10-K 1 a10k-123116.htm 10-K Document

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, 2016
¨
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
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.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
  
Accelerated filer  
  
Non-accelerated filer
  
Smaller reporting company þ
 
  
 
 
(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 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $33.9 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 17, 2017, there were 26,609,737 shares of Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders, to be filed not later than April 30, 2017 are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.




TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
Item 16.
 




TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
PART I

FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains disclosures which are “forward-looking” statements within the meaning of Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding future financial results and performance, potential sales revenue, potential club closures, results of cost savings initiatives, 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 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 pricing model, 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 made 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.
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, 2016, the Company, through its subsidiaries, operated 150 fitness clubs (“clubs”). Our clubs collectively served approximately 544,000 members as of December 31, 2016. We owned and operated a total of 102 clubs under the “New York Sports Clubs” (“NYSC”) brand name within a 120-mile radius of New York City as of December 31, 2016, including 35 locations in Manhattan where we are the largest fitness club owner and operator. We owned and operated 28 clubs in the Boston region under our “Boston Sports Clubs” (“BSC”) brand name, 12 clubs (one of which is partly-owned) in the Washington, D.C. region under our “Washington Sports Clubs” (“WSC”) brand name and five clubs in the Philadelphia region under our “Philadelphia Sports Clubs” (“PSC”) brand name as of December 31, 2016. In addition, as of December 31, 2016, we owned and operated three clubs in Switzerland and partly-owned one club that operated under a different brand name in Washington, D.C., 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. 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.
Over our 43-year history, since incorporating in 1973, we have developed and refined our club formats, which allows us to cost-effectively construct and efficiently operate our fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately 20,000 square feet, while our multi-recreational clubs average

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approximately 38,000 square feet. The aggregate average size of our clubs is approximately 27,000 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.
Reportable Segments
During the first quarter of 2016, we began managing and reporting operating results through one reportable segment. Previously, we managed and reported results through two reportable segments: clubs and BFX Studio. Beginning in early 2016, our chief operating decision maker discontinued the review of BFX Studio financial information separately for purposes of making operating decisions and assessing financial performance. Also, in the second half of 2016, all BFX Studio locations were converted to clubs, discontinuing the BFX Studio brand. Accordingly, we now manage and report results through one reportable segment.
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 4.8% from $21.4 billion in 2011 to $25.8 billion in 2015, with a 6.6% increase from 2014 to 2015. 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 1.8% from 51.4 million in 2011 to an all-time high of 55.3 million in 2015, with a 2.2% increase from 2014 to 2015. According to the IHRSA, the health club industry is witnessing a shift in the preferences of health club members. The club landscape extends beyond traditional, full-service fitness centers that serve local communities and all age groups as well as affordable fitness centers with basic amenities. Studio concepts, including boxing, yoga, Pilates, group cycling, barre, boot camps, and sports-specific training, also shape the club market.
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 2015 was 39 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 43.9% from 2011 to 2015 and in the over-55 age group, where membership grew 27.5% from 2011 to 2015. These two age groups made up approximately 40% of total U.S. health club members in 2015. 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, state prevalence of obesity continued to remain high across the country in 2015, with no state with a prevalence of obesity less than 20%. In 2015, 44 states had a prevalence of obesity of 25% or more and 25 of these states had a prevalence of obesity 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 U.S. and one of the largest fitness club owners and operators in the United States. Our strong real estate presence in the New York, Boston, Washington, D.C., and Philadelphia 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

4


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 243,000, or 45%, of our members currently have a passport membership, which includes Regional Passport, Passport, and Elite Membership, as well as 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, 2016, 28% 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.
Business Strategy
In the long-term, we seek to maximize our net member growth, revenues, earnings and cash flows using the following strategies:
Grow membership revenues. We seek to grow our membership revenues in existing clubs through driving membership growth and optimizing dues through price and member retention. We believe our offerings are compelling because we include group exercise classes, top of the line equipment, pools and courts in the price of certain memberships, when available. Our member count increased by 3,000 members for a total member count of 544,000 in 2016 and we will continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth.
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. We offer a multi-session personal training membership product and fee-based Small Group Training classes to generate additional revenue. In 2016, under our Small Group Training classes, we introduced FlexPass and FlexSystem programs at certain clubs. FlexPass allows members to book a wide variety of small group classes in any of our available clubs. These small group classes include offerings such as Ultimate Fitness Experience (“UXF”), Kettle Bells and Circuit Training, etc. FlexSystem programs are designed to help members develop lean muscle mass, increase endurance and build strength. FlexSystem also offers unlimited monthly class membership, which allows members to craft a training program that fits their schedule. In addition, we offer Sports Clubs for Kids programs at select clubs.
Non-membership revenues have decreased from $101.3 million, or 21.2% of revenues for the year ended December 31, 2012, to $92.5 million, or 23.3% of revenues for the year ended December 31, 2016. Although we experienced a decrease in non-membership revenues, we plan to remain focused on increasing our ancillary programs in 2017 with continued improvements in training and hiring and building on ancillary programs such as our fee-based class offerings. In January 2017, we teamed up with the Gronkowski family to launch the Gronk Fitness Program. This program, available exclusively at Boston Sports Clubs, introduces "Practical Sports Interval Training", which is a system created by the Gronkowski family and inspired by the proven techniques of National Football League trainers. This Gronk Fitness Program is designed to help people stay strong, toned, healthy, fit, and focused while committed to their long term goals. In 2017, we will also continue to remain focused on improving our personal training membership products. Personal training revenue increased 1.3% over this five-year period and increased as a percentage of total revenue from 13.7% in 2012 to 16.8% in 2016.  These sources of ancillary and other non-membership revenues generate incremental profits with minimal capital investment and assist in attracting and retaining members.
Enter into arrangements with revenue generating partnerships. We intend to utilize our valuable real estate to form partnerships with premium boutique fitness providers, some of which will utilize a “shop-in-shop” concept. Our partnerships

5


utilizing the “shop-in-shop” concept are Tone House Fitness, LLC and Cyc Fitness Partners, LLC. We believe this “shop-in-shop” model will lead to benefits for both parties, which includes, but is not limited to, leveraging co-location public relations and marketing, mutually beneficial foot traffic, member conversion opportunities, merchandise sales, ride and personal training packages.
Optimization of our clubs.   We remain committed to optimizing our existing club base, including through club closures when appropriate. During 2016, we opened one club, converted two BFX Studio locations to clubs and closed five clubs. We are also considering the sale of clubs or groups of clubs. In the event we build and acquire new clubs, the club expansion is expected to be funded with cash on hand or through internally generated cash flows.
Retain members by focusing on the member experience.   Our Company’s mission has evolved into “Bring the best out of every body.” We enact our mission through our “Clubhouse Rules,” 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. 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. Through hiring, developing and training a qualified and diverse team that is passionate about fitness and health; maintaining and enhancing our programs and services; continually increasing our attention to individual member needs; and investing in our digital ecosystem, 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, website feedback and social media to help analyze the areas we can improve upon as well as the areas in which the members are satisfied overall.
Provide fitness experiences 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 an array of cardiovascular machines, resistance training equipment, free weights and functional training zones. 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 are accessible to all 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 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. We have a functional training zone within our clubs that features an array of innovative equipment designed to maximize the member’s workout. The functional training zone is approximately 800 to 1,200 square feet with AstroTurf flooring, a Total Body Resistance Exercise (“TRX”) suspension training frame and a variety of functional training equipment including Kettle Bells, Battling Ropes and Power Sleds. In 2017, we will focus on creating a second functional training zone in certain clubs. This new functional training zone will feature a variety of functional training equipment, which will include, but is not limited to, a rig, lifting platforms, performance treadmills, sand bags, dumbbells and kettle bells. Our functional training zones are open to members for free self-guided workouts, personal training sessions and fee-based programs.
Marketing
Our in-house marketing team is responsible for brand positioning, brand strategy, and product innovation for all of TSI’s regional brands. The primary objective is to ensure that our regional brands seize market share and opportunities through well-defined and coordinated go-to-market strategies that focus on being a premier network of fitness clubs. 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. We seek to inspire brand experiences and in doing so, drive sustainable and quality growth, while building a strong reputation and loyalty with members. In order to have credible and authentic connections to create such desirability with our members, we utilize a market segmentation strategy which includes targeted marketing in addition to mass marketing. We seek to identify and understand consumers’ individual motivations and goals for exercising in an effort to create meaningful products, services and experiences that build a lasting impression and brand loyalty.

