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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, 2017
¨
Transition Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                to             

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.)
1001 US North Highway 1, Suite 201, Jupiter, Florida 33477
(Address and zip code of Registrant’s principal executive office)
399 Executive Boulevard, Elmsford, New York 10523
(Mailing address)
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
þ

 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $69.6 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 23, 2018, there were 27,210,377 shares of Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, to be filed not later than April 30, 2018 are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.




Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
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.
 




Table of Contents

TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
PART I

FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking” statements within the meaning of the 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 “the Company,” “we,” “our,” “TSI Holdings” and similar references refer to Town Sports International Holdings, Inc. and its subsidiaries. References to “TSI, LLC” refer to Town Sports International, LLC, and “TSI Group” refer to Town Sports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company. The Company is a diversified holding company owning subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI, LLC, has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of the United States (“U.S.”).  TSI Group was formed in 2017 to invest in public and private equities and real estate. TSI Holdings’ corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for stockholders.
General
Based on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast region of the United States. As of December 31, 2017, the Company, through its subsidiaries, owned and operated 165 fitness clubs (“clubs”). Our clubs collectively served approximately 587,000 members as of December 31, 2017. As of December 31, 2017, we owned and operated a total of 119 clubs in the New York metropolitan region (102 of which were under the “New York Sports Clubs” brand name, 16 of which were under the “Lucille Roberts” brand name and one of which was under the “TMPL” brand name), including 39 locations in Manhattan where we are one of the largest fitness club owners and operators. Additionally, we owned and operated 28 clubs in the Boston metropolitan region under our “Boston Sports Clubs” brand name, 10 clubs (one of which is partly-owned) in the Washington, D.C. metropolitan region under our “Washington Sports Clubs” brand name and five clubs in the Philadelphia metropolitan region under our “Philadelphia Sports Clubs” brand name, and three clubs in Switzerland. In addition, as of December 31, 2017, we have one partly-owned club that operates 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.

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In 2017, we acquired a total of 18 clubs. We acquired the Lucille Roberts Health Club business (“Lucille Roberts”), which added 16 clubs to our portfolio. These 16 clubs continue to operate as women only clubs under the Lucille Roberts trade name. We also acquired one existing club in Massapequa, NY, currently operating under the New York Sports Clubs brand name, including the land and the building such club occupies, as well as TMPL Gym (“TMPL”), an existing club in Manhattan, which continues to operate under the TMPL brand name. TMPL is the Company’s luxury brand that the Company plans to expand. All 18 acquisitions were additions to our portfolio in the New York metropolitan region. The results of operations of the clubs acquired have been included in our consolidated financial statements from the respective dates of such acquisitions.
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 regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburbs and neighboring communities.
Over our 44-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 19,000 square feet, while our multi-recreational clubs average approximately 38,000 square feet. The aggregate average size of our clubs is approximately 25,000 square feet. Our clubs typically have an open fitness area to accommodate cardiovascular and strength-training equipment, as well as special purpose rooms for group fitness classes and other exercise programs. We seek to provide a broad array of high-quality exercise programs and equipment that are popular and effective, promoting a quality exercise experience for our members. When developing clubs, we carefully examine the potential membership base and the likely demand for supplemental offerings such as swimming, basketball, children’s programs, tennis or squash and, provided suitable real estate is available, we will add one or more of these offerings to our fitness-only format. For example, a multi-recreational club in a family market may include Sports Clubs for Kids programs, which can include swim lessons and sports camps for children.
Industry Overview
According to the most recent information released by the International Health, Racquet and Sports Club Association (“IHRSA”), the U.S. health club industry posted growth in revenue, memberships, and number of club locations. Revenue grew from 6.9% to $27.6 billion in 2016 from $25.8 billion in 2015, while club count increased 1.1% to 36,540 sites in 2016 from 36,160 in 2015. Roughly 57.3 million Americans belonged to a health club in 2016, up from 55.3 million in 2015. According to the IHRSA, the health 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, the average age of a health club member in 2016 was 39 years old. One-third of health club members, which is the most represented age group, were between the ages of 35-54 years old. The second most represented age group was 18-34 years old, which represented 28% of health club members. The oldest, the over-55 age group, represented 24% of all health club members, while those under age 18 represented 15% of all health club members. The number of health club members under age 18 has grown from 5.3 million in 2012 to 8.7 million in 2016.
As the numbers showed in 2016, the health club industry reported growth in all three key indicators: revenue, membership, and club count. Still, more than 27% of Americans remain inactive, as reported by the Physical Activity Council. More than two out of five Americans do not participate in any of the 120 activities measured by the Physical Activity Council. We are in a unique position to address physical inactivity as the health club serves as a hub for health, wellness and exercise. 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 largest owners and operators of fitness clubs in the Northeast region of the U.S. In 2017, we acquired 18 clubs in the New York metropolitan region. 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.

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Regional clustering strategy provides significant benefits to members and corporations.   By operating a network of clubs in a concentrated geographic area, the value of our memberships is enhanced by our ability to offer members access to any of our clubs, which provides the convenience of having fitness clubs near a member’s workplace and home. This is also a benefit to our corporate members, as many corporations have employees that will take advantage of multiple gym locations. Approximately 226,000, or 39%, of our members currently have a passport, elite or flagship membership, 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, 2017, approximately 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.
Business Strategy
In the long-term, we seek to maximize our net member growth, revenues, earnings and cash flows using the following strategies:
Growth through acquisitions. We plan to expand our club base through selective acquisitions. We believe this is an important element of our corporate strategy as it strengthens our competitive position and expands and enhances the services that we can offer to members. In 2017, we acquired 18 clubs in the New York metropolitan region and constructed and opened two clubs. In January 2018, we acquired two additional clubs. We expect to continue to acquire selective clubs to continue our expansion of club offerings, including clubs outside of our current regions. In the event we build and acquire additional new clubs, the club expansion is expected to be funded with cash on hand or through internally generated cash flows. We may also consider certain acquisitions other than health clubs to diversify the business while enhancing shareholder value.
Grow membership revenues. We seek to grow our membership revenues in existing clubs through driving membership growth and optimizing dues 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 43,000 members for a total member count of 587,000 in 2017 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 addition, we offer Sports Clubs for Kids programs at select clubs.
Optimization of our clubs. We remain committed to optimizing our existing club base, including club closures when appropriate. We closed five clubs in 2017. We expect these profit margin initiatives will enable us to improve in club level economics