000 square feet of space per studio which compares to the approximately 26,000 square feet aggregate average size of our Clubs.
In February 2015, our Board of Directors announced that it is evaluating strategic alternatives, including a possible sale of the Company, and has retained Deutsche Bank Securities, Inc. to assist it in such process. The Company also announced the promotion of Daniel Gallagher to Chief Executive Officer and President from the position of President and Chief Operating Officer and the transition of Robert Giardina from Chief Executive Officer to the position of Executive Chairman.
Reportable Segments
During the fourth quarter of 2014, we began managing and reporting operating results through two reportable segments: Clubs and BFX Studio. The Clubs segment comprised clubs under the NYSC, BSC, PSC and WSC brand names, and the clubs we own in Switzerland. BFX Studio is our private studio brand that was introduced in 2014 and is reported as a separate reportable segment as it does not meet the aggregation criteria to be aggregated with our fitness clubs. Previously, we had managed and reported operating results through one reportable segment. We reflect these segments for all the historical periods presented. For certain financial information relating to our segments, see Note 19 to our consolidated financial statements.
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 3.5% from $19.5 billion in 2009 to $22.4 billion in 2013, with a 2.8% increase from 2012 to 2013. According to IHRSA, participation in health clubs has been growing steadily with total U.S. fitness club memberships increasing at a compound annual growth rate of 4.0% from 45.3 million in 2009 to an all time high of 52.9 million in 2013, with a 5.4% increase from 2012 to 2013. Currently, approximately 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 2013, health club members visited clubs at an all time high of 103 days on average, up 4% from 99 days in 2012. According to the IHRSA, the fitness industry is witnessing a shift in the exercise and preference of health club members. The club landscape now extends beyond the traditional, full-service fitness centers

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as studio concepts including bootcamp, high intensity interval training, group cycling, barre, Pilates, yoga, boxing, and sports-specific training, also shape the market in a more pronounced way.
 
According to the IHRSA, demographic trends have helped drive the growth experienced by the fitness industry over the past decade. The average age of a health club member in 2013 was 40 years old and more than one-fourth of health club members were between the ages of 18 and 34 years old. The greatest membership growth in the past few years has been in the under-18 age group, which has grown 67.4% from 2009 to 2013 and in the over-55 age group, where membership grew 20.4% from 2009 to 2013. These two age groups made up approximately 39% of total U.S. health club members in 2013. The industry has benefited from the “millennials”, and aging “baby boomer” and “Eisenhower” generations as they place greater emphasis on their health, including a focus on fitness.

According to the Centers for Disease Control and Prevention, during the past 20 years, there has been a dramatic increase in obesity in the U.S. and rates remain high. State prevalence of obesity continues to remain high across the country in 2013, with no state with a prevalence of obesity less than 20.0%. In 2013, 43 states had a prevalence of 25% or more and 20 of these states had a prevalence of 30% or more. As healthcare costs continue to rise in the U.S., some of the focus on 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 for treating obesity related sicknesses.

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 one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States and one of the largest fitness club owners and operators in the United States. We are the largest fitness club owner and operator in our New York and Boston regions. We are also the third largest in our Washington region and second largest in our Philadelphia region. Our strong real estate presence in the metropolitan regions enhances convenience to our members. 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 237,000, or 65%, 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 typically generate higher monthly dues than our single club memberships 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, 2014, 43% 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, Daniel Gallagher, and our former Chief Executive Officer and now Executive Chairman, Robert Giardina, provides us with a competitive strength. Mr. Gallagher joined the Company in February of 1999 as Vice President of Finance and served as the Company’s Chief Financial Officer from 2008 to 2013. Mr. Gallagher was promoted to President and Chief Operating Officer in January 2014 and Chief Executive Officer and President in February 2015. Prior to joining the Company, Mr. Gallagher’s experience included management roles at large public accounting firms including Coopers & Lybrand and PricewaterhouseCoopers. Mr. Giardina has extensive knowledge of the fitness industry and over 30 years of experience with the Company. Mr. Giardina originally joined the Company in 1981 and served as President and Chief Operating Officer from 1992 to 2001, and as Chief Executive Officer from 2002 through 2007. Mr. Giardina was appointed President and Chief Executive Officer from 2010 to 2013, and as Chief Executive Officer through February 2015. Mr. Giardina now serves as Executive Chairman. We believe that Mr. Gallagher and Mr. Giardina, as well as the other members of our senior executive team are highly talented and innovative executives who have extensive retail and multi-unit experience, 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:
High Value Low Price strategy. In 2014, we began to expand our target market to include members that prefer a lower cost membership, and have introduced a new pricing strategy to most of our clubs called HVLP. Monthly dues at these clubs are offered at a reduced price and advertising cost is increased. The HVLP strategy offers the same current level of service and amenities but at a lower price point giving us an opportunity to recapture market share and compete against low cost gyms that have opened in our markets. We will offer only the Passport Membership at approximately 25 of our clubs. We believe our offerings are more compelling than other low cost operators because we include exciting group exercise classes, top of the line equipment, pools and courts with price of membership, when available.
The sales process has been greatly simplified at the clubs operating under the HVLP strategy. All club employees have the ability to sell a membership, however the majority of memberships are sold by a membership consultant. Prior to introducing the HVLP pricing strategy, the Company offered Passport Membership, Core Membership, Gold Membership and Restricted Membership. The HVLP strategy introduces the Premier Membership, which is a month-to-month plan offering the same level of quality service currently offered under the Core Membership, but at a significantly reduced rate and higher joining fees. The Premier Membership allows members unlimited use of a single "home club" with access to use other non-home clubs for an additional usage fee. The Passport Membership continues to offer the same current level of service and amenities, which allows members to use any club at any time. In the HVLP strategy, the Core Membership, Gold Membership and Restricted Membership will no longer be offered and will be converted to either Passport Membership or Premier Membership as described below.
As of December 31, 2014, 71 clubs were under this new pricing strategy with the majority of clubs adopting this strategy in the fourth quarter of 2014. We expect most of our clubs to adopt the HVLP strategy by May 31, 2015, with approximately 25 clubs offering only Passport Memberships. The HVLP clubs are expected to experience earnings pressure in the near-term related to existing members opting for lower dues as well as new members enrolling at lower rates. However, we believe this strategy will improve results and increase market share for our brands in the long-run from the increased membership sales volume.
BFX Studio concept. We have used our extensive industry experience to offer our own private studio brand, BFX Studio. In 2014, we introduced our first BFX Studio with a soft opening in July and a grand opening in September. We currently plan to open three additional BFX Studio units in 2015. This three-product luxury studio brand takes advantage of the rise in consumer demand for studio experiences. Our BFX Studio includes three unique offerings: Ride Republic, which is indoor cycling, Private Sessions for personal training and Master Class for certain group exercise classes. BFX Studio is staffed with high caliber instructors in each of the three core offerings and the studios are designed to appeal to all ages and all experience levels of metropolitan, active healthy lifestylers. Each BFX Studio is approximately 9,000 to 12,000 square feet.
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. Over the past five years, we have expanded the range of ancillary club services provided to members. Non-membership revenues have increased from $90.3 million, or 19.5% of revenues for the year ended December 31, 2010, to $98.6 million, or 21.7% of revenues for the year ended December 31, 2014. Personal training revenue, in particular, increased 15.5% over this five-year period and increased as a percentage of total revenue from 13.2% in 2010 to 15.5% in 2014. Our long-term goal is to generate approximately 20% of revenue from personal training. We offer a multi-session personal training membership product and fee-based class offerings to generate additional revenue. The fee-based class offerings include our Ultimate Fitness Experience (“UXF”) class and our fee-based Small Group Training programs. The Small Group Training programs include offerings such as Pilates Reformer Technique,

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Total Body Resistance Exercise (“TRX”) and Kettlebells, and our Signature Classes which include VBarre and Pilates Tower. We also offer Sports Clubs for Kids programs at select clubs. In 2015, 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. These sources of ancillary and other non-membership revenues generate incremental profits with minimal capital investment and assist in attracting and retaining members.
Build and acquire new clubs.   We plan to expand our club base through both designing and building clubs and through selective acquisitions. During 2014, we opened four clubs and one BFX Studio unit. We also plan to open one NYSC and three BFX Studio units in 2015. We expect to fund our club expansion with cash on hand or through internally generated cash flows and, if needed, we can utilize borrowings under our revolving credit facility.
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. We tailor the hours of each club to the needs of the specific member demographic utilizing each club and offer a variety of ancillary services, including personal training, group classes, Small Group Training, Sports Clubs for Kids programs, and the XpressLine strength workout which is an eight-station total-body circuit workout designed to be used in 22 minutes and accommodates all fitness levels. 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 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 better measure the member experience, we utilize member surveys and website feedback 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.   We help educate our members to best practices in their pursuit of fitness, wellness and healthy lifestyles and each of our clubs has a large array of cardiovascular machines, resistance training equipment, free weights and functional training zones. To further enhance the member experience we have developed a proprietary training tool called FitMap which guides members and our fitness team through safe exercise progressions for all age groups and active lifestyles. Exercise equipment is positioned to allow for easy movement from machine to machine, facilitating a convenient and efficient workout. Equipment in these areas is generally arranged in long parallel rows that are 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 which accommodate individual preferences and viewing, and many cardio machines now include embedded technology that offers both entertainment and tracking features that record workout results and communicate with many mobile technologies. 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 further 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. In 2014, we completed the roll-out of our UXF training zone to the majority of our existing club base, with a total of 151 clubs including this zone at December 31, 2014. 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 suspension training frame and a variety of functional training equipment including Kettle Bells, Battling Ropes and Power Sleds. 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.
Marketing
Our marketing campaign, which we believe has increased awareness of our brand names, is directed by our marketing department. In 2014, we increased marketing spend to introduce the HVLP strategy to most of our clubs. Our marketing campaign for the HVLP clubs typically features a price/value message and uses a high-visibility approach within close proximity of the club. Our marketing team develops advertising strategies to convey each of our regionally branded networks as the premier network of fitness clubs in its region. Our marketing team’s goal is to focus on growing our membership base, achieving broad awareness of

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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 484,000 as of December 31, 2014, a 41-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, television and outdoor advertising, which includes banners, billboards, transit and mall advertising. Geo-targeted and behaviorally targeted digital and social media, such as paid search, email blasts, online banners and video, as well as other emerging new media vehicles are also utilized. These broader market efforts are bolstered by local marketing plans and tactics, which include direct mail, local sponsorships and co-promotions, as well as 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 current events and trending stories to communicate the serious approach we take toward fitness in a light-hearted way. 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 periodically 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 Fox & Friends, CNBC, Fox News, Fox Sports, ABC News, ESPN and Dr. Oz Show; and major newspapers and magazines, such as USA Today, Boston Globe, Fitness, Self, Shape, New York Magazine, Family Circle, Glamour, Details, Adweek, and Men’s Fitness.
 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 HealthCorps, ALS Therapy Development Institute, Muscular Dystrophy Association, American Cancer Society, Susan G. Komen Race for the Cure, Wounded Warrior Project, No Kid Hungry, as well as many smaller local and specific charities such as: Boston Children’s Hospital, Josephine’s Garden for Pediatric Cancer, North Rockland Soccer Association, The Theatre Offensive of Boston and Verrazano Babe Ruth League.
Sales
We sell our memberships through four channels: direct sales at the club level; through corporate and group sales; through our online website; and through our call center which we introduced in September 2010 principally to reach out to former members and to handle specific campaigns. We are constantly reviewing other possible opportunities to sell memberships through the call center. We employ approximately 450 “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 four week training program through which they learn our sales strategy and gain valuable hands-on experience. In our New York and Boston regions, this training primarily occurs in our two sales academies. 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