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Sales
We sell our memberships primarily through three channels: direct sales at the club level; through corporate and group sales; and through our online website. We employ approximately 400 “in-club” membership sales consultants who are responsible for new membership sales in and around their designated club locations. Each club generally has two to three membership sales consultants. These consultants report directly to the club general manager, who, in turn, reports to a business director. Membership sales consultants complete a classroom based sales training followed by ongoing training within the club environment. Training includes hands on experience of the entire sales process (from prospecting to after care) and product knowledge in what we consider a live but supervised environment. Through our corporate and group sales approach we concentrate on building long-term relationships with local and regional companies, organizations and other large groups. We also manage private fitness centers for both large and small corporations, colleges and universities, and private clubs. As of December 31, 2016, these managed sites include three managed university locations, and eight managed sites.
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 a free one-day pass or purchase a 30 day guest pass. 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. 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.
Memberships
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, 2016, we offered the following types of memberships at our clubs:
The Neighborhood Membership (previously named Premier Membership) allow members unlimited use of a single “home club.” Membership dues for the Neighborhood Membership generally sold in the range of $19.99 to $59.99 per month.
The Neighborhood Plus Membership entitles members to use certain defined clubs within a region. Membership dues for the Neighborhood Plus Membership generally sold in the range of $29.99 to $44.99 per month.
The Regional Passport Membership entitles members to use any of our clubs within a region. Membership dues for the Regional Passport Membership generally sold in the range of $59.99 to $74.99 per month.
The Passport Membership entitles members to use any of our clubs in any region, except for Elite clubs, as described below. Membership dues for the Passport Membership generally sold in the range of $69.99 to $79.99 per month.
The Elite Membership (previously named as Premium Membership), available at five of our clubs that have a greater array of member services and facilities. Similar to the Passport Membership, the Elite Membership also entitles members to use any of our clubs in any region. Membership dues for the Elite Memberships generally sold in the range of $84.99 and $189.99 per month.
The membership prices above are dependent on club location and whether the member joins under a “month-to-month” or a “commit” contract. A member may cancel a commit membership at any time for a fee. Under the commit model, new members commit to a one year membership, generally at a lower monthly rate than a month-to-month 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, 2016, approximately 90% of our total members were on a month-to-month basis.
In joining a club, a new member signs a membership agreement that typically obligates the member to pay fees (“Joining Fees”) including a one-time initiation fee and the first annual fee. Initiation fees generally range between $0 and $29 while the annual fee generally charged between $59.99 and $69.99 for all memberships. These one-time Joining Fees averaged $61, $72 and $75 per sale for the years ended December 31, 2016, 2015 and 2014, respectively. The annual fee is also charged on each anniversary of the enrollment date, however is no longer considered a joining fee after the first payment.
Monthly electronic fund transfers (“EFT”) of individual membership dues on a per-member basis, including the effect of promotions, averaged approximately $45, $50 and $59 per month for the years ended December 31, 2016, 2015 and 2014, respectively. Currently, approximately 99% of our members pay their membership dues the first of each month through EFT,

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with EFT membership revenue constituting approximately 72.9% of total consolidated revenue for the year ended December 31, 2016.
Usage
Our total club usage, based on the number of member visits, was 31.7 million and 30.8 million member visits for the years ended December 31, 2016 and 2015, respectively. In the year ended December 31, 2016, approximately 28% of total usage or club visits was to members’ non-home clubs, indicating that our members take advantage of our network of clubs.
Our membership plans allow for club members to elect to pay a per visit fee of $12.95 to use clubs that are not defined in their membership plan. In the aggregate, approximately $1.0 million and $719,000 of usage fees were generated in 2016 and 2015, respectively. The increase in usage fees was primarily due to a decline in the number of Passport members. Consequently, more club members elected to pay for a per visit fee when using a club that is not defined in their membership plan. Usage fees are reported in membership dues in our consolidated statements of operations.
Non-Membership Revenue
The table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2012 through 2016.
 
For the Years Ended December 31, ($ in thousands)
 
2016
 
%
 
2015
 
%
 
2014
 
%
 
2013
 
%
 
2012
 
%
Total revenue
$
396,921

 
100.0
%
 
$
424,323

 
100.0
%
 
$
453,842

 
100.0
%
 
$
470,225

 
100.0
%
 
$
478,981

 
100.0
%
Non-Membership Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal training revenue
66,487

 
16.8
%
 
73,191

 
17.3
%
 
70,338

 
15.5
%
 
66,367

 
14.1
%
 
65,641

 
13.7
%
Other ancillary club revenue(1)
19,642

 
4.9
%
 
22,138

 
5.2
%
 
22,304

 
4.9
%
 
24,720

 
5.3
%
 
29,897

 
6.2
%
Fees and Other
revenue(2)
6,361

 
1.6
%
 
6,254

 
1.5
%
 
5,971

 
1.3
%
 
5,985

 
1.3
%
 
5,804

 
1.2
%
Total non-membership revenue
$
92,490

 
23.3
%
 
$
101,583

 
24.0
%
 
$
98,613

 
21.7
%
 
$
97,072

 
20.7
%
 
$
101,342

 
21.2
%
 
(1)
Other ancillary club revenue primarily consists of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes.
(2)
Fees and other revenue primarily consist of rental income, management fees, marketing revenue and laundry revenue. 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 65% 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 20,000 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 38,000 square feet.
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, 2012 to December 31, 2016, we constructed ten new clubs, acquired six clubs and closed or relocated 24 clubs. Currently, 50 of our clubs, or approximately 33% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31, 2016, we constructed and opened one club, converted two BFX Studio locations to clubs, and closed five clubs, ending the year with 150 total clubs under operation.

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This compares to opening of one club and two BFX Studio locations, and closing of seven clubs during the year ended December 31, 2015. In both 2016 and 2015, we also upgraded certain existing clubs and plan to continue to do so in 2017.  
Our facilities include a mix of 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, functional training zones and babysitting services. Personal training services are offered at all locations for an additional charge. Our fee-based programs offered at many of our clubs, include personal training, Small Group Training, children’s programs, and summer camps for kids.
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 the following:
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 or a personal trainer who helps to develop a customized routine that supports the member’s fitness goals. This initial assessment session includes a 30-minute workout evaluation, 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 four to 12 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.
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, which are fee-based programs that have smaller groups, and provide more focused, and typically more advanced classes.
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, 2016, Sports Clubs for Kids was being offered in 33 locations throughout our NYSC, BSC, WSC and PSC 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.

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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 teams. Senior management compensation, for example, is tied to overall company performance. Business directors and club level managers can achieve bonuses tied to meeting specific net member gain and profit targets. We offer our employees various benefits including health, dental, vision and disability insurance; pre-tax healthcare, commuting and dependent care accounts; free gym membership; and a 401(k) plan. We believe we offer an industry competitive benefits plan that provides us with an advantage in attracting and retaining a quality leadership team, club managers and staff. This allows for the retention and development of staff who appreciate and delivers on key company initiatives and expectations.
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 2016, we created a more customizable and efficient experience for members through updated digital tools, which included an enhanced, clearer and easier to use website and the Company's first-ever mobile application. The website features membership sign up, club location search, class schedules and booking, training information, custom profiles for group fitness instructors and trainers. In addition, members are able to customize their group fitness experience based on fitness goals and preferences through a personalized search feature on the website. With the mobile application, members also have access to gym check-in, class sign-up, class schedules and their own user profile including a workout log.
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.
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 29,960 in 2012 to 36,180 in 2016, 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;
private studios, and other boutique fitness offerings;
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;

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amenity gyms in apartments, condominiums and offices;
weight-reducing salons;
country clubs; 
the home-use fitness equipment industry; and
online fitness coaching.
The principal methods of competition include pricing and ease of payment, required level of members’ contractual commitment, level and quality of services, age of facility and equipment, training and quality of supervisory staff, size and layout of facility and convenience of location with respect to access to transportation and pedestrian traffic.
We consider our traditional service offerings to be in the mid-tier of the value/service proposition and designed to appeal to a large portion of the population who utilize fitness facilities. The number of competitor clubs that offer lower pricing and a lower level of service have continued to grow in our markets over the last few years. These clubs have attracted, and may continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs.
We also face competition from club operators offering comparable or higher pricing with higher levels of service. 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. Additionally, we face competition from the rising popularity and demand for private studios offering niche boutique experiences.
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. We are also subject to numerous other types

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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.
We primarily accept payments for our memberships through EFT from credit cards, and, therefore, we are subject to both federal and state legislation and certification requirements, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have considered legislation requiring gyms and health clubs to offer non-automatic renewal membership option at all times and/or limit the duration for which gym memberships can auto-renew through EFT payments, if at all. Our business relies heavily on the fact that our memberships continue on a month-to-month basis after the completion of any initial term requirements (if any), and compliance with these laws, regulations, and similar requirements may be onerous and expensive, and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have such health club statutes provide harsh penalties for violations, including membership contracts being void or voidable.
Additionally, the collection, maintenance, use, disclosure and disposal of individually identifiable data by our businesses are regulated at the federal, state and provincial levels as well as by certain financial industry groups, such as the Payment Card Industry Organization and the National Automated Clearing House Association. Federal, state and financial industry groups may also consider from time to time new privacy and security requirements that may apply to our businesses and may impose further restrictions on our collection, disclosure and use of individually identifiable information that are housed in one or more of our databases.
The tax treatment of membership dues varies by state. Some states in which we operate require sales tax to be collected on membership dues and personal training sessions. Several others states in which we operate have proposed similar tax legislation. These taxes have the effect of increasing the payments by our members, which could impede our ability to attract new members or induce members to cancel their membership.
Changes in any statutes, rules or regulations could have a material adverse effect on our financial condition and results of operations.
Employees
On December 31, 2016, we had approximately 7,600 employees, of whom approximately 1,400 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 a culture of openness, innovation and inclusiveness that creates a high level of work accountability. We have good relations with our employees and are proud to offer them a great work environment with opportunities for growth and development.
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 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 the Company by enrolling through the “Email 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.

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Item 1A.     Risk Factors
Investors should carefully consider the risks described below and all other information in this Annual Report. 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 are dependent on our Chief Executive Officer. In addition, the 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, Patrick Walsh. Mr. Walsh makes all major strategic, operating, investment, and capital allocation decisions for the Company and its subsidiaries. We believe the loss of Mr. Walsh 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.
Our future profitability is not assured.
Our operating results for future periods are subject to numerous uncertainties and there can be no assurances that we will be profitable in the foreseeable future, if at all. If our revenues decrease in a given period, we may be unable to reduce operating expenses as a significant part of our operating expenses are fixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss (or a larger net loss) for that period and subsequent periods.
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 age and condition of our clubs and equipment, 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 initiation fees. Any decrease in our average membership rates or reductions in initiation 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.
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 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

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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 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.
The lower average membership dues have and may in the future negatively impact our comparable club revenue growth and our operating margins.
In recent years, we lowered monthly dues and/or initiation and processing fees at certain clubs in order to attract more members and, as a result, initially experienced lower revenues and margin pressure. More recently, the Company has been raising monthly dues and/or initiation fees to more accurately reflect the membership value; however, if we are unable to attract a sufficient number of new members or if we experience higher attrition as a result of these price increases, the pressure on the Company's revenue and result of operations could continue to be adversely impacted.
Declines in revenue have adversely affected our results or operations and cash flow from operations and we may be compelled to take additional actions which may not be successful in mitigating such effects.
We have been experiencing declining revenue from members for several years as the fitness industry continues to be highly competitive in the geographic regions in which we compete. New members have been joining at lower monthly rates and cancellations of members paying higher rates will continue to negatively impact our results and liquidity if these trends are not reversed. In response to this, we initiated cost savings initiatives in 2015 that continued into fiscal 2016 to help mitigate the impact the decline in revenue has had on its profitability and cash flow from operations.
We continue to focus on increasing membership in existing clubs to increase revenue. We may consider additional actions within our control, including the sale of certain assets, club acquisitions, additional club closures and entering into arrangements with revenue generating partnerships, some of which will utilize a “shop-in-shop” concept. We may also consider additional strategic alternatives including opportunities to reduce TSI LLC's existing debt and further cost savings initiatives, among other possibilities, if any. Our ability to continue to meet our obligations is dependent on our ability to generate positive cash flow from a combination of initiatives, including those mentioned above. Failure to successfully implement these initiatives could have a material adverse effect on our liquidity and our operations and we would need to implement alternative plans that could include additional asset sales, additional reductions in operating costs, deferral of capital expenditures, further reductions in working capital and debt restructurings. There can be no assurance that such alternatives would be available to us or that we would be successful in their implementation.
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, 2016, we closed five clubs, while in 2015 we closed six clubs. We recognized $742,000 of fixed asset impairments in the year ended December 31, 2016 and $14.6 million of fixed asset impairments in the year ended

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December 31, 2015. In addition, we recorded goodwill impairment charges of $31.6 million in the year ended December 31, 2015. The fixed asset impairment and goodwill impairment charges in 2015 were primarily due to existing members downgrading their memberships to those with lower monthly dues and new members enrolling at lower rates. 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 will continue to monitor the results and changes in expectations of these clubs closely to determine if additional fixed asset or goodwill impairment charges will be necessary.
Our geographic concentration heightens our exposure to adverse regional developments.
As of December 31, 2016, we operated 102 fitness clubs in the New York metropolitan market, 28 fitness clubs in the Boston market, 12 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.
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.
Our dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and could adversely affect our revenues and gross profit.
Equipment and certain products and services used in our clubs, including our exercise equipment and point-of-sale software and hardware, are sourced from third-party suppliers. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate our business efficiently and consistently meet our business requirements. The ability of these third-party suppliers to successfully provide reliable and high-quality services is subject to technical and operational uncertainties that are beyond our control, including, for our overseas suppliers, vessel availability and port delays or congestion. Any disruption to our suppliers’ operations could impact our supply chain and our ability to service our existing stores and open new stores on time or at all and thereby generate revenue. If we lose such suppliers or our suppliers encounter financial hardships unrelated to the demand for our equipment or other products or services, we may not be

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able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to new suppliers would be time consuming and expensive and may result in interruptions in our operations. If we should encounter delays or difficulties in securing the quantity of equipment we require to open new and refurbish existing stores, our suppliers encounter difficulties meeting our demands for products or services, our websites experience delays or become impaired due to errors in the third-party technology or there is a deficiency, lack or poor quality of products or services provided, our ability to serve our members and grow our brand would be interrupted. If any of these events occur, it could have a material adverse effect on our business and operating results.
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 business. We seek to protect our trademarks, trade names and other intellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectual property rights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could cause membership levels to decline and make it more difficult to attract new members.
Use of social media may adversely impact our reputation or subject us to fines or other penalties.
There has been a substantial increase in the use of social media platforms, including blogs, social media websites and other forms of internet-based communication, which allow individuals' access to a broad audience of consumers and other interested persons. Negative commentary about us may be posted on social media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available information about health clubs and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action against our stores, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well as physical damage to our stores.
We also use social medial platforms as marketing tools. For example, we maintain Facebook and Twitter accounts. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.
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 a new club.
We have, and will continue to have, significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs and the need to generate significant cash flow to meet our lease obligations.
We have, and will continue to have, significant lease obligations. 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, 2017 through December 31, 2021, we have leases for 23 club locations that are due to expire without any renewal options, three of which expire in 2017, 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.
In addition to future minimum lease payments, some of our club leases provide for additional rental payments based on a percentage of net sales, or “percentage rent,” if sales at the respective stores exceed specified levels, as well as the payment of

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common area maintenance charges, real property insurance, and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.
We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business. Furthermore, the significant cash flow required to satisfy our obligations under the leases increases our vulnerability to adverse changes in general economic, industry, and competitive conditions, and could limit our ability to fund working capital, incur indebtedness, and make capital expenditures or other investments in our business.
If an existing or future club is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.
We may experience prolonged periods of losses in our recently opened clubs 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. The sale of 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