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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. Through our corporate and group sales approach we concentrate on building long-term relationships with local and regional companies and other large groups. As a means of continuing to grow our corporate and group sales, we launched the Fitcorp Private Fitness Center in June 2013 as part of the Fitcorp acquisition in May 2013. The Fitcorp Private Fitness Center is responsible for managing private fitness centers for both large and small corporations, colleges and universities, and private clubs. These managed sites include three managed university locations, and seven managed sites, including four managed sites acquired in connection with our Fitcorp acquisition.
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 one-week 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 1.5% of memberships sold in 2014. 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, 2014, we currently offer the following types of memberships at our Clubs:
The Premier Membership is offered at our HVLP clubs and is a month-to-month plan offering the same level of quality service currently offered under the Core Membership, but at a significantly reduced rate. The Premier Membership allows members unlimited use of a single "home club". Premier members can also elect to pay a per visit fee of $12.95 to use non-home clubs.The current list price of a Premier Membership generally ranges from $9.95 to $39.95 per month with joining fees ranging from $0 to $250 and an annual fee to be paid on each anniversary date of enrollment of $40 to $50.
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, offered in our WSC and PSC regions, entitles members to use any of our clubs within one region. These membership plans provide the convenience of having fitness clubs near a member’s workplace and home. The current list price of commit Regional Passport and Passport Memberships generally ranges from $69.99 per month to $99.99 per month, excluding passport restricted members, corporate and group members and premium memberships available at a very limited number of clubs. Our corporate and group memberships are sold as Passport Memberships and averaged approximately $70 per month for those sold in the year ended December 31, 2014. 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 $105.99 per month to $115.99 per month. Further, our Boston Racquet Club offers a higher level Premium Membership with pricing ranging from $135.00 to $199.00 per month. Joining fees under the Passport Membership range from $50 to $150. The Passport Membership also includes an annual fee of $50 to be paid on each anniversary date of enrollment.
We expect most of our clubs to be converted to the HVLP pricing strategy by May 31, 2015, with approximately 25 clubs offering only Passport Memberships. The conversion of clubs to HVLP discontinues the currently existing membership types described below including the Core Membership, the Restricted Membership and the Gold Membership. The Passport Membership continues to offer the same current level of service and amenities under a month-to-month plan, which allows members to use any club at any time. These memberships continue to be offered at those clubs that have not yet been converted.
The Core Membership enables members to use a specific club at any time. The current list price of a commit Core membership generally ranges from $39.99 per month to $89.99 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 of $12.95 to use non-home clubs. Core members existing at the time of HVLP adoption will convert to a Passport Membership.
The Restricted Membership is a favorably-priced, restricted-use month-to-month only membership held primarily by students and teachers. Usage fees of $12.95 per visit are applied if a restricted member chooses to use a club during certain peak hours, Monday through Thursday. The Restricted Membership is currently listed from $19.99 per month to $39.99 per month. Additional groups may also be offered a restricted membership at times through our call center. Restricted members existing at the time of HVLP adoption will convert to a Premier Membership.
Prior to November 1, 2010, we also offered The Gold Membership. 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 of $12.95 to use

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non-home clubs during peak hours. Gold members existing at the time of HVLP adoption will convert to a Passport Membership.
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. In 2014 and 2013, 77% and 90%, respectively, of our newly enrolled members opted for a commit membership. The decrease in commit membership in 2014 was primarily due to the HVLP conversion, which reflected an increased number of members joining the new month-to-month Premier Membership. As of December 31, 2014, approximately 54% of our members had originated under a month-to-month non-commit membership and 46% 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, 2014, approximately 85% of our total members were on a month-to-month basis.
Prior to the implementation of our rate lock guarantee and maintenance fee in May 2011, we 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 to which all members agree at the time of enrollment. This fee, which is currently $39.99, is collected annually in January and is recognized in membership revenue over the subsequent 12 month period following collection. In January 2014 and January 2013, we collected approximately $9.0 million and $7.0 million, respectively, related to this new fee. The HVLP memberships also charge an annual fee beginning on the first day of membership and on each annual anniversary date thereafter. In 2014, membership dues increases were applied to approximately 25% of our membership base (for those members joining prior to the May 2011 rate lock guarantee) resulting in an overall dues increase of approximately less than 3% on these members.
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. Joining fees collected for new monthly electronic funds transfer, or EFT, members averaged approximately $65, $59 and $57 per member for the years ended December 31, 2014, 2013 and 2012, respectively. Joining fees related to the Premier Membership are generally higher than those charged previously under the Core Membership. Joining fees under the Premier membership averaged approximately $100 compared to $60 for non-HVLP clubs in the fourth quarter of 2014. Monthly EFT of individual membership dues on a per-member basis, including the effect of promotions and memberships with reduced dues, averaged approximately $59 per month for both the years ended December 31, 2014 and 2013, and $58 per month for the year ended December 31, 2012. Currently, approximately 98% of our members pay their membership dues through EFT, with EFT membership revenue constituting approximately 73.1% of total consolidated revenue for the year ended December 31, 2014. 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.
Usage
Our suburban clubs are generally open 5:00 AM to 10:00 PM on weekdays and 7:00 AM to 7:00 PM on weekends, while our urban clubs are generally open 5:30 AM to 11:00 PM on weekdays and 8:00 AM to 9:00 PM on weekends. Our total club usage, based on the number of member visits, was 28.7 million and 29.1 million member visits for the years ended December 31, 2014 and 2013, respectively. In the year ended December 31, 2014, approximately 43% 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 of $12.95 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 $2.1 million of usage fees were generated in 2014 and 2013, respectively, and are reported in membership dues in our consolidated statements of operations.

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Non-Membership Revenue
The table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2010 through 2014.
 
 
For the Years Ended December 31, ($ in thousands)
 
2014
 
%
 
2013
 
%
 
2012
 
%
 
2011
 
%
 
2010
 
%
Total revenue
$
453,842

 
100.0
%
 
$
470,225

 
100.0
%
 
$
478,981

 
100.0
%
 
$
466,941

 
100.0
%
 
$
462,387

 
100.0
%
Non-Membership Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal training revenue(1)
70,338

 
15.5
%
 
66,367

 
14.1
%
 
65,641

 
13.7
%
 
62,394

 
13.4
%
 
60,875

 
13.2
%
Other ancillary club revenue(2)
22,304

 
4.9
%
 
24,720

 
5.3
%
 
29,897

 
6.3
%
 
28,297

 
6.1
%
 
24,684

 
5.3
%
Fees and Other
revenue(3)
5,971

 
1.3
%
 
5,985

 
1.3
%
 
5,804

 
1.2
%
 
4,890

 
1.0
%
 
4,761

 
1.0
%
Total non-membership revenue
$
98,613

 
21.7
%
 
$
97,072

 
20.7
%
 
$
101,342

 
21.2
%
 
$
95,581

 
20.5
%
 
$
90,320

 
19.5
%
 
(1)
Personal training revenue in the year ended December 31, 2010 includes $2,697 related to unused and expired sessions in three jurisdictions, of which $570 is related to expired sessions that would have been recognized in 2010.
(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. The year ended December 31, 2013 includes $424 for the correction of an accounting error related to out of period rental income.
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 existing 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 21,000 square feet. Our multi-recreational clubs generally range in size from 20,000 to 65,000 square feet, with one club being approximately 200,000 square feet. The average multi-recreational club size is approximately 37,000 square feet. We are in the process of introducing the new HVLP pricing strategy to most of our clubs. We expect this pricing strategy to drive membership with our reduced price point and increased advertising. Also, we introduced our first BFX Studio in 2014, with a soft opening in July and a grand opening in September. We currently plan to open three additional BFX Studio units in 2015. The BFX Studio generally ranges from 9,000 to 12,000 square feet and consist of three spaces including a cycling studio, group exercise studio and a personal training area.  
Our existing 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, 2010 to December 31, 2014, we constructed six new clubs and one BFX Studio unit and acquired six clubs, while closing or relocating 15 clubs. Currently, 55 of our clubs, or approximately 35% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31, 2014, we constructed and opened four clubs and one BFX Studio unit, and closed eight clubs, ending the year with 158 total clubs under operation. This compares to six club acquisitions and four club closings during the year ended December 31, 2013. In both 2014 and 2013, we also upgraded certain existing clubs and plan to continue to do so in 2015.  
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. As part of our club growth strategy we also evaluate potential targeted acquisitions of both single club and multiple club operators in our core markets that would complement our existing club network. In addition, we evaluate

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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 in New York and three signed leases in place for BFX Studio units in Boston and New York.
Our facilities include a mix of state-of-the-art cardiovascular and strength equipment from some of the best manufacturers including Life Fitness, Technogym, Nautilus, Cybex®, Precor®, Star Trac®, Hammer®, Woodway® and Octane®. At many locations, additional amenities are also offered, including swimming pools, racquet and basketball courts, UXF functional training zones, 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 2014 we revised our proprietary TSI FitMap training protocol which guides our members through safe and effective exercise progressions. 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.
In 2014, we completed the roll-out of our UXF training zone to the majority of our existing club base, with a total of 151 clubs including this zone at December 31, 2014. 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 suspension training frame and a variety of functional training equipment including Kettle Bells, Battling Ropes and Power Sleds. 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 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. Recently most manufacturers are including embedded screens on their newest cardio fitness equipment which offer enhancements to both on-demand entertainment along with workout data tracking and connectivity to most mobile technologies.
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.
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. 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. 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. All of our fitness clubs offer our personal training membership products where members can select from a package of one to 16 personal training sessions per month. These sessions must be used in each respective month they are issued. Members who purchase this product commit to a three month period. Members can also purchase prepaid single sessions or multi-session packages which are sold at a premium to the personal training membership product. The personal training membership product provides members with a certified personal trainer who works with the member to create an individualized goal-based program. 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.

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Our commitment to providing a quality exercise experience to our members also includes group exercise programming. Our instructors teach a variety of classes, including dance, cycling, strength conditioning, boxing, yoga, Pilates and step 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 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, 2014, Sports Clubs for Kids was being offered in 36 locations throughout our New York Sports Clubs, Boston Sports Clubs, Washington 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.
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 club level managers can achieve bonuses tied to meeting specific revenue and member retention targets. We offer our employees various benefits including health, dental and disability insurance; pre-tax healthcare, commuting and dependent care accounts; free gym membership; and a 401(k) plan. We believe the availability of employee benefits provides us with a strategic advantage in attracting and retaining quality managers and staff, 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
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 program to replace or upgrade key systems and to optimize their performance.
In 2014, we continued our program to replace our proprietary, internally developed 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 with a new third-party developed software system. As of December 31, 2014, all of our clubs were running on the new platform for club related activities with 71 clubs also processing new membership sales on the new platform. The remaining clubs are still processing membership sales under the legacy Club Management system but all clubs are expected to complete the conversion to the new system in the first half of 2015.