17


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.
We may be exposed to other litigation from time to time that can have significant adverse effects upon us.
In the ordinary course of conducting our business, we are exposed to litigation from time to time that can have significant adverse effects upon our consolidated financial position, results of operations and cash flows. At any given time there may be one or more civil actions initiated against us, including the matters disclosed under “Legal Proceedings” in this Annual Report. If one or more of these pending lawsuits, or any lawsuits in the future are adjudicated in a manner adverse to our interests, or if a settlement of any lawsuit requires us to pay a significant amount, the result could have an adverse impact on our consolidated financial position, results of operations and cash flows. In addition, any litigation, regardless of the outcome, may distract our management from the operation of our business.
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.
Changes in legislation or requirements related to electronic fund transfer, or our failure to comply with existing or future regulations, may adversely impact our business.
We primarily accept payments for our memberships through EFT from members’ bank accounts and, therefore, we are subject to federal, state and provincial legislation and certification requirements governing EFT, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have considered legislation requiring gyms and health clubs to offer a prepaid membership option at all times and/or limit the duration for which gym memberships can auto-renew through EFT payments, if at all. Our business relies heavily on the fact that our memberships continue on a month-to-month basis after the completion of any initial term requirements, and compliance with these laws and regulations and similar requirements may be onerous and expensive. In addition, variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have such health club statutes provide harsh penalties for violations, including membership contracts being void or voidable. Our failure to comply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages and civil liability and may result in the loss of our ability to accept EFT payments, which would have a material adverse effect on our business, results of operations and financial condition. In addition, any such costs, which may arise in the future as a result of changes to the legislation and regulations or

18


in their interpretation, could individually or in the aggregate cause us to change or limit our business practice, which may make our business model less attractive to our members.
We are subject to a number of risks related to ACH, credit card and debit card payments we accept.
We accept payments through automated clearing house (“ACH”), credit card and debit card transactions. For ACH, credit card and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our memberships, which could cause us to lose members or suffer an increase in our operating expenses, either of which could harm our operating results.
If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards, debit cards or bank accounts on a timely basis or at all, we could lose membership revenue, which would harm our operating results.
If we fail to adequately control fraudulent ACH, credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financial condition and results of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card would significantly impair our ability to operate our business.
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 that 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.
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. Correcting any disruptions or failures that affect our proprietary system could be difficult, time-consuming and expensive because we would need to use contracted consultants familiar with our system.
Any failure of our current system could also cause us to lose members and adversely affect our business and results of operations. Our members may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or failures that affect our billing and other administrative functions could have an adverse effect on our operating results.
Infrastructure changes are being undertaken to accommodate our growth, provide network redundancy, better manage telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical architecture. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, acts of terrorism and similar events could damage our systems. In addition, computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our sites. Any system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose members, damage our reputation, and adversely affect our business and results of operations.
Our growth could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.
Future expansion will place increased demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively could seriously harm our business. To be successful, we will need to continue to improve management information systems and our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales

19


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 one commercial bank as of December 31, 2016 totaled $21.0 million. During 2016, in any one month, the amount held in one commercial bank has been as high as approximately $44.2 million.
Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of operations could be adversely affected.
Our business requires significant levels of capital to finance the development of additional sites for new clubs and the construction of our clubs. If cash from available sources is insufficient or unavailable due to restrictive credit markets, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all. Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities. If we issue new equity securities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to execute our current growth plans, take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans and operating results.
We may incur rising costs related to construction of new clubs and maintaining our existing clubs. If we are not able to pass these cost increases through to our members, our returns may be adversely affected.
Our clubs require significant upfront investment. If our investment is higher than we had planned, we may need to outperform our operational plan to achieve our targeted return. We cannot assure that we can offset cost increases by increasing our membership dues and other fees and improving profitability through cost efficiencies.
We may be required to remit unclaimed property to states for unused, expired personal training sessions.
We recognize revenue from personal training sessions as the services are performed (i.e., when the session is trained). Unused personal training sessions expire after a set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. The State of New York has informed us that it is considering whether we are required to remit the amount received by us for unused, expired personal training sessions to the State of New York as unclaimed property. As of December 31, 2016, we had approximately $15.1 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.
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, 2016, certain of our state and local tax returns from years 2006 through 2014 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, in a revised letter dated December 12, 2016, we received from the State of New York a revised

20


assessment related to tax years 2006-2009 for $4.7 million, inclusive of $2.0 million of interest. We disagree with the proposed assessment and have scheduled a conciliation conference with the State of New York to appeal the assessment. 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 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, 2016, our total outstanding consolidated debt was $202.0 million under our 2013 Term Loan Facility. The 2013 Term Loan Facility expires on November 15, 2020. In addition, as of December 31, 2016, under the 2013 Revolving Loan Facility there were no outstanding borrowings and outstanding letters of credit issued totaled $2.9 million, which if still outstanding, will likely need to be funded by our cash upon the expiration of the 2013 Revolving Loan Facility on November 15, 2018. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2016 was $42.1 million, with borrowings under such facility subject to the conditions applicable to borrowings under our 2013 Senior Credit Facility, which conditions we may or may not be able to satisfy at the time of borrowing. Our substantial debt could have important consequences, including:
making it more difficult to satisfy our obligations, including 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 new clubs and other general corporate requirements;
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 before the expiration of the current 2013 Term Loan Facility, 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.

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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 $42.0 million of our outstanding debt under our 2013 Senior Credit Facility as of December 31, 2016, 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 $202.0 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.
The terms of the 2013 Senior Credit Facility provide 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, TSI, LLC is required to maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.50:1.00. As of December 31, 2016, the total leverage ratio was slightly below 4.50:1.00. Other than $2.9 million of letters of credit, we did not have any amounts utilized on the 2013 Revolving Loan Facility and therefore we were not subject to this financial covenant as of December 31, 2016. The terms of the 2013 Senior Credit Facility include a financial covenant under which the Company is not able to utilize more than 25%, or $11.3 million, in accordance with terms of the credit agreement, of the 2013 Revolving Loan Facility if the total leverage ratio exceeds 4.50:1:00 (calculated on a proforma basis to give effect to any borrowing).
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.

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Risks Related to Our Common Stock
The stock ownership of certain large shareholders will likely limit your ability to influence corporate matters.
As of February 17, 2017, the Company had three stockholders (including Patrick Walsh, the Chief Executive Officer and Chairman of our board of directors) which, together with each such stockholder's affiliates, beneficially owned 16.7%, 17.5% and 15.3% of our outstanding common stock, respectively, based on public filings made by such shareholders. Each of these stockholders may vote their stock with respect to certain matters, including any determinations with respect to mergers or other business combinations, the acquisition of assets for stock consideration or disposition of all or substantially all of our assets, and the issuance of any additional common stock or other equity securities, in a manner which may not be viewed as beneficial by other stockholders.
Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.
In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this report and others such as:
actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in the market’s expectations about our operating results;
success of competitors;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning us or our industry in general;
operating and stock price performance of other companies that investors deem comparable to the Company;
our ability to market new and enhanced services on a timely basis;
changes in laws and regulations affecting our business;
our ability to meet compliance requirements;
commencement of, or involvement in, litigation involving us;
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; any major change in our board of directors or management;
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
general economic and political conditions such as recessions, interest rates, fuel prices, and acts of war or terrorism.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.
Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

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Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.
Item 1B.    Unresolved Staff Comments
None
Item 2.    Properties
We lease 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, 2017 through December 31, 2021, we have leases for 23 club locations that are due to expire without any renewal options, three of which are due to expire in 2017, 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 20,000 square feet of office space in New York City, which expires in April 2017. We also have smaller regional offices in Fairfax, VA, and Boston, MA, for administrative and general corporate purposes.
We lease approximately 82,000 square feet in Elmsford, NY, for the operation of a centralized laundry facility for NYSC 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.