In 2014, we introduced a new technology package in support of the BFX Studio brand. This new system leveraged the platform chosen for the existing TSI brands and new features and functionality were developed in support of the BFX Studio brand goals. Large self service check in kiosks allow clients to manage their arrival process at the studio, freeing up our team members to assist the clients instead of working behind a desk. A fully automated loyalty program identifies our most engaged clients and gives them additional value-added privileges to incentivize continued and increased participation. The BFXStudio.com website was launched as the primary point of sales allowing clients to purchase and fully manage their appointments at BFX Studio through the internet. This highly transactional site is natively available for personal computers, tablets and phones.
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. Improvements in the IT infrastructure will continue to be made in the future in order to better serve our business needs.

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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, COMPANIESGETFIT.COM, BFX STUDIO, RIDE REPUBLIC, MASTER CLASS, and PRIVATE SESSIONS. 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 29,750 in 2009 to 32,150 in 2013, 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;
private studios, including, among others, Flywheel, Soul Cycle, Barry’s Bootcamp and Cross-Fit, as well as other private studios offering 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, condominiums and offices;
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.
Competitive Position Measured by Number of Clubs
 
Market
 
Number of
Clubs
 
Position
Boston metropolitan
 
30

 
#1 owner and operator
New York metropolitan
 
107

 
#1 owner and operator
Washington, D.C. metropolitan
 
13

 
#3 owner and operator; #1 in urban center
Philadelphia metropolitan
 
5

 
#2 owner and operator; #1 in urban center
Switzerland
 
3

 
Local owner and operator only
Historically, our club service offerings were 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. As a means of facing the shift in fitness industry, we are in the process of introducing the HVLP strategy to most of our clubs where we believe we have a higher value-to-service proposition with reduced monthly dues under month-to-month membership plans.
As of December 31, 2014, 71 clubs were under this new pricing strategy. We expect most of our clubs to adopt the HVLP strategy by May 31, 2015, with approximately 25 clubs offering only Passport Memberships. The HVLP clubs are expected to

12


experience earnings pressure in the near-term related to existing members opting for lower dues as well as new members enrolling at lower rates. However, we believe this strategy will improve results and increase market share for our brands in the long-run from the increased membership sales volume.
We also face competition from club operators offering comparable or higher pricing with higher levels of service. Larger outer-suburban family fitness centers, in areas where suitable real estate is more likely to be available, also compete effectively against our suburban formats.
Also, we face competition from the rising popularity and demand for private studios offering niche boutique experiences. As a means of growing and expanding our business, we launched our own private studio concept, the BFX Studio, in the second half of 2014. This three-dimension luxury studio brand takes advantage of the rise in consumer demand for studio experiences and has a higher membership pricing point versus our clubs.
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 result in increased price competition and limit our ability to 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 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 less 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.

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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, 2014, we had approximately 8,000 employees, of whom approximately 3,200 were employed full-time. 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.
Available Information
We make available through our web site at http://investor.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 without penalty. In addition, we experience attrition and must continually engage existing members and attract new members in order to maintain our membership levels and ancillary sales. 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. In order to increase membership levels, we may from time to time offer lower membership rates and joining fees. Any decrease in our average membership rates or reductions in joining fees may adversely impact our results of operations.
Negative economic conditions, including increased unemployment levels and decreased consumer confidence, have in the past contributed to 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.

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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 employer subsidies. A decline in membership levels may have a material adverse effect on our business, financial condition, results of operations and cash flows.

The conversion of certain of our clubs to our high value - low price strategy may negatively impact our comparable club revenue growth and our operating margins.
We have adopted a strategic initiative to convert most of our clubs to our new HVLP strategy, which depends in substantial part on our ability to attract a significant number of additional new members at each of our clubs. We expect to initially experience lower revenues and margin pressure in connection with these conversions. To the extent we are unable to attract a sufficient number of new members, or if existing members at such clubs convert their existing memberships to our new lower cost memberships at higher numbers than we have anticipated, our revenues and results of operations will be materially adversely impacted. Further, we expect to incur significant additional advertising expenses in connection with our implementation of this new pricing strategy. Our results of operations will be materially impacted by the new strategy to the extent we do not attract sufficient numbers of new members to offset these costs.
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, 2014, we closed eight clubs, while in 2013 we closed four clubs. We recognized $4.6 million of fixed asset impairments in the year ended December 31, 2014 and $714,000 of fixed asset impairments in the year ended December 31, 2013. In addition, in the year ended December 31, 2014, we recorded goodwill impairment charges of $137,000 related to one outlier club, in part due to decreased membership. Some of our club 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 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.
We have experienced reduced membership levels at many of our clubs. During the year ended December 31, 2014, we tested 36 underperforming clubs and recorded an impairment loss of $4.6 million on fixed assets related to a total of nine clubs, including five underperforming clubs, and three clubs which were closed and one club we expect to convert to a managed location in February 2015. The 27 other clubs tested that did not have impairment charges had an aggregate of $38.3 million of net leasehold improvements and furniture and fixtures remaining as of December 31, 2014. The remaining impaired clubs have been converted or we plan to convert to the HVLP pricing strategy in the first half of 2015 other than one club which will be converted into a managed location in February 2015. We expect increased membership under the HVLP strategy. To the extent the HVLP pricing strategy does not meet our expectations, we may record additional impairment charges.
Our geographic concentration heightens our exposure to adverse regional developments.
As of December 31, 2014, we operated 107 fitness clubs in the New York metropolitan market, 30 fitness clubs in the Boston market, 13 fitness clubs in the Washington, D.C. market, five 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, severe weather, potential terrorist threats or other unforeseen events.
    
For example, in the year ended December 31, 2012, as a result of flooding and power outages caused by Hurricane Sandy, 131 clubs were closed on October 29, 2012, with one club that closed permanently, 16 clubs that remained closed for over a week and one club that was closed for over a year and reopened in December 2013. 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.

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Any condition that causes people to refrain, or prevents people, from visiting our clubs, such as severe weather, outbreaks of pandemic or contagious diseases, or threats of terrorist attacks may adversely affect our business, operating results and financial condition.
Our business and operations could be materially and adversely affected by severe weather or outbreaks of pandemic or contagious diseases, threats of terrorist attacks or other conditions that cause people to refrain, or prevent people, from visiting our clubs. Our business could be severely impacted by a widespread regional, national or global health epidemic. A widespread health epidemic or perception of a health epidemic (such as Ebola), whether or not traced to one of our clubs, may cause members and prospective members to avoid public gathering places or otherwise change their behaviors and impact our ability to staff our clubs. Outbreaks of disease, such as influenza, could reduce traffic in our clubs. Any of these events would negatively impact our business. In addition, any negative publicity relating to these and other health-related matters may affect members’ perceptions of our clubs, reduce member and prospective member visits to our clubs and negatively impact demand for our club offerings.
Further, 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 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.
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.
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. 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.
We also face competition from the increased popularity and demand for private studios offering group exercise classes. The prevalence of these smaller studios may compete against our own studio type offerings, such as cycling, Yoga and Pilates, as well as our new BFX Studio, as consumers may opt to use these competing studios to fulfill their fitness needs.
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

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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.

We may experience prolonged periods of losses in our recently opened club and when we open new clubs in existing markets our comparable club revenue growth and our operating margins may be negatively impacted.
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 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 adversely affect results from operations.
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 are subject to government regulation, and changes in these regulations could have a negative effect on our financial condition and results of operations.
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, but not limited to the following:
general rules and regulations of the Federal Trade Commission;
rules and regulations of state and local consumer protection agencies;
state statutes that prescribe certain forms and provisions of membership contracts
state statutes that govern the advertising, sale, financing and collection of memberships;
federal and state laws and regulations governing privacy and security of information; and
state and local health regulations
Any changes in such laws or regulations could have a material adverse effect on our financial condition and results of 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

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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. Techniques used to obtain unauthorized access or to sabotage systems change frequently and are constantly evolving. These techniques and other 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 or one of our vendors to protect customer data. We may be unable to anticipate these techniques or to implement adequate preventive or reactive measures. Several recent, highly publicized data security breaches at other companies have heightened consumer awareness of this issue. Further, a significant number of states require the customers be notified if a security breach results in the disclosure of their personal financial account or other information. Additional states and governmental entities are considering such “notice” laws. In addition, other public disclosure laws may require that material security breaches be reported.
Any compromise of our security or that of our third party vendors or noncompliance with privacy or other laws or requirements could harm our reputation, cause our members to lose confidence in us, or harm our 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 or that of our third party vendors, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose members to computer viruses or other disruptions. We may be required to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Actual or perceived vulnerabilities may lead to claims against us. To the extent the measures taken by us or our third party vendors 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 and President, Daniel Gallagher. We believe the loss of Mr. Gallagher 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.
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 with a new system through a multi-year phase in implementation program which is expected to be completed in 2015. Correcting any disruptions or failures that affect our proprietary system or the new system, as it is implemented, 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 effect on our operating results.

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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.

Outsourcing certain aspects of our business could result in disruption and increased costs.
We have outsourced certain aspects of our business to third party vendors that subject us to risks, including disruptions in our business and increased costs. For example, we have engaged third parties to host and manage certain aspects of our data center, information and technology infrastructure and electronic pay solutions. Accordingly, we are subject to the risks associated with the vendor's ability to provide these services to meet our needs. If the cost of these services is more than expected, if the vendor is not able to handle the volume of activity or perform the quality of service that we expect, if we or the vendor are unable to adequately protect our data and information is lost, if our ability to deliver our services is interrupted, or if our third party vendors face financial or other difficulties, then our business and results of operations may be negatively impacted.
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 two commercial banks as of December 31, 2014 totaled $85.4 million. During 2014, in any one month, this amount has been as high as approximately $118.0 million.
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.

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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, 2014, we had approximately $15.2 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. This could have a material adverse effect on our cash flows.
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 20 years, including option periods).  During the next five years, or the period from January 1, 2015 through December 31, 2019, we have leases for 25 club locations that are due to expire without any renewal options, three of which expire in 2015, and 48 club locations that are due to expire with renewal options. For leases with 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.
We have a stockholders rights plan which could delay or prevent a change in control; implemented in response to significant stock accumulation and threatened proxy contest, which may divert resources and distract management. 
On December 31, 2014, our Board adopted a stockholder rights plan (the “Rights Plan”). The Rights Plan may cause substantial dilution to a person or group that attempts to acquire our Company on terms that our Board does not believe are in our stockholders’ best interest. The Rights Plan is intended to protect stockholders in the event of an unfair or coercive offer to acquire control of the Company and to provide our Board with adequate time to evaluate unsolicited offers. The Rights Plan may prevent or make takeovers or unsolicited corporate transactions with respect to our Company more difficult, even if stockholders consider such transactions favorable, possibly including transactions in which stockholders might otherwise receive a premium for their shares.  For more information on the Rights Plan, please see the Rights Agreement dated December 31, 2014 filed as an exhibit to our Current Report on Form 8-K filed January 2, 2015.
The Rights Plan was implemented in response to PW Partners Atlas Fund III LP and HG Vora Special Opportunities Master Fund, Ltd. and certain of their affiliates (collectively, “Walsh/Vora”) accumulation of a significant position (according to their filings with the SEC, approximately 26%) of the outstanding shares of the Company’s common stock and a letter dated December 22, 2014 on behalf of Walsh/Vora threatening to launch a proxy contest in the absence of a settlement that provided them with a majority of the seats on our board. The current holdings of our common stock by Walsh/Vora have not triggered the Rights Plan at this time because such shares or our Common Stock were beneficially owned by them prior to the first public announcement of the adoption of the Rights Plan. However, the acquisition by Walsh/Vora of any additional shares of our common stock, subject to certain exceptions set forth in the Rights Plan, may trigger the Rights Plan. On January 7, 2015, we received notice from Walsh/Vora of their intention to nominate six director candidates for election to our Board at our 2015 annual meeting of shareholders. If elected, the Walsh/Vora nominees would constitute a majority of our Board following the 2015 Annual Meeting.  A proxy contest could require significant time and attention by management and our Board. Further, any perceived uncertainties as to our future direction and control could result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results.

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The outcome of our publicly announced process of evaluating strategic alternatives is uncertain, may not result in a transaction or may result in the disruption of our business.
In February 2015, our Board of Directors announced that it is evaluating strategic alternatives, including a possible sale of the Company, and has retained Deutsche Bank Securities, Inc. to assist it in such process. While we intend to complete our evaluation expeditiously, there is no guarantee that the process will result in a sale of the Company or other transaction. In addition, our announcement that we are evaluating various strategic alternatives may make it more difficult to recruit, retain and motivate our employees, may cause disruption in our relationship with vendors or members or may deter potential vendors or members from entering in any business transaction or membership with us until we have announced a final outcome. The potential for a strategic transaction may divert the attention of management and any announcements or speculation regarding the status or result of our process of evaluating strategic alternatives may cause volatility in our stock price. In the event we decide to pursue into a strategic transaction, there is no assurance that such transaction will be completed or will be successful.
We may have exposure to additional tax liabilities.
From time to time, we are under audit by federal and local tax authorities and we may be liable for additional tax obligations and may incur additional costs in defending any claims that may arise.   For example, as of December 31, 2014, certain of our state and local tax returns from years 2006 through 2012 were currently being examined by certain state and local jurisdictions and it is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations.  In particular, we received from the State of New York a revised assessment related to tax years 2006-2009 for $3.5 million, inclusive of $1.2 million of interest. We have subsequently received a request for additional information from the State of New York. All of the information was submitted by January 2015. We continue to evaluate the merits of the proposed assessment as new information becomes available during continued discussions with the State of New York. We have not recorded a tax reserve related to the proposed assessment.  It is difficult to predict the ultimate outcome of this or any other tax examination and the result of any such tax examination could have a material adverse effect on our results of operations and financial condition.
Risks Related to Our Leverage and Our Indebtedness
On November 15, 2013, TSI, LLC entered into a $370.0 million senior secured credit facility (“2013 Senior Credit Facility”). The 2013 Senior Credit Facility consists of a $325.0 million term loan facility (“2013 Term Loan Facility”), and a $45.0 million revolving loan facility (“2013 Revolving Loan Facility”). The 2013 Term Loan Facility matures on November 15, 2020, and the 2013 Revolving Loan Facility matures on November 15, 2018.
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. The principal sources of our liquidity are funds generated from operating activities, available cash and cash equivalents and borrowings under our $45.0 million 2013 Revolving Loan Facility. If our current resources do not satisfy our liquidity requirements, we may have to seek additional financing.
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, 2014, our total outstanding consolidated debt was $308.3 million. In addition, as of December 31, 2014, under the 2013 Revolving Loan Facility there were no outstanding borrowings and outstanding letters of credit issued totaled $3.0 million. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2014 was $42.0 million and the available unutilized portion, based on the Company’s total leverage ratio exceeding 4.50:1.00 as of December 31, 2014, was $11.3 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 2013 Revolving Loan Facility and partially variable on our 2013 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 2013 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.
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 2013 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 $148.3 million, of our outstanding debt under our 2013 Senior Credit Facility as of December 31, 2014 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 $308.3 million outstanding term loan principal balance with the swap expiring on May 15, 2018. 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 2013 Senior Credit Facility and the agreements related thereto 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:
incur debt;
pay dividends or make distributions;
purchase or redeem stock;
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.

22


The 2013 Senior Credit Facility provides for a financial covenant in the situation where the total utilization of the revolving loan commitments (other than letters of credit up to $5.5 million at any time outstanding) exceeds 25% of the aggregate amount of those commitments. In such event, our subsidiaries are required to maintain a total leverage ratio of no greater than 4.50:1.00. While not subject to the total leverage ratio covenant as of December 31, 2014 as the Company’s only utilization of the 2013 Revolving Loan Facility at that date was $3.0 million of issued and outstanding letters of credit thereunder, because the Company’s total leverage ratio as of that date was in excess of 4.50:1.00, the Company is currently not able to utilize more than 25% of the 2013 Revolving Loan Facility. The Company will continue not to be able to utilize more than 25% of the 2013 Revolving Loan Facility until it has a total leverage ratio of no greater than 4.50:1.00.
Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet certain financial ratios under the 2013 Senior Credit Facility. We may be unable to meet those tests and the lenders may decide not to waive any failure to meet those tests. A failure to satisfy these tests could limit our ability to obtain funds to pay dividends or cause a default under the 2013 Senior Credit Facility. If an event of default under the 2013 Senior Credit Facility occurs, the lenders could elect to terminate any and all outstanding undrawn commitments to lend and 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
On September 12, 2014, we completed the previously announced legal sale of our East 86th Street property to an unaffiliated third-party, which housed one of our New York Sports Clubs as well as a retail tenant that generated rental income for us. The gross proceeds associated with the property sale was $85.7 million, which includes $150,000 of additional payments to us. Concurrent with the closing of the transaction, we leased back the portion of the property comprising our health club. We expect to lease (“Initial Lease”) the premises for at least 18 months and then, upon notice from the purchaser/landlord, the Initial Lease will terminate and we will vacate the property while the purchaser/landlord demolishes the existing building and the adjacent building and builds a new luxury, high-rise multi-use building. In connection with vacating the property, we will enter into a new lease (“New Club Lease”) for approximately 24,000 square feet in the new building for the purpose of operating a health club upon completion of construction by the purchaser/landlord (which we expect will take approximately three and one-half years). The term of the Initial Lease is 10 years, and at the end of this initial term, we have two options at our sole discretion to renew the lease; the first for an additional 10 year period and a second for an additional five year period (although we expect that the purchaser/landlord will exercise its right to early terminate the Initial Lease so that it may commence the construction of the new building). Under the Initial Lease (and New Club Lease if entered into), the purchaser/landlord has agreed to pay us liquidated damages if the new club is not available by a certain date. The latest date that the liquidated damages would begin to be paid would be April 13, 2020 and would continue until the new club is available. For accounting purposes, the nature of these potential liquidated damages constitutes continuing involvement with the purchaser/landlord’s development of the property. As a result of this continuing involvement, the sale-leaseback transaction is currently required to be accounted for as a financing arrangement rather than as a completed sale. Under this treatment, we have included the proceeds received as a financing arrangement on our balance sheet. Except for payments under the Initial Lease and the New Club Lease, we do not expect to make any cash payments to the purchaser/landlord with respect to the building financing arrangement. We recorded a taxable (for federal and state income tax purposes) gain on the sale of the property and made estimated tax payments during 2014 in this regard. As of December 31, 2014, the total financing arrangement was $83.4 million, which is net of $1.8 million to be held in escrow for our former tenant and $500,000 to remain in escrow to be released to us six months after the date of sale.
We lease the remainder of our fitness clubs pursuant to long-term leases (generally 15 to 20 years, including options). In the next five years, or the period from January 1, 2015 through December 31, 2019, we have leases for 25 club locations that are due to expire without any renewal options, three of which are due to expire in 2015, and 48 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.

23


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 space also serves as corporate office space. 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.

24


The following table provides information regarding our club locations:
Location
  
Address
  
Date Opened or Management Assumed
New York Sports Clubs:
  
 
  