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The following table provides information regarding our club locations:
Location
  
Address
  
Date Opened or Management Assumed
New York Sports Clubs:
  
 
  
 
Manhattan, NY
  
61 West 62nd Street
  
July 1983
Manhattan, NY
  
1601 Broadway
  
September 1991
Manhattan, NY
  
349 East 76th Street
  
April 1994
Manhattan, NY
  
248 West 80th Street
  
May 1994
Manhattan, NY
  
502 Park Avenue
  
February 1995
Manhattan, NY
  
117 Seventh Avenue South
  
March 1995
Manhattan, NY
  
303 Park Avenue South
  
December 1995
Manhattan, NY
  
1635 Third Avenue
  
October 1996
Manhattan, NY
 
575 Lexington Avenue
 
November 1996
Manhattan, NY
  
278 Eighth Avenue
  
December 1996
Manhattan, NY
  
200 Madison Avenue
  
February 1997
Manhattan, NY
  
2162 Broadway
  
November 1997
Manhattan, NY
  
633 Third Avenue
  
April 1998
Manhattan, NY
  
217 Broadway
  
March 1999
Manhattan, NY
  
23 West 73rd Street
  
April 1999
Manhattan, NY
  
34 West 14th Street
  
July 1999
Manhattan, NY
  
1372 Broadway
  
October 1999
Manhattan, NY
  
300 West 125th Street
  
May 2000
Manhattan, NY
  
19 West 44th Street
  
August 2000
Manhattan, NY
  
128 Eighth Avenue
  
December 2000
Manhattan, NY
  
2527 Broadway
  
August 2001
Manhattan, NY
  
3 Park Avenue
  
August 2001
Manhattan, NY
  
10 Irving Place
  
November 2001
Manhattan, NY
  
230 West 41st Street
  
November 2001
Manhattan, NY
  
1221 Avenue of the Americas
  
January 2002
Manhattan, NY
  
200 Park Avenue
  
December 2002
Manhattan, NY
  
232 Mercer Street
  
September 2004
Manhattan, NY
  
225 Varick Street
  
August 2006
Manhattan, NY
  
885 Second Avenue
  
February 2007
Manhattan, NY
  
301 West 145th Street
  
October 2007
Manhattan, NY
  
1400 5th Avenue
  
December 2007
Manhattan, NY
  
75 West End Avenue
  
April 2013
Manhattan, NY
  
555 Sixth Avenue
  
September 2014
Manhattan, NY
  
28-30 Avenue A
  
March 2015
Manhattan, NY
 
30 Broad Street
 
March 2015
Manhattan, NY
 
1231 Third Avenue
 
Future opening
Manhattan, NY
 
4 Astor Place
 
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

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Location
  
Address
  
Date Opened or Management Assumed
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
Greenwich, CT
  
6 Liberty Way
  
May 1999
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
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
  
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
Boston, MA
 
699 Boylston Street
 
June 2015
Allston, MA
  
15 Gorham Street
  
July 1997
Wellesley, MA
  
140 Great Plain Avenue
  
July 2000
Lynnfield, MA
  
425 Walnut Street
  
July 2000
Lexington, MA
  
475 Bedford Avenue
  
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.
  
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



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 the Appellate Division, Second Department of the Supreme Court of the State of New York 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, which judgment was upheld by the appellate court on April 29, 2015. 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 was 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 Company completed settlement negotiations, pursuant to which TSI, LLC will pay its trainers the aggregate sum of $165,000 in exchange for full releases. The settlement agreement has been executed by the parties, has been approved by the court and the class, and the Company paid the settlement amount in the fourth quarter of 2016.
On January 21, 2016, in an action styled Triangle 17 Center, LLC v. Town Sports International Holdings (NJ), LLC, et al. (“TSI Holdings NJ”), filed in the New Jersey Superior Court, a Landlord of one of TSI Holdings NJ’s competitors filed an action against TSI Holdings NJ, its affiliate and subsidiary, claiming that TSI Holdings NJ engaged in sham litigation to prevent the opening of a competitor’s facility in close proximity to TSI Holdings NJ’s location in Ramsey, New Jersey.  This matter settled for nominal consideration without any admission of liability on the Company’s part.
On or about October 6, 2016, Moelis & Company LLC commenced an action against TSI, LLC in the Supreme Court of the State of New York claiming entitlement to certain fees due pursuant to a Letter Agreement between the parties dated December 28, 2015. In consideration for Moelis & Company LLC’s services, it is claimed that TSI, LLC agreed to pay a debt discount transaction fee plus costs and expenses incurred. While the Company disagreed and objected to Moelis' claim, solely for business purposes, TSI, LLC settled the matter in 2016.
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, construction matters, 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, 2016:
 
 
 
First Quarter
$
3.02

 
$
0.92

Second Quarter
$
3.97

 
$
2.39

Third Quarter
$
3.45

 
$
2.43

Fourth Quarter
$
3.16

 
$
2.10

Year ended December 31, 2015:
 
 
 
First Quarter
$
7.69

 
$
6.00

Second Quarter
$
7.01

 
$
2.54

Third Quarter
$
3.13

 
$
1.92

Fourth Quarter
$
3.08

 
$
1.12

Holders
As of February 17, 2017, there were approximately 98 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 March 5, 2014 and June 5, 2014 the Company paid a quarterly cash dividend of $0.16 per share to common stock holders. The Company did not declare any dividends in 2016 and 2015. The cash dividends were funded by available cash on hand.
The board of directors does not currently intend to declare 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 approximately $506,000 at December 31, 2016, 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, 2016.
Recent Sales of Unregistered Securities
We did not sell any securities during the year ended December 31, 2016 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), other than as previously reported in a Current Report on Form 8-K.

30


Stock Performance Graph
The graph depicted below compares the changes 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
a10k-12311_chartx41524.jpg
*
$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ended December 31.
 
 
December 31,
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
Town Sports International Holdings, Inc
$
100.00

 
$
189.19

 
$
264.97

 
$
111.64

 
$
22.36

 
$
46.98

NASDAQ Composite
$
100.00

 
$
116.41

 
$
165.47

 
$
188.69

 
$
200.32

 
$
216.54

Russell 2000
$
100.00

 
$
116.35

 
$
161.52

 
$
169.43

 
$
161.95

 
$
196.45


Notes :
(1)
The graph covers the period from December 31, 2011 to December 31, 2016.
(2)
The graph assumes that $100 was invested at the market close on December 31, 2011, 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 5, 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.
Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act, or the Exchange Act that might incorporate by reference this Annual Report or future filings made by the Company under those statutes, the Stock Performance Graph is not deemed filed with the SEC, is not deemed soliciting material and shall not be

31


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, 2016 and 2015 and the selected consolidated statement of operations and cash flow data for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere herein. The selected consolidated balance sheet data as of December 31, 2014, 2013 and 2012 and the selected consolidated statement of operations and cash flow data for the years ended December 31, 2013 and 2012 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,
 
 
2016

2015

2014

2013

2012
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
396,921

 
$
424,323

 
$
453,842

 
$
470,225

 
$
478,981

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Payroll and related
 
149,029

 
175,898

 
177,009

 
174,894

 
181,632

Club operating
 
185,104

 
196,725

 
192,716

 
179,683

 
178,950

General and administrative
 
24,702

 
30,683

 
31,352

 
28,431

 
24,139

Depreciation and amortization
 
43,727

 
47,887

 
47,307

 
49,099

 
49,391

Impairment of fixed assets
 
742

 
14,571

 
4,569

 
714

 
3,436

Impairment of goodwill
 

 
31,558

 
137

 

 

Gain on sale of building(1)
 

 
(77,146
)
 

 

 

Gain on lease termination(2)


 
(2,967
)
 

 

 

Insurance recovery related to damaged property(3)
 

 

 

 
(3,194
)
 

Operating (loss) income
 
(6,383
)
 
7,114

 
752

 
40,598

 
41,433

(Gain) loss on extinguishment of debt(4)
 
(37,893
)
 
(17,911
)
 
493

 
750

 
1,010

Interest expense, net of interest income
 
13,938

 
20,579

 
19,039

 
22,616

 
24,597

Equity in the earnings of investees and rental income
 
(242
)
 
(2,361
)
 
(2,402
)
 
(2,459
)
 
(2,461
)
Income (loss) before provision (benefit) for corporate income taxes
 
17,814

 
6,807

 
(16,378
)
 
19,691

 
18,287

Provision (benefit) for corporate income taxes(5)
 
9,771

 
(14,351
)
 
52,611

 
7,367

 
6,321

Net income (loss)
 
$
8,043

 
$
21,158

 
$
(68,989
)
 
$
12,324

 
$
11,966

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.31

 
$
0.86

 
$
(2.84
)
 
$
0.51

 
$
0.51

Diluted
 
$
0.31

 
$
0.84

 
$
(2.84
)
 
$
0.50

 
$
0.50

Dividends declared per common share(6)
 
$

 
$

 
$
0.32

 
$
0.16

 
$
3.00


32


 
 
As of December 31,
 
 
2016

2015

2014

2013

2012
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
45,596

 
$
76,217

 
$
93,452

 
$
73,598

 
$
37,758

Working capital (deficit) surplus
 
(6,323
)
 
27,947

 
52,280

 
27,830

 
(11,825
)
Total assets(7)
 
235,878

 
303,101

 
407,150

 
410,588

 
400,498

Long-term debt, including current installments(7)
 
196,825

 
266,740

 
297,188

 
311,705

 
306,067

Total stockholders’ (deficit) equity
 
(85,670
)
 
(96,245
)
 
(118,084
)
 
(43,516
)
 
(55,496
)
Net debt(8)
 