 
Manhattan
  
151 East 86th Street
  
January 1977
Manhattan
  
61 West 62nd Street
  
July 1983
Manhattan
  
614 Second Avenue
  
July 1986
Manhattan
  
151 Reade Street
  
January 1990
Manhattan
  
1601 Broadway
  
September 1991
Manhattan
  
349 East 76th Street
  
April 1994
Manhattan
  
248 West 80th Street
  
May 1994
Manhattan
  
502 Park Avenue
  
February 1995
Manhattan
  
117 Seventh Avenue South
  
March 1995
Manhattan
  
303 Park Avenue South
  
December 1995
Manhattan
  
30 Wall Street
  
May 1996
Manhattan
  
1635 Third Avenue
  
October 1996
Manhattan
 
575 Lexington Avenue
 
November 1996
Manhattan
  
278 Eighth Avenue
  
December 1996
Manhattan
  
200 Madison Avenue
  
February 1997
Manhattan
  
2162 Broadway
  
November 1997
Manhattan
  
633 Third Avenue
  
April 1998
Manhattan
  
217 Broadway
  
March 1999
Manhattan
  
23 West 73rd Street
  
April 1999
Manhattan
  
34 West 14th Street
  
July 1999
Manhattan
  
503-511 Broadway
  
July 1999
Manhattan
  
1372 Broadway
  
October 1999
Manhattan
  
300 West 125th Street
  
May 2000
Manhattan
  
19 West 44th Street
  
August 2000
Manhattan
  
128 Eighth Avenue
  
December 2000
Manhattan
  
2527 Broadway
  
August 2001
Manhattan
  
3 Park Avenue
  
August 2001
Manhattan
  
10 Irving Place
  
November 2001
Manhattan
  
230 West 41st Street
  
November 2001
Manhattan
  
1221 Avenue of the Americas
  
January 2002
Manhattan
  
200 Park Avenue
  
December 2002
Manhattan
  
232 Mercer Street
  
September 2004
Manhattan
  
225 Varick Street
  
August 2006
Manhattan
  
885 Second Avenue
  
February 2007
Manhattan
  
301 West 145th Street
  
October 2007
Manhattan
  
1400 5th Avenue
  
December 2007
Manhattan
  
75 West End Avenue
  
April 2013
Manhattan
  
28-30 Avenue A
  
Future opening
Bronx, NY
  
1601 Bronxdale Avenue
  
November 2007
Brooklyn, NY
  
110 Boerum Place
  
October 1985
Brooklyn, NY
  
1736 Shore Parkway
  
June 1998
Brooklyn, NY
  
179 Remsen Street
  
May 2001
Brooklyn, NY
  
324 Ninth Street
  
August 2003
Brooklyn, NY
  
1630 E 15th Street
  
August 2007
Brooklyn, NY
  
7118 Third Avenue
  
May 2004
Brooklyn, NY
  
439 86th Street
  
April 2008

25


Location
  
Address
  
Date Opened or Management Assumed
Brooklyn, NY
  
242 Bedford Avenue
  
Future opening
Brooklyn, NY
  
147 Greenpoint Avenue
  
June 2014
Queens, NY
  
69-33 Austin Street
  
April 1997
Queens, NY
  
153-67 A Cross Island Parkway
  
June 1998
Queens, NY
  
2856-2861 Steinway Street
  
February 2004
Queens, NY
  
8000 Cooper Avenue
  
March 2007
Queens, NY
  
99-01 Queens Boulevard
  
June 2007
Queens, NY
  
39-01 Queens Blvd
  
December 2007
Staten Island, NY
  
300 West Service Road
  
June 1998
Scarsdale, NY
  
696 White Plains Road
  
October 1995
Mamaroneck, NY
  
124 Palmer Avenue
  
January 1997
Croton-on-Hudson, NY
  
420 South Riverside Drive
  
January 1998
Larchmont, NY
  
15 Madison Avenue
  
December 1998
Nanuet, NY
  
58 Demarest Mill Road
  
May 1998
Great Neck, NY
  
15 Barstow Road
  
July 1989
East Meadow, NY
  
625 Merrick Avenue
  
January 1999
Commack, NY
  
6136 Jericho Turnpike
  
January 1999
Oceanside, NY
  
2909 Lincoln Avenue
  
May 1999
Long Beach, NY
  
265 East Park Avenue
  
July 1999
Garden City, NY
  
833 Franklin Avenue
  
May 2000
Huntington, NY
  
350 New York Avenue
  
February 2001
Syosset, NY
  
49 Ira Road
  
March 2001
West Nyack, NY
  
3656 Palisades Center Drive
  
February 2002
Woodmere, NY
  
158 Irving Street
  
March 2002
Hartsdale, NY
  
208 E. Hartsdale Avenue
  
September 2004
Somers, NY
  
Somers Commons, 80 Route 6
  
February 2005
White Plains, NY
  
4 City Center
  
September 2005
Hawthorne, NY
  
24 Saw Mill River Road
  
January 2006
Dobbs Ferry, NY
  
50 Livingstone Avenue
  
June 2008
Smithtown, NY
  
5 Browns Road
  
December 2007
Carmel, NY
  
1880 Route 6
  
July 2007
Hicksville, NY
  
100 Duffy Avenue
  
November 2008
New Rochelle, NY
  
Trump Plaza, Huguenot Street
  
March 2008
Deer Park, NY
  
455 Commack Avenue
  
March 2009
Garnerville, NY
  
20 W. Ramapo Road
  
October 2011
Stamford, CT
  
106 Commerce Road
  
January 1998
Danbury, CT
  
38 Mill Plain Road
  
January 1998
Stamford, CT
  
1063 Hope Street
  
November 1998
Greenwich, CT
  
6 Liberty Way
  
May 1999
Westport, CT
  
427 Post Road, East
  
January 2002
West Hartford, CT
  
65 Memorial Road
  
November 2007
Princeton, NJ
  
301 North Harrison Street
  
May 1997
Matawan, NJ
  
450 Route 34
  
April 1998
Marlboro, NJ
  
34 Route 9 North
  
April 1998
Ramsey, NJ
  
1100 Route 17 North
  
June 1998
Mahwah, NJ
  
7 Leighton Place
  
June 1998
Springfield, NJ
  
215 Morris Avenue
  
August 1998
Colonia, NJ
  
1250 Route 27
  
August 1998
Somerset, NJ
  
120 Cedar Grove Lane
  
August 1998
Hoboken, NJ
  
59 Newark Street
  
October 1998
West Caldwell, NJ
  
913 Bloomfield Avenue
  
April 1999

26


Location
  
Address
  
Date Opened or Management Assumed
Jersey City, NJ
  
147 Two Harborside Financial Center
  
June 2002
Newark, NJ
  
1 Gateway Center
  
October 2002
Ridgewood, NJ
  
129 S. Broad Street
  
June 2003
Westwood, NJ
  
35 Jefferson Avenue
  
June 2004
Livingston, NJ
  
39 W. North Field Rd.
  
February 2005
Hoboken, NJ
  
210 14th Street
  
December 2006
Englewood, NJ
  
34-36 South Dean Street
  
December 2006
Clifton, NJ
  
202 Main Avenue
  
March 2007
Montclair, NJ
  
56 Church Street
  
January 2008
Butler, NJ
  
1481 Route 23
  
January 2009
East Brunswick, NJ
  
300 State Route 18
  
March 2009
Bayonne, NJ
  
550 Route 440 North
  
December 2011
Boston Sports Clubs:
  
 
  
 
Boston, MA
  
1 Bulfinch Place
  
August 1998
Boston, MA
  
201 Brookline Avenue
  
June 2000
Boston, MA
  
361 Newbury Street
  
November 2001
Boston, MA
  
350 Washington Street
  
February 2002
Boston, MA
  
505 Boylston Street
  
January 2006
Boston, MA
  
560 Harrison Avenue
  
February 2006
Boston, MA
  
695 Atlantic Avenue
  
October 2006
Boston, MA
  
One Beacon Street
  
May 2013
Boston, MA
  
197 Clarendon Street
  
May 2013
Boston, MA
  
800 Boylston Street
  
May 2013
Boston, MA
  
100 Summer Street
  
May 2013
Boston, MA
  
540 Gallivan Road
  
October 2014
Boston, MA
 
95 Washington Street
 
November 2014
Allston, MA
  
15 Gorham Street
  
July 1997
Wellesley, MA
  
140 Great Plain Avenue
  
July 2000
Andover, MA
  
307 Lowell Street
  
July 2000
Lynnfield, MA
  
425 Walnut Street
  
July 2000
Lexington, MA
  
475 Bedford Avenue
  
July 2000
Franklin, MA
  
750 Union Street
  
July 2000
Cambridge, MA
  
625 Massachusetts Avenue
  
January 2001
West Newton, MA
  
1359 Washington Street
  
November 2001
Waltham, MA
  
840 Winter Street
  
November 2002
Watertown, MA
  
311 Arsenal Street
  
January 2006
Newton, MA
  
135 Wells Avenue
  
August 2006
Somerville, MA
  
1 Davis Square
  
December 2007
Medford, MA
  
70 Station Landing
  
December 2007
Westborough, MA
  
1500 Union Street
  
September 2008
Woburn, MA
  
300 Presidential Way
  
December 2008
Wayland, MA
  
Wayland Town Center
  
November 2014
Providence, RI
  
131 Pittman Street
  
December 2008
Washington Sports Clubs:
  
 
  
 
Washington, D.C.
  
214 D Street, S.E
  
January 1980
Washington, D.C.
  
1835 Connecticut Avenue, N.W .
  
January 1990
Washington, D.C.
  
2251 Wisconsin Avenue, N.W
  
May 1994
Washington, D.C.
  
1211 Connecticut Avenue, N.W
  
July 2000
Washington, D.C.
  
1345 F Street, N.W
  
August 2002
Washington, D.C.
  
783 Seventh Street, N.W
  
October 2004
Washington, D.C.
  
3222 M Street, N.W
  
February 2005
Washington, D.C.
  
14th Street, N.W
  
June 2008
North Bethesda, MD
  
10400 Old Georgetown Road
  
June 1998

27


Location
  
Address
  
Date Opened or Management Assumed
Silver Spring, MD
  
8506 Fenton Street
  
November 2005
Bethesda, MD
  
6800 Wisconsin Avenue
  
November 2007
Fairfax, VA
  
11001 Lee Highway
  
October 1999
Clarendon, VA
  
2700 Clarendon Boulevard
  
November 2001
Philadelphia Sports Clubs:
  
 
  
 
Philadelphia, PA
  
220 South 5th Street
  
January 1999
Philadelphia, PA
  
2000 Hamilton Street
  
July 1999
Chalfont, PA
  
One Highpoint Drive
  
January 2000
Philadelphia, PA
  
1735 Market Street
  
October 2000
Radnor, PA
  
555 East Lancaster Avenue
  
December 2006
Swiss Sports Clubs:
  
 
  
 
Basel, Switzerland
  
St. Johanns-Vorstadt 41
  
August 1987
Zurich, Switzerland
  
Glarnischstrasse 35
  
August 1987
Basel, Switzerland
  
Gellerstrasse 235
  
August 2001
BFX Studio:
  
 
  
 
Manhattan, NY
  
555 Sixth Avenue
  
July 2014
Manhattan, NY
 
30 Broad Street
 
Future opening
Manhattan, NY
 
1231 Third Avenue
 
Future opening
Boston, MA
 
699 Boylston Street
 
Future opening



28


Item 3.    Legal Proceedings
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, the tenant, and take additional space in a nearby facility leased by another subsidiary of TSI, LLC. Following a determination of an initial award, which TSI, LLC and the tenant have paid in full, the landlord appealed the trial court’s award of damages, and on August 29, 2011, an additional award (amounting to approximately $900,000) (the “Additional Award”), was entered against the tenant, which has recorded a liability. 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. As a result, the developer reimbursed TSI, LLC and the tenant the amount of the initial award in installments over time and also agreed to be responsible for the payment of the Additional Award, and the tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord are currently litigating the payment of the Additional Award and judgment was entered against the developer on June 5, 2013 in the amount of approximately $1.0 million, plus interest. On June 13, 2013, the developer filed a notice of its intent to appeal the judgment. The appeal remains pending. TSI, LLC does not believe it is probable that TSI, LLC will be required to pay for any amount of the Additional Award.
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. The Court has bifurcated class and merits discovery. The deadline for the completion of pre-class certification document discovery was December 31, 2014 and the deadline for a class certification motion is March 2, 2015. 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, the Company is involved in various other lawsuits, claims and proceedings incidental to the ordinary course of business, including personal injury, employee relations claims and landlord-tenant disputes. The results of litigation are inherently unpredictable. Any claims against the Company, 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. The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. We currently believe that the ultimate outcome of such lawsuits, claims and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or liquidity. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.
Item 4.    Mine Safety Disclosures
Not applicable.