156,404

 
199,200

 
214,832

 
251,402

 
277,985

 
 
Year Ended December 31,
 
 
2016

2015

2014

2013

2012
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
21,190

 
$
24,870

 
$
4,758

 
$
67,388

 
$
60,053

Investing activities
 
(20,003
)
 
(31,571
)
 
(42,054
)
 
(30,606
)
 
(22,490
)
Financing activities
 
(31,763
)
 
(10,511
)
 
57,503

 
(975
)
 
(47,722
)
Other Data:
 
 
 
 
 
 
 
 
 
 
Non-cash rental income, net of non-cash rental expense
 
(3,617
)
 
(3,647
)
 
(5,399
)
 
(5,692
)
 
(4,037
)
Non-cash share-based compensation expense
 
1,807

 
1,386

 
1,911

 
2,204

 
1,306

 
 
Year Ended December 31,
 
 
2016

2015

2014
 
2013
 
2012
Club and Membership Data:
 
 
 
 
 
 
 
 
 
 
New clubs opened
 
1

 
1

 
4

 

 

Clubs acquired
 

 

 

 
6

 

BFX Studio locations converted to clubs
 
2

 

 

 

 

Clubs closed
 
(5
)
 
(6
)
 
(8
)
 
(4
)
 

Wholly-owned clubs operated at end of period
 
149

 
151

 
156

 
160

 
158

Total clubs operated at end of period(9)
 
150

 
152

 
158

 
162

 
160

BFX Studio locations at end of period
 

 
3

 
1

 

 

Total members at end of period(10)
 
544,000

 
541,000

 
484,000

 
497,000

 
510,000

Restricted members at end of period(11)
 

 

 
20,000

 
41,000

 
38,000

Comparable club revenue (decrease) increase(12)
 
(4.1
)%
 
(5.6
)%
 
(4.2
)%
 
(1.8
)%
 
1.6
%
Revenue per weighted average club (in thousands)(13)
 
$
2,634

 
$
2,777

 
$
2,842

 
$
2,971

 
$
3,032

Average revenue per member(14)
 
$
728

 
$
823

 
$
941

 
$
934

 
$
922

Average Joining Fees collected per member(15)
 
$
61

 
$
72

 
$
75

 
$
59

 
$
57

Annual attrition(16)
 
44.3
 %
 
46.9
 %
 
44.3
 %
 
41.9
 %
 
41.0
%

(1)
The $77,146 gain on sale of building in the year ended December 31, 2015 was related to the sale of our East 86th Street property. Refer to Note 8 – Sale of Building to the Company’s consolidated financial statements for further details.
(2)
The $2,967 net gain on lease termination in the year ended December 31, 2015 was related to the termination of a lease for a planned club opening that was not yet effective.

33


(3)
The $3,194 of insurance recovery related to damaged property in the year ended December 31, 2013 was related to property damaged by Hurricane Sandy.
(4)
The $37,893 gain on extinguishment of debt recorded for the year ended December 31, 2016 was net of the write-off of deferred financing costs and debt discount of $545 and $1,561, respectively, and other costs related to the transaction. In April 2016, TSI Holdings settled a transaction to purchase $8,705 principal amount of debt outstanding under the 2013 Senior Credit Facility for $3,787. In May 2016, TSI Holdings settled another transaction to purchase $62,447 principal amount of debt outstanding under the 2013 Senior Credit Facility for $25,978. The purchased debt was transferred to TSI, LLC and canceled.
The $17,911 gain on extinguishment of debt recorded for the year ended December 31, 2015 included the write-off of related deferred financing costs and debt discount of $249 and $707, respectively, and other costs related to the transaction. In the year ended December 31, 2015, TSI Holdings purchased $29,829 principal amount of debt outstanding under the 2013 Senior Credit Facility in the open market for $10,947, and such debt was transferred to TSI, LLC and cancelled.
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.
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 a previous senior secured credit facility, entered into in May 2011, 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 the $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.
(5)
Corporate income taxes for the years ended December 31, 2016, 2015 and 2014 included non-cash charges of $54,193, $52,637 and $60,368, respectively, related to tax valuation allowances. Corporate income taxes for the years ended December 31, 2013 and 2012 included income tax benefits totaling $16 and $483, respectively, related to the correction of accounting errors. For the years ended December 31, 2016, 2015 and 2014, see Note 13 — Corporate Income Taxes to the Company’s consolidated financial statements in this Annual Report for further details.
(6)
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.
(7)
Effective January 1, 2016, the Company elected to change its method of presentation relating to debt issuance costs in accordance with Accounting Standards Update (“ASU”) 2015-03. As a result, in 2015, 2014, 2013, and 2012, the Company reclassified $2,259, $2,683, $3,204 and $4,272, respectively, of deferred financing costs from other long-term assets to long-term debt.
(8)
Net debt represents the total principal balance of long-term debt outstanding, net of cash and cash equivalents.
(9)
Includes wholly-owned and one partly-owned club. Not included in the total club count is one partly-owned club in which we have an equity interest but operates under a different brand and locations that are managed by us in which we do not have an equity interest. These managed sites include three fitness clubs located in colleges and universities and eight managed sites.
(10)
Represents members (including restricted members) at wholly-owned and partly-owned clubs. Restricted members primarily include students and teachers.
(11)
Restricted members (“Restricted Memberships”) primarily include students and teachers. This membership allowed for club usage at restricted times, at a discount to other memberships offered. The Restricted Membership was discontinued and the Company aggregated all members beginning in 2015.
(12)
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.

34


(13)
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.
(14)
Average revenue per member is total revenue from wholly-owned clubs for the period divided by the average number of members from wholly-owned clubs for the period, 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.
(15)
Average joining fees collected per member is calculated as total initiation and annual fees divided by the number of new members during each respective year.
(16)
Annual attrition is calculated as total member losses for the year divided by the average monthly member count over the year during each respective year.
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. 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 under the headings “Risk Factors,” “Business” and “Forward-Looking Statements” contained in Item 1A, Item 1, and Part I, respectively, 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 U.S. and one of the largest fitness club owners and operators in the U.S. As of December 31, 2016, the Company, through its subsidiaries, operated 150 clubs. Our clubs collectively served approximately 544,000 members as of December 31, 2016. We owned and operated a total of 102 clubs under the NYSC brand name within a 120-mile radius of New York City as of December 31, 2016, including 35 locations in Manhattan where we are the largest fitness club owner and operator. We owned and operated 28 clubs in the Boston region under our BSC brand name, 12 clubs (one of which is partly-owned) in the Washington, D.C. region under our WSC brand name and five clubs in the Philadelphia region under our PSC brand name as of December 31, 2016. In addition, as of December 31, 2016, we owned and operated three clubs in Switzerland and partly-owned one club that operated under a different brand name in Washington, D.C. 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. 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.
Revenue and Operating Expenses
We have two principal sources of revenue:
Membership revenue:    Our largest source of revenue is dues inclusive of monthly membership fees, annual maintenance fees, initiation and processing fees paid by our members. In addition, we collect usage fees on a per visit basis for non-passport members using non-home clubs. These dues and fees comprised 76.7% of our total revenue for the year ended December 31, 2016. We recognize revenue from membership dues in the month when the services are rendered. We recognize revenue from initiation and processing fees over the estimated average membership life and annual fees over a twelve month period.
Ancillary club revenue:    For the year ended December 31, 2016, we generated 16.8% of our revenue from personal training and 4.9% of our revenue from other ancillary programs and services consisting of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes, 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.