29


PART II
Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
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:
 
 
High
 
Low
Year ended December 31, 2014:
 
 
 
First Quarter
$
14.70

 
$
8.14

Second Quarter
$
8.78

 
$
5.65

Third Quarter
$
7.36

 
$
4.01

Fourth Quarter
$
7.00

 
$
5.37

Year ended December 31, 2013:
 
 
 
First Quarter
$
11.11

 
$
8.91

Second Quarter
$
11.37

 
$
9.31

Third Quarter
$
13.03

 
$
10.83

Fourth Quarter
$
14.96

 
$
11.50

Holders
As of February 19, 2015, there were approximately 104 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
On each of November 26, 2013, March 5, 2014 and June 6, 2014 the Company paid a quarterly cash dividend of $0.16 per share to common stock holders. The cash dividends were funded by available cash on hand.
The board of directors does not currently intend to pay dividends. 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. If we decide to pay a dividend, we may rely on cash on hand at TSI Holdings, which was $41.2 million at December 31, 2014, and distributions received from our subsidiaries to provide the funds necessary to pay dividends on our common stock. The existing credit agreement of TSI, LLC restricts the ability of our subsidiaries to pay cash distributions to TSI Holdings in order for TSI Holdings to pay cash dividends except (a) in an amount, when combined with certain prepayments of indebtedness, of up to $35.0 million, subject to pro forma compliance with a total leverage ratio of no greater than 4.50:1.00 and no default or event of default existing or continuing under the credit agreement, 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 4.00:1.00 and no default or event of default existing or continuing under the credit agreement.
Issuer Purchases of Equity Securities
We did not purchase any equity securities during the fourth quarter ended December 31, 2014.
Recent Sales of Unregistered Securities
We did not sell any securities during the year ended December 31, 2014 that were not registered under the Securities Act of 1933, as amended.

30


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. 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Town Sports International Holdings, Inc, the NASDAQ Composite Index,
and the Russell 2000 Index
*
$100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
 
 
December 31,
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Town Sports International Holdings, Inc
$
100.00

 
$
174.25

 
$
315.45

 
$
596.79

 
$
835.48

 
$
352.18

NASDAQ Composite
$
100.00

 
$
117.61

 
$
118.70

 
$
139.00

 
$
196.83

 
$
223.74

Russell 2000
$
100.00

 
$
126.86

 
$
121.56

 
$
141.43

 
$
196.34

 
$
205.95

______________________
Notes :
(1)
The graph covers the period from December 31, 2009 to December 31, 2014.
(2)
The graph assumes that $100 was invested at the market close on December 31, 2009 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. On each of November 26, 2013, March 5, 2014 and June 6, 2014, we paid a quarterly cash dividend of $0.16 per share to common stock holders.
(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.

31


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, 2014 and 2013 and the selected consolidated statement of operations and cash flow data for the years ended December 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements included elsewhere herein. The selected consolidated balance sheet data as of December 31, 2012, 2011 and 2010 and the selected consolidated statement of operations and cash flow data for the years ended December 31, 2011 and 2010 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.
 
 
 
Year Ended December 31,
 
 
2014

2013

2012

2011

2010
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
453,842

 
$
470,225

 
$
478,981

 
$
466,941

 
$
462,387

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Payroll and related
 
177,009

 
174,894

 
181,632

 
177,528

 
185,583

Club operating
 
192,716

 
179,683

 
178,950

 
176,463

 
174,135

General and administrative
 
31,352

 
28,431

 
24,139

 
25,799

 
28,773

Depreciation and amortization
 
47,307

 
49,099

 
49,391

 
51,536

 
52,202

Insurance recovery related to damaged property(1)
 

 
(3,194
)
 

 

 

Impairment of fixed assets
 
4,569

 
714

 
3,436

 

 
3,254

Impairment of goodwill
 
137

 

 

 

 

Operating income
 
752

 
40,598

 
41,433

 
35,615

 
18,440

Loss on extinguishment of debt(2)
 
493

 
750

 
1,010

 
4,865

 

Interest expense, net of interest income
 
19,039

 
22,616

 
24,597

 
24,127

 
21,013

Equity in the earnings of investees and rental income
 
(2,402
)
 
(2,459
)
 
(2,461
)
 
(2,391
)
 
(2,139
)
Loss (income) before (benefit) provision for corporate income taxes
 
(16,378
)
 
19,691

 
18,287

 
9,014

 
(434
)
(Benefit) provision for corporate income taxes(3)
 
52,611

 
7,367

 
6,321

 
2,699

 
(144
)
Net (loss) income
 
$
(68,989
)
 
$
12,324

 
$
11,966

 
$
6,315

 
$
(290
)
(Loss) earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(2.84
)
 
$
0.51

 
$
0.51

 
$
0.28

 
$
(0.01
)
Diluted
 
$
(2.84
)
 
$
0.50

 
$
0.50

 
$
0.27

 
$
(0.01
)
Dividends declared per common share(4)
 
$
0.32

 
$
0.16

 
$
3.00

 
$

 
$


32


 
 
As of December 31,
 
 
2014

2013

2012

2011

2010
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
93,452

 
$
73,598

 
$
37,758

 
$
47,880

 
$
38,803

Working capital surplus (deficit)
 
52,280

 
27,830

 
(11,825
)
 
(18,311
)
 
(11,926
)
Total assets
 
409,833

 
413,792

 
404,770

 
450,402

 
474,693

Long-term debt, including current installments
 
299,871

 
314,909

 
310,339

 
288,994

 
316,513

Total stockholders’ (deficit) equity
 
(118,084
)
 
(43,516
)
 
(55,496
)
 
354

 
(6,945
)
Net debt(5)
 
214,832

 
251,402

 
277,985

 
243,870

 
277,710

 
 
Year Ended December 31,
 
 
2014

2013

2012

2011

2010
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
4,758

 
$
67,388

 
$
60,053

 
$
74,885

 
$
51,238

Investing activities
 
(42,054
)
 
(30,606
)
 
(22,490
)
 
(30,907
)
 
(22,035
)
Financing activities
 
57,503

 
(975
)
 
(47,722
)
 
(35,349
)
 
(1,765
)
Other Data:
 
 
 
 
 
 
 
 
 
 
Non-cash rental income, net of non-cash rental expense
 
(5,399
)
 
(5,692
)
 
(4,037
)
 
(3,663
)
 
(5,552
)
Non-cash share-based compensation expense
 
1,911

 
2,204

 
1,306

 
1,412

 
1,336

 
 
Year Ended December 31,
 
 
2014

2013

2012
 
2011
 
2010
Club and Membership Data:
 
 
 
 
 
 
 
 
 
 
New clubs opened
 
4

 

 

 
2

 

Clubs acquired
 

 
6

 

 

 

Clubs closed
 
(8
)
 
(4
)
 

 
(2
)
 
(1
)
Wholly-owned clubs operated at end of period
 
156

 
160

 
158

 
158

 
158

Total clubs operated at end of period(6)
 
158

 
162

 
160

 
160

 
160

BFX Studio at end of period
 
1

 

 

 

 

Total members at end of period(7)
 
484,000

 
497,000

 
510,000

 
523,000

 
493,000

Restricted members at end of period(8)
 
20,000

 
41,000

 
38,000

 
38,000

 
17,000

Comparable club revenue (decrease) increase(9)
 
(4.2
)%
 
(1.8
)%
 
1.6
%
 
1.8
%
 
(4.3
)%
Revenue per weighted average club (in thousands)(10)
 
$
2,842

 
$
2,971

 
$
3,032

 
$
2,934

 
$
2,881

Average revenue per member(11)
 
$
941

 
$
934

 
$
922

 
$
915

 
$
947

Average joining fees collected per member(12)
 
$
65

 
$
59

 
$
57

 
$
55

 
$
37

Annual attrition(13)
 
44.3
 %
 
41.9
 %
 
41.0
%
 
39.9
%
 
41.9
 %
__________________________
(1)
The $3,194 of insurance recovery related to damaged property in the year ended December 31, 2013 related to property damaged by Hurricane Sandy.
(2)
The $493 loss on extinguishment of debt recorded for the year ended December 31, 2014 is comprised of the write-off of unamortized debt issuance costs and debt discount, in connection with the fourth quarter 2014 mandatory prepayment of $13,500 on the 2013 Term Loan Facility.

33


The $750 loss on extinguishment of debt recorded for the year ended December 31, 2013 is comprised of the write-off of net deferred financing costs and debt discount in connection with the November 15, 2013 debt refinancing. The proceeds from the 2013 Senior Credit Facility were used to repay the remaining outstanding principal amounts of the 2011 Senior Credit Facility of $315,743 plus accrued and unpaid interest.
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 $15,000 on our term loan facility.
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.
(3)
Corporate income taxes for the year ended December 31, 2014 includes a non-cash charge of $60,368, related to a tax valuation allowance.Corporate income taxes for the year ended December 31, 2013, 2012 and 2011 includes income tax benefits totaling $16, $483 and $343, respectively, related to the correction of accounting errors. See Note 16 — Corporate Income Taxes to the Company’s consolidated financial statements in this Annual Report for further details.
(4)
In April 2014, February 2014 and November 2013, the board of directors of the Company declared quarterly cash dividends of $0.16 per share. The quarterly dividend was discontinued in the second quarter of 2014.
In the year ended December 31, 2012, the board of directors of the Company declared a special cash dividend of $3.00 per share.
(5)
Net debt represents the total principal balance of long-term debt outstanding, net of cash and cash equivalents.
(6)
Includes wholly-owned and partly-owned clubs. Not included in the total club count are locations that are managed by us in which we do not have an equity interest. These managed sites include three managed university locations, and seven managed sites, including four managed sites acquired in connection with our Fitcorp acquisition in May 2013.
(7)
Represents members at wholly-owned and partly-owned clubs.
(8)
Restricted members primarily include students and teachers. This membership allows for club usage at restricted times, at a discount to other memberships offered. The Company is currently in the process of introducing the HVLP strategy to most of its clubs which will eliminate the Restricted Membership.
(9)
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.
(10)
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.
(11)
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.
(12)
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.
(13)
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.

34


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
Based on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States (“U.S.”) and one of the largest fitness club owners and operators in the U.S. As of December 31, 2014, the Company, through its subsidiaries, operated 158 fitness clubs ("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, 2014, these clubs collectively served approximately 484,000 members. We owned and operated a total of 107 clubs under the “New York Sports Clubs” brand name within a 120-mile radius of New York City as of December 31, 2014, including 37 locations in Manhattan where we are the largest fitness club owner and operator. We owned and operated 30 clubs in the Boston region under our “Boston Sports Clubs” brand name, 13 clubs (two of which are partly-owned) in the Washington, D.C. region under our “Washington Sports Clubs” brand name and five clubs in the Philadelphia region under our “Philadelphia Sports Clubs” brand name as of December 31, 2014. In addition, we owned and operated three clubs in Switzerland as of December 31, 2014. 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 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. For many years, our target market was focused on the population that has annual income levels of between $50,000 and $150,000, or the "mid-value" segment of the market. In 2014, we began to expand our target market to include members that prefer a lower cost membership, and have introduced a new pricing strategy to most of our clubs called High Value Low Price ("HVLP").
Monthly dues at these clubs are offered at a reduced price and advertising cost is increased. The HVLP strategy offers the same current level of service and amenities but at a lower price point giving us an opportunity to recapture market share and compete against low cost gyms that have opened in our markets. We will offer only the Passport Membership at approximately 25 of our clubs. We believe our offerings are more compelling than other low cost operators because we include exciting group exercise classes, top of the line equipment, pools and courts with price of membership, when available.
The sales process has been greatly simplified at the clubs operating under the HVLP strategy. All club employees have the ability to sell a membership, however the majority of memberships are sold by a membership consultant. Prior to introducing the HVLP pricing strategy, the Company offered Passport Membership, Core Membership, Gold Membership and Restricted Membership. The HVLP strategy introduces the Premier Membership, which is a month-to-month plan offering the same level of quality service currently offered under the Core Membership, but at a significantly reduced rate and higher joining fees. The Premier Membership allows members unlimited use of a single "home club" with access to use other non-home clubs for an additional usage fee. The Passport Membership continues to offer the same current level of service and amenities, which allows members to use any club at any time. In the HVLP strategy, the Core Membership, Gold Membership and Restricted Membership will no longer be offered and will be converted to either Passport Membership or Premier Membership as described below.
As of December 31, 2014, 71 clubs were under this new pricing strategy with the majority of clubs adopting this strategy in the fourth quarter of 2014. We expect most of our clubs to adopt the HVLP strategy by May 31, 2015, with approximately 25 clubs offering only Passport Memberships. The HVLP clubs are expected to experience earnings pressure in the near-term related to existing members opting for lower dues as well as new members enrolling at lower rates. However, we believe this strategy will improve results and increase market share for our brands in the long-run from the increased membership sales volume.
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

35


located in the more central urban markets of the region and then branching out from these urban centers to suburbs and neighboring communities.
As the fitness industry continues to see a rise in popularity of private studio offerings, we have used our extensive industry experience to offer our own private studio brand, BFX Studio. In 2014, we introduced our first BFX Studio with a soft opening in July and a grand opening in September. We currently plan to open three additional BFX Studio units in 2015. This three-dimension luxury studio brand takes advantage of the rise in consumer demand for studio experiences. BFX Studio includes three unique offerings: Ride Republic, which is indoor cycling, Private Sessions for personal training and Master Class for a variety of specialty group exercise classes. BFX Studio is staffed with high caliber instructors in each of the three core offerings and the studios are designed to appeal to all ages and all experience levels of metropolitan, active healthy lifestylers. This studio concept requires approximately 9,000 to 12,000 square feet of space per studio which compares to the approximately 26,000 square feet aggregate average size of our Clubs.
Revenue and Operating Expenses
We have two principal sources of revenue:
Membership revenue:    Our largest sources of revenue are dues inclusive of monthly membership fees, annual maintenance fees and 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. These dues and fees comprised 78.3% of our total revenue for the year ended December 31, 2014. We recognize revenue from membership dues in the month when the services are rendered. Approximately 98% 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, 2014, we generated 15.5% of our revenue from personal training and 4.9% 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 continue to grow ancillary club revenue by building on ancillary programs such as our personal training membership product and our fee-based Small Group Training programs.
We also receive revenue (approximately 1.3% of our total revenue for the year ended December 31, 2014) 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.
In September 2014, we completed the previously announced legal sale of our East 86th Street property to an unaffiliated third-party, which housed one of our New York Sports Clubs as well as a retail tenant that generated rental income for us. Because the transaction is characterized for accounting purposes as a financing rather than a sale, the rental payments are treated as interest on the financing arrangement. Further, we will continue to account for the rental income from this retail tenant until the tenant’s lease is terminated. Rental income from this retail tenant was approximately $2.0 million for each of the years ended December 31, 2014 and 2013. Refer to Note 11 – Building Financing Arrangement to our consolidated financial statements for further details.
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, 2014 and 2013, our attrition rate was 44.3% and 41.9%, respectively. The increased attrition rate primarily reflected increased competition and the effect of eight club closures in 2014 as compared to four club closures in 2013.
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. Approximately 40% of general and administrative expenses relate directly to club operations including phone and data lines, computer maintenance, business licenses, office and sales supplies, general liability insurance, recruiting and training.

36


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% to 5% 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.
Operating income is impacted by certain charges and benefits which can fluctuate year to year. In 2014, we recorded fixed asset impairment charges totaling $4.6 million related to a total of nine clubs, including five underperforming clubs, three clubs which were closed in the second half of 2014 and one club which will be converted into a managed location in February 2015. In 2013, operating income included benefits of $3.2 million resulting from insurance proceeds collected primarily in connection with property damaged by Hurricane Sandy and $424,000 related to the recognition of out of period non-cash rental income, partially offset by fixed asset impairment charges totaling $714,000. 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 of 2012.
 
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
 
 
($ amounts in thousands)
Operating income
 
$
752

 
$
40,598

 
$
41,433

(Decrease) increase over prior period
 
(98.1
)%
 
(2.0
)%
 
16.3
 %
Net income
 
$
(68,989
)
 
$
12,324

 
$
11,966

(Decrease) increase over prior period
 
(659.8
)%
 
3.0
 %
 
89.5
 %
Cash flows provided by operating activities
 
$
4,758

 
$
67,388

 
$
60,053

(Decrease) increase over prior period
 
(92.9
)%
 
12.2
 %
 
(19.8
)%
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. During 2014, we opened four clubs and one BFX Studio unit. We also plan to open one NYSC and three BFX Studio units in 2015.
As of December 31, 2014, 156 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 locations where we do not have an equity interest which include three fitness clubs located in colleges and universities, and seven managed sites, including four managed sites acquired in connection with our Fitcorp acquisition in May 2013.

37


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
 
Full-Year
2012
 
 
 
 
First Quarter
 
4.5
 %
 
 
Second Quarter
 
2.1
 %
 
 
Third Quarter (a)
 
1.0
 %
 
 
Fourth Quarter
 
(1.1
)%
 
1.6
 %
2013
 
 
 
 
First Quarter
 
(2.4
)%
 
 
Second Quarter
 
(1.7
)%
 
 
Third Quarter
 
(1.7
)%
 
 
Fourth Quarter (a)
 
(1.3
)%
 
(1.8
)%
2014
 
 
 
 
First Quarter
 
(4.7
)%
 
 
Second Quarter
 
(4.5
)%
 
 
Third Quarter
 
(4.5
)%
 
 
Fourth Quarter
 
(3.9
)%
 
(4.2
)%
__________________________
(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. Comparable club revenue for the fourth quarter of 2013 excludes $424,000 of out of period rental income recognized resulting from the correction of an accounting error.
Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary revenue increases (decreases).
The decline in the comparable club revenue in the fourth quarter of 2012 was in part due to the impact of Hurricane Sandy on our business, including decreases in personal training and ancillary revenues and a net loss of members. The comparable club revenue declines experienced since 2013 are primarily due to the impact of membership declines. We experienced an overall member loss of 13,000 in each of 2013 and 2014.
Historical Club Count
 
 
 
Year Ended December 31,
 
 
2014

2013

2012
Wholly-owned clubs operated at beginning of period
 
160

 
158

 
158

New clubs opened
 
4

 

 

Clubs acquired
 

 
6

 

Clubs closed
 
(8
)
 
(4
)
 

Wholly-owned clubs operated at end of period
 
156

 
160

 
158

Partly-owned clubs operated at end of period
 
2

 
2

 
2

Total clubs operated at end of period(1)(2)
 
158

 
162

 
160

(1) Includes wholly-owned and partly-owned clubs. Not included in the total club count are locations that are managed by us in which we do not have an equity interest. These managed sites include three managed university locations, and seven managed sites, including four managed sites acquired in connection with our Fitcorp acquisition in May 2013.
(2) Excludes one BFX Studio opened in the third quarter of 2014.

38


Consolidated Results of Operations
The following table sets forth certain operating data as a percentage of revenue for the periods indicated:
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
Payroll and related
39.0

 
37.2

 
37.9

Club operating
42.5

 
38.2

 
37.4

General and administrative
6.9

 
6.0

 
5.0

Depreciation and amortization
10.4

 
10.5

 
10.3

Insurance recovery related to damaged property

 
(0.7
)
 

Impairment of fixed assets
1.0

 
0.2

 
0.7

Operating income
0.2

 
8.6

 
8.7

Loss on extinguishment of debt
0.1

 
0.1

 
0.2

Interest expense
4.2

 
4.8

 
5.2

Equity in the earnings of investees and rental income
(0.5
)
 
(0.5
)
 
(0.5
)
Income before provision for corporate income taxes
(3.6
)
 
4.2

 
3.8

Provision for corporate income taxes
11.6

 
1.6

 
1.3

Net (loss) income
(15.2
)%
 
2.6
 %
 
2.5
 %
Year ended December 31, 2014 compared to year ended December 31, 2013
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
 
 
Year Ended December 31,
 
 
 
2014
 
2013
 
 
 
Revenue
 
% Revenue
 
Revenue
 
% Revenue
 
% Variance
Membership dues
$
343,185

 
75.6
%
 
$
358,761

 
76.3
%
 
(4.3
)%
Joining fees
12,044

 
2.7
%
 
14,392

 
3.0
%
 
(16.3
)%
Membership revenue
355,229

 
78.3
%
 
373,153

 
79.3
%
 
(4.8
)%
Personal training revenue
70,338

 
15.5
%
 
66,367

 
14.1
%
 
6.0
 %
Other ancillary club revenue
22,304

 
4.9
%
 
24,720

 
5.3
%
 
(9.8
)%
Ancillary club revenue
92,642

 
20.4
%
 
91,087

 
19.4
%
 
1.7
 %
Fees and other revenue
5,971

 
1.3
%
 
5,985

 
1.3
%
 
(0.2
)%
Total revenue
$
453,842

 
100.0
%
 
$
470,225

 
100.0
%
 
(3.5
)%
Total revenue decreased $16.4 million, or 3.5%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result of decreases in membership revenue. For the year ended December 31, 2014, revenue decreased approximately $19.2 million at our clubs opened or acquired prior to December 31, 2012 combined with the decrease of revenue related to corporate sales and $4.6 million at clubs that closed subsequent to December 31, 2012. These decreases were partially offset by a $7.5 million increase in revenue from our clubs and BFX Studio that were opened or acquired subsequent to December 31, 2012.
Membership dues revenue decreased $15.6 million in the year ended December 31, 2014 compared to the year ended December 31, 2013 primarily driven by a decline in membership. The overall member loss of 13,000 in each of 2014 and 2013 largely contributed to the decline in membership and membership dues.
Joining fees revenue decreased $2.3 million in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily reflecting a decline in membership sales. The decrease was partially offset by the effect of the lower estimated average membership life of 22 months during each of the quarters of 2014, versus 25 months and 24 months for the three month periods ended March 31, 2013 and June 30, 2013, respectively, and 23 months for the second half of 2013.