35


We also receive revenue (approximately 1.6% of our total revenue for the year ended December 31, 2016) from the rental of space in our facilities to operators who offer wellness-related offerings, such as physical therapy and juice bars. In addition, we sell in-club advertising and sponsorships and generate management fees from certain club facilities that we do not wholly own. We also collect laundry related revenue for the laundering of towels for third parties. We refer to these revenues as Fees and other revenue.
Our performance is dependent in part on our ability to continually attract and retain members at our clubs. In the years ended December 31, 2016 and 2015, our attrition rate was 44.3% and 46.9%, respectively.
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 45% 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.
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 2% 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 2016, operating income was impacted by fixed asset impairment charges of $742,000 related to underperforming clubs. In 2015, operating income included a gain on sale of building of $77.1 million and gain on lease termination of $3.0 million, partially offset by goodwill impairment charges of $31.6 million associated with the NYSC and BSC regions, and fixed asset impairment charges of $14.6 million related to underperforming clubs. In 2014, operating income was impacted by fixed asset impairment charges of $4.6 million related to underperforming clubs, and goodwill impairment charges of $137,000 associated with one outlier club.
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ amounts in thousands)
Operating (loss) income
 
$
(6,383
)
 
$
7,114

 
$
752

(Decrease) increase over prior period
 
(189.7
)%
 
846.0
%
 
(98.1
)%
Net income (loss)
 
$
8,043

 
$
21,158

 
$
(68,989
)
(Decrease) increase over prior period
 
(62.0
)%
 
130.7
%
 
(659.8
)%
Cash flows provided by operating activities
 
$
21,190

 
$
24,870

 
$
4,758

(Decrease) increase over prior period
 
(14.8
)%
 
422.7
%
 
(92.9
)%
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 in our recent and planned 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 2016, we opened one new location. During 2017, we also plan to open two additional locations in New York City. In addition, our operating income margins have been, and may continue to be negatively affected by our lower average dues per membership.

36


As of December 31, 2016, 149 of our fitness clubs were wholly-owned by us and our consolidated financial statements include the operating results of all such clubs. One location in Washington, D.C., was partly-owned by us, with our profit sharing percentage approximating 45%, and is treated as an unconsolidated affiliate for which we apply the equity method of accounting. We also partly-owned another location in Washington D.C., which does not operate under the WSC brand, with a profit sharing percentage approximating 20% (after priority distributions) for which the equity accounting is also applied. 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 eight managed sites.
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
2014
 
 
 
 
First Quarter
 
(4.7
)%
 
 
Second Quarter
 
(4.5
)%
 
 
Third Quarter
 
(4.5
)%
 
 
Fourth Quarter
 
(3.9
)%
 
(4.2
)%
2015
 
 
 
 
First Quarter
 
(3.5
)%
 
 
Second Quarter
 
(5.4
)%
 
 
Third Quarter
 
(7.1
)%
 
 
Fourth Quarter
 
(6.7
)%
 
(5.6
)%
2016
 
 
 
 
First Quarter
 
(7.6
)%
 
 
Second Quarter
 
(4.5
)%
 
 
Third Quarter
 
(3.0
)%
 
 
Fourth Quarter
 
(2.2
)%
 
(4.1
)%
Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary revenue increases (decreases).
The comparable club revenue decline experienced in 2016 was primarily due to lower average dues per membership, partially offset by an increase in membership sales volume and annual fees. The comparable club revenue decline experienced in 2015 and 2014 was primarily due to the decline in membership dues. In 2015, the effect of new members enrolling at lower monthly dues combined with members cancelling who were paying higher monthly dues was only partially offset by an increase in membership sales volume.

37


Historical Club Count
 
 
Year Ended December 31,
 
 
2016

2015

2014
Wholly-owned clubs operated at beginning of period
 
151

 
156

 
160

New clubs opened
 
1

 
1

 
4

BFX Studio locations converted to clubs
 
2

 

 

Clubs closed
 
(5
)
 
(6
)
 
(8
)
Wholly-owned clubs operated at end of period
 
149

 
151

 
156

Partly-owned clubs operated at end of period(1)
 
1

 
1

 
2

Total clubs operated at end of period(1)(2)(3)
 
150

 
152

 
158

(1)
Excludes one partly-owned club that operated under a different brand name in our Washington, D.C. region.
(2)
Includes wholly-owned clubs and one partly-owned club. 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 fitness clubs located in colleges and universities and eight managed sites.
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,
 
2016
 
2015
 
2014
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
Payroll and related
37.5

 
41.5

 
39.0

Club operating
46.7

 
46.4

 
42.5

General and administrative
6.2

 
7.2

 
6.9

Depreciation and amortization
11.0

 
11.3

 
10.4

Impairment of fixed assets
0.2

 
3.4

 
1.0

Impairment of goodwill

 
7.4

 

Gain on sale of building

 
(18.2
)
 

Gain on lease termination

 
(0.7
)
 

 
101.6

 
98.3

 
99.8

Operating (loss) income
(1.6
)
 
1.7

 
0.2

(Gain) loss on extinguishment of debt
(9.5
)
 
(4.2
)
 
0.1

Interest expense
3.5

 
4.9

 
4.2

Equity in the earnings of investees and rental income
(0.1
)
 
(0.6
)
 
(0.5
)
Income (loss) before provision (benefit) for corporate income taxes
4.5

 
1.6

 
(3.6
)
Provision (benefit) for corporate income taxes
2.5

 
(3.4
)
 
11.6

Net income (loss)
2.0
 %
 
5.0
 %
 
(15.2
)%

38


Year ended December 31, 2016 compared to year ended December 31, 2015
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
 
Year Ended December 31,
 
 
 
2016
 
2015
 
 
 
Revenue
 
% Revenue
 
Revenue
 
% Revenue
 
% Variance
Membership dues
$
296,795

 
74.8
%
 
$
309,096

 
72.8
%
 
(4.0
)%
Initiation and processing fees
7,636

 
1.9
%
 
13,644

 
3.2
%
 
(44.0
)%
Membership revenue
304,431

 
76.7
%
 
322,740

 
76.0
%
 
(5.7
)%
Personal training revenue
66,487

 
16.8
%
 
73,191

 
17.3
%
 
(9.2
)%
Other ancillary club revenue
19,642

 
4.9
%
 
22,138

 
5.2
%
 
(11.3
)%
Ancillary club revenue
86,129

 
21.7
%
 
95,329

 
22.5
%
 
(9.7
)%
Fees and other revenue
6,361

 
1.6
%
 
6,254

 
1.5
%
 
1.7
 %
Total revenue
$
396,921

 
100.0
%
 
$
424,323

 
100.0
%
 
(6.5
)%
Revenue decreased $27.4 million, or 6.5%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, as a result of lower membership revenue and ancillary club revenue. Revenue decreased approximately $16.8 million at our clubs opened over than 24 months (“mature clubs”) and $13.6 million at closed clubs. These decreases were partially offset by a $3.0 million increase in revenue from our clubs that were opened within the last 24 months.
Membership dues revenue decreased $12.3 million, or 4.0% in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily reflecting lower average dues per membership and the effect of club closures, partially offset by an increase in annual fees.
Initiation and processing fees revenue decreased $6.0 million, or 44.0% in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily reflecting a decrease in initiation fees collected per new membership which began in the third quarter of 2015, and a reduction in new memberships. Initiation and processing fees are amortized over the estimated average membership life and as a lesser amount of fees is collected, the revenue recognized will continue to decrease for the amortization period. As the high initiation fees that were initially collected in relation to the conversion to the lower pricing model in 2014 and the first half of 2015 continue to fully amortize and are no longer part of the calculation, we expect this revenue to decrease further. The decrease was also due to the effect of higher estimated average membership life of 25 months for the full year of 2016 versus 22 months for the same prior-year period, which resulted in initiation and processing fees being amortized over the longer time period and therefore less revenue was recognized.
Personal training revenue decreased $6.7 million, or 9.2% in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to a decline in sales volume for our personal training products, as well as the impact of club closures.
Other ancillary club revenue decreased $2.5 million, or 11.3%, in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to decreased revenue from our Sports Clubs for Kids programs.
Comparable club revenue decreased 4.1% in the year ended December 31, 2016 compared to the year ended December 31, 2015. The price of membership dues and enrollment fees decreased on average which was partially offset by an increase in memberships at our comparable clubs.