39


The lower amortizable life in the current year period resulted in higher joining fees revenue recognition as joining fees were amortized over a shorter estimated average membership life.
Personal training revenue increased $4.0 million in the year ended December 31, 2014 compared to the year ended December 31, 2013, driven by increased pricing on our multi-session personal training membership products as well as increased interest in those products.
Other ancillary club revenue decreased $2.4 million in the year ended December 31, 2014 compared to the year ended December 31, 2013 driven primarily by a decline in revenue from our Sports Club for Kids and Small Group Training programs.
Comparable club revenue decreased 4.2% in the year ended December 31, 2014 compared to the prior year. Memberships at our comparable clubs were down 3.1%, the price of our dues and fees were down 0.5%, and the combined effect of ancillary club revenue, joining fees and other revenue were down 0.6%.
Operating Expenses
Operating expenses (in thousands) were comprised of the following for the periods indicated:
 
 
 
Year Ended December 31,
 
 
 
 
 
 
2014
 
2013
 
$ Variance
 
% Variance
Payroll and related
 
$
177,009

 
$
174,894

 
$
2,115

 
1.2
 %
Club operating
 
192,716

 
179,683

 
13,033

 
7.3
 %
General and administrative
 
31,352

 
28,431

 
2,921

 
10.3
 %
Depreciation and amortization
 
47,307

 
49,099

 
(1,792
)
 
(3.6
)%
Insurance recovery related to damaged property
 

 
(3,194
)
 
3,194

 
100
 %
Impairment of fixed assets
 
4,569

 
714

 
3,855

 
539.9
 %
Impairment of goodwill
 
137

 

 
137

 
N/A

Operating expenses
 
$
453,090

 
$
429,627

 
$
23,463

 
5.5
 %
Operating expenses increased $23.5 million, or 5.5%, in the year ended December 31, 2014 compared to the prior year. The operating expenses comparison was impacted by $3.2 million of insurance proceeds received in 2013 in connection with property damaged by Hurricane Sandy which reduced 2013 operating expenses, as well as an increased fixed asset and goodwill impairment charges of $4.0 million in 2014. Separate from these items, operating expenses increased $16.3 million, or 3.8%, $10.7 million of which related to our newly opened clubs and BFX Studio. The remaining increase primarily reflected general cost escalations, including increased utilities costs, and higher marketing expenses due to the conversion to the HVLP strategy further described below.
Payroll and related.    Payroll and related expenses for the year ended December 31, 2014 increased $2.1 million, or 1.2%, compared to the prior year. The increase related to 2013 and 2014 openings, including the BFX Studio, was approximately $4.1 million. This increase was offset by the decrease related to 2013 and 2014 club closures of $1.9 million.
As a percentage of total revenue, payroll and related expenses increased to 39.0% in the year ended December 31, 2014 from 37.2% in the year ended December 31, 2013.
Club operating.    Club operating expenses increased $13.0 million or 7.3% compared to the year ended December 31, 2013. This increase was principally attributable to the following:
Rent and occupancy expenses increased $6.2 million. This increase included $4.7 million related to leases that commenced for newly opened and future clubs in 2013 and 2014, including our new BFX Studio units, as well as $2.4 million in increased occupancy expenses at our mature clubs. The current year increase was also driven by a prior-year period net decrease of $790,000 related to three early lease terminations in 2013 and the write-off of the remaining deferred rent at two of those locations. These increases were partially offset by a decrease of $1.7 million related to clubs closed in 2014. Of this amount, $1.4 million was a net occupancy gain related to the 2014 club closures which includes penalty payments to landlords and the write-offs of deferred rent at clubs with early terminations.
Utilities expense increased $2.3 million in the year ended December 31, 2014 compared to the prior year principally due to higher energy costs. Energy costs were negatively impacted by the severe cold experienced in our markets during the first quarter of 2014.

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Marketing expenses increased $2.0 million in the year ended December 31, 2014 compared to the prior year principally due to increased advertising spend at locations converting to the HVLP pricing strategy.
Repair and maintenance expenses increased $1.0 million in the year ended December 31, 2014 compared to the prior year, reflecting an increase in overall club maintenance, in particular, repairs of heating, ventilation and air conditioning system.
As a percentage of total revenue, club operating expenses increased to 42.5% in the year ended December 31, 2014 from 38.2% in the year ended December 31, 2013.
General and administrative.    General and administrative expense increased $2.9 million, or 10.3%, in the year ended December 31, 2014 compared to the year ended December 31, 2013. This increase was primarily due to increases in licensing fees related to the implementation of our new club operating system of approximately $1.4 million and general liability insurance expense of $567,000. We also experienced increased professional fees of approximately $845,000 and administrative club closure expenses of $262,000. These increases were partially offset by a decrease of $324,000 in club acquisition related fees from those incurred in the year ended December 31, 2013.
As a percentage of total revenue, general and administrative expenses increased to 6.9% in the year ended December 31, 2014 from 6.0% in the prior year.
Depreciation and amortization.    In the year ended December 31, 2014 compared to the year ended December 31, 2013, depreciation and amortization expense decreased $1.8 million, or 3.6%, due to a decline in our depreciable fixed asset base and certain fixed asset write-offs in the last half of 2013.
Insurance recovery related to damaged property.    In the year ended December 31, 2013, we collected $3.2 million of insurance cash proceeds related primarily due to property damaged by Hurricane Sandy. There were no such proceeds collected in the year ended December 31, 2014.
Impairment of fixed assets.    In the year ended December 31, 2014, we recorded an impairment loss of $4.6 million on fixed assets related to a total of nine clubs, including five underperforming clubs, and three clubs which were closed and one club we expect to convert to a managed location in February 2015. In the year ended December 31, 2013, we recorded fixed asset impairment charges totaling $714,000 related to three underperforming clubs.
Loss on Extinguishment of Debt
In the year ended December 31, 2014, loss on extinguishment of debt was $493,000, comprised of the write-off of unamortized debt issuance costs and debt discount in connection with the November 2014 mandatory prepayment of $13.5 million on the 2013 Term Loan Facility. This mandatory payment was related to the sale of the East 86th Street property pursuant to the terms of the 2013 Senior Credit Facility as described in the Liquidity and Capital Resources section. In the year ended December 31, 2013, loss on extinguishment of debt was $750,000 comprised of the write-off of net deferred financing costs and debt discount related to the debt refinancing in November 2013.
Interest Expense
Interest expense decreased by $3.6 million in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to lower interest rates resulting from the November 15, 2013 refinancing, which were lower by approximately 125 basis points on the non-hedged debt principal and 80 basis points on the hedged debt principal.
Provision for Corporate Income Taxes
We recorded income tax expense of $52.6 million during the year ended December 31, 2014, which included $60.4 million (net of the elimination of federal effect of state deferred taxes) to recognize a full valuation allowance against the US net deferred tax assets. For year ended December 31, 2013, we had recorded a tax provision of $7.4 million. Our 2014 and 2013 effective tax rates were 321% and 37% in the years ended December 31, 2014 and 2013, respectively. Separate from the impact of valuation allowance, our 2014 effective tax rate was 48%. Our effective tax rates for 2014 and 2013 were favorably impacted by tax benefits derived from the captive insurance arrangement by approximately 7% and 5%, respectively. Additionally, our effective rate was adversely impacted to 369% in connection with recording a valuation allowance against U.S. deferred tax assets during the year ended December 31, 2014.
As of December 31, 2014, we have a net deferred tax liability of $11.6 million as there is a full valuation allowance recorded against the U.S. net deferred tax assets. The state net deferred tax liability balance as of December 31, 2014 is $3.3 million. In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that

41


some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed reduces the deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carry forwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.
As of December 31, 2014, we are not in a three year cumulative loss position. However, we are projected to be in a cumulative loss position during the three year period ending in December 31, 2015, which was considered to be a significant piece of negative evidence. We determined that it is appropriate to conclude that there are losses that are projected in the near term due to the conversion to the HVLP strategy, which includes increased marketing spend and lower membership revenue during initial months of conversion. We believe the conversion to the HVLP strategy will significantly increase membership at the HVLP clubs in future periods and related income. However, because the accounting guidance for income taxes considers a projection of future earnings inherently subjective, it does not carry significant weight to overcome the objectively verifiable evidence of cumulative losses in recent years. Based on the weighting of available evidence, both positive and negative evidence, most notably the projected three year cumulative loss, we recorded a $60.4 million non-cash charge to income tax expense to establish a full valuation allowance against our U.S. net deferred tax assets. Although recognition of the valuation allowance for our net deferred tax assets is a non-cash charge, it did have a direct negative impact on net loss and shareholder’s deficit for the quarter and fiscal year ended December 31, 2014.
In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets generally cannot be used as a source of income to realize deferred tax assets with a definitive loss carry forward period. We do not amortize goodwill for book purposes but have amortized goodwill with tax basis for tax purposes. The deferred tax liability recorded at December 31, 2014 relates to the tax effect of differences between the book and tax basis of goodwill that is not expected to reverse until some indefinite future period.
The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2012), New York City (2006, 2007, and 2008), and the Commonwealth of Massachusetts (2009, 2010). On March 26, 2014, we received from the State of New York a revised assessment related to tax years 2006-2009 for $3.5 million, inclusive of $1.2 million of interest. We have subsequently received a request for additional information from the State of New York. All of the information was submitted by January 2015. We continue to evaluate the merits of the proposed assessment as new information becomes available during continued discussions with the State of New York. We have not recorded a tax reserve related to the proposed assessment. It is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of the reasonably possible change to unrecognized tax benefits within the next 12 months cannot be made.
In 2014, we filed Form 3115, Application for Change in Accounting Method (“Application”), with the IRS requesting a change in accounting for the treatment of landlord contributions. Accordingly, we reduced our unrecognized tax benefits by $12.7 million for the landlord contributions positions taken in prior years. The reduction in unrecognized tax benefits didn’t affect our effective tax rate since the position related to a temporary difference; however, we recognized a tax benefit of $334,000 primarily related to the reversal of accrued interest.
The results for the year ended December 31, 2013 also include the correction of errors that resulted in an increase in tax benefits 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 2013, we identified corrections related to temporary differences in fixed assets for state depreciation resulting in the recognition of an income tax benefit of $225,000. Also, in the fourth quarter of 2013, we identified corrections related to temporary differences in landlord allowances resulting in the recognition of out of period expense of $209,000 for a net benefit to the provision for corporate income taxes of $16,000 in the year ended December 31, 2013.

42


Year ended December 31, 2013 compared to year ended December 31, 2012
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
 
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
 
 
 
Revenue
 
% Revenue
 
Revenue
 
% Revenue
 
% Variance
Membership dues
 
$
358,761

 
76.3
%
 
$
366,044

 
76.4
%
 
(2.0
)%
Joining fees
 
14,392

 
3.0
%
 
11,595

 
2.4
%
 
24.1
 %
Membership revenue
 
373,153

 
79.3
%
 
377,639

 
78.8
%
 
(1.2
)%
Personal training revenue
 
66,367

 
14.1
%
 
65,641

 
13.7
%
 
1.1
 %
Other ancillary club revenue
 
24,720

 
5.3
%
 
29,897

 
6.3
%
 
(17.3
)%
Ancillary club revenue
 
91,087

 
19.4
%
 
95,538

 
20.0
%
 
(4.7
)%
Fees and other revenue
 
5,985