39


Operating Expenses
Operating expenses (in thousands) were comprised of the following for the periods indicated:
 
 
Year Ended December 31,
 
 
 
 
 
 
2016
 
2015
 
$ Variance
 
% Variance
Payroll and related
 
$
149,029

 
$
175,898

 
$
(26,869
)
 
(15.3
)%
Club operating
 
185,104

 
196,725

 
(11,621
)
 
(5.9
)%
General and administrative
 
24,702

 
30,683

 
(5,981
)
 
(19.5
)%
Depreciation and amortization
 
43,727

 
47,887

 
(4,160
)
 
(8.7
)%
Impairment of fixed assets
 
742

 
14,571

 
(13,829
)
 
(94.9
)%
Impairment of goodwill
 

 
31,558

 
(31,558
)
 
(100.0
)%
Gain on sale of building
 

 
(77,146
)
 
77,146

 
100.0
 %
Gain on lease termination
 

 
(2,967
)
 
2,967

 
100.0
 %
Operating expenses
 
$
403,304

 
$
417,209

 
$
(13,905
)
 
(3.3
)%
Operating expenses increased due to the following factors:
Payroll and related. Payroll and related expenses for the year ended December 31, 2016 decreased $26.9 million, or 15.3%, compared to the year ended December 31, 2015, primarily reflecting decreased overhead and club payroll associated with club closures, headcount reductions and other cost savings initiatives. In the years ended December 31, 2016 and 2015, Payroll and related expenses also included $1.7 million and $3.0 million, respectively, of separation expense primarily related to the departure of certain executive officers.
Club operating. Club operating expenses decreased $11.6 million or 5.9% in the year ended December 31, 2016 compared to the year ended December 31, 2015. This decrease was principally attributable to the following:
Marketing expenses decreased $4.7 million mainly due to reduced spending in the year ended December 31, 2016 related to our cost-savings initiatives, and the increased advertising spend in the year ended December 31, 2015 associated with the roll-out of the lower pricing model.
Repair and maintenance expenses decreased $2.9 million primarily reflecting a decrease in vendor costs as well as other cost-savings initiatives. The decline also reflected the effect of club closures.
Utilities expenses decreased $2.3 million primarily reflecting the effect of club closures, and lower electric rates, lower energy prices due to the mild weather experienced in our markets in the year ended December 31, 2016.
Rent and occupancy expenses decreased $327,000 in the year ended December 31, 2016 compared to the year ended December 31, 2015.  The decrease was driven by savings of $3.3 million for closed clubs, and a decrease in early lease termination penalties of $1.3 million. Offsetting these decreases was an increase of $2.9 million at mature clubs primarily due to rent escalations and an increase of $1.4 million related to newly opened clubs and one future club.
General and administrative. General and administrative expense decreased $6.0 million, or 19.5%, in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily reflecting the results of our cost savings initiatives. In addition, for the year ended December 31, 2015, it included costs of $899,000 associated with the changes to our Board of Directors and other related expenses.
Depreciation and amortization. In the year ended December 31, 2016 compared to the year ended December 31, 2015, depreciation and amortization expense decreased $4.2 million, or 8.7%, primarily due to a decline in our depreciable fixed assets base resulting from club closures and impairment charges.
Impairment of fixed assets.  We recorded fixed asset impairment charges of $742,000 and $14.6 million at underperforming clubs in the year ended December 31, 2016 and 2015, respectively.
Impairment of goodwill. We did not have goodwill impairment charges in the year ended December 31, 2016. In the year ended December 31, 2015, as a result of the significant decrease in market capitalization and a decline in our current performance primarily due to existing members downgrading their memberships to those with lower monthly dues and new members enrolling at lower rates, we performed an interim impairment test as of May 31, 2015. We concluded that there would be no remaining implied fair value of goodwill attributable to the NYSC and BSC regions. Accordingly, we wrote off $31.6 million of goodwill associated with these reporting units. 

40


Gain on Sale of Building. On September 12, 2014, we completed the legal sale of our property (building and land) on East 86th Street, New York City, to an unaffiliated third-party for gross proceeds of $85.7 million. Concurrent with the closing of the transaction, we leased back the portion of the property comprising our health club (“Initial Lease”) and had agreed to vacate the property in connection with the purchaser's future development of a new luxury, high-rise multi-use building. In connection with vacating the property, we had agreed to 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. This sale-leaseback transaction was characterized as a financing arrangement for accounting purposes rather than a sale until any continuing involvement has ceased. In March 2015, we received the remaining proceeds that had been held in escrow of $500,000.
On December 23, 2015, we terminated the Initial Lease and the agreement to enter into the New Club Lease and received gross proceeds of $3.5 million in connection with the termination. Because the lease was terminated with no continuing involvement, this sale-leaseback transaction was accounted for as a completed sale as of December 23, 2015. Under this treatment, we recorded a $77.1 million gain, previously accounted for as a financing, on the sale of the property, recorded in Gain on sale of building in the consolidated statements of operations for the year ended December 31, 2015.
Gain on lease termination. In the year ended December 31, 2015, we recorded a $3.0 million net gain on lease termination related to the termination of a lease for a planned club opening that was not yet effective.
Gain on Extinguishment of Debt
On April 21, 2016, TSI Holdings settled a transaction to purchase $8.7 million principal amount of debt outstanding under the 2013 Senior Credit Facility for $3.8 million, or 43.5% of face value. On May 6, 2016, TSI Holdings settled another transaction to purchase $62.4 million principal amount of debt outstanding under the 2013 Senior Credit Facility for $26.0 million, or 41.6% of face value. The April and May transactions created gains on extinguishment of debt in 2016 of $37.9 million. The gain was net of the write-off of deferred financing costs and debt discount of $545,000 and $1.6 million, respectively, and other costs related to the transaction. The purchased debt described above was transferred to TSI, LLC and canceled.
In the year ended December 31, 2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under the 2013 Senior Credit Facility in the open market for $10.9 million, and such debt was transferred to TSI, LLC and cancelled, which resulted in a gain on extinguishment of debt of $17.9 million, including the write-off of related deferred financing costs and debt discount of $249,000 and $707,000, respectively.
Interest Expense
Interest expense decreased by $6.6 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily reflecting the effect of principal payments made on, and purchases of debt outstanding under, the 2013 Term Loan Facility in late 2015 and early 2016. Additionally, in 2015, we recorded approximately $2.0 million of non-cash rental income related to our former tenant following the legal sale of this location in September 2014. Because the legal sale of our East 86th Street property was characterized for accounting purposes as a financing rather than a sale, the rental payments were treated as interest on the financing arrangement until any continuing involvement in the property ceased. In December 2015, we terminated our current lease and the agreement to enter into our future lease with the purchaser/landlord, so this sale-leaseback transaction was accounted for as a completed sale in December 2015.
Provision (Benefit) for Corporate Income Taxes
We recorded income tax expense of $9.8 million during the year ended December 31, 2016. For year ended December 31, 2015, we recorded an income tax benefit of $14.4 million, which included a decrease of $17.3 million (net of the elimination of federal effect of state deferred taxes); to the full valuation allowance against the U.S. net deferred tax assets. Our effective tax rate was 55% and (211)% for the years ended December 31, 2016 and 2015, respectively. Separate from the impact of valuation allowance, our effective tax rate was 37% and 38% for the years ended December 31, 2016 and 2015, respectively.
As of both December 31, 2016 and 2015, we have a net deferred tax liability of $61,000 as there is a full valuation allowance recorded against the U.S. net deferred tax assets. The state net deferred tax liability balance was $17,000 as of both December 31, 2016 and 2015.
In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that 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

41


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 required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We recorded valuation allowances in the amounts of $54.2 million and $52.6 million as of December 31, 2016 and 2015, respectively.
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 liabilities recorded at December 31, 2016 and 2015 related 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 for our goodwill from operations of our clubs in Switzerland (“Swiss Operations”).
We are currently under examination in New York State (2006 through 2014). In May 2016, we consented to extend the assessment period for tax years 2006 - 2012 through June 30, 2017. In a revised letter dated December 12, 2016, we received a revised assessment from the State of New York related to tax years 2006-2009 for $4.7 million, inclusive of $2.0 million of interest. We disagreed with the proposed assessment and have scheduled a conciliation conference with the State of New York to appeal the assessment. 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. Additionally, we are also under examination in New York City (2006 through 2012), which we have consented to extend the assessment period through December 31, 2017. We were also recently notified by the Internal Revenue Service that they intend to examine federal income tax returns for the years ended December 31, 2014 and 2015.
Year ended December 31, 2015 compared to year ended December 31, 2014
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
 
 
Year Ended December 31,
 
 
 
 
2015
 
2014
 
 
 
 
Revenue
 
% Revenue
 
Revenue
 
% Revenue
 
% Variance
Membership dues
 
$
309,096

 
72.8
%
 
$
343,185

 
75.6
%
 
(9.9
)%
Initiation and processing fees
 
13,644

 
3.2
%
 
12,044

 
2.7
%
 
13.3
 %
Membership revenue
 
322,740

 
76.0
%
 
355,229

 
78.3
%
 
(9.1
)%
Personal training revenue
 
73,191

 
17.3
%
 
70,338

 
15.5
%
 
4.1
 %
Other ancillary club revenue
 
22,138

 
5.2
%
 
22,304

 
4.9
%
 
(0.7
)%
Ancillary club revenue
 
95,329

 
22.5
%
 
92,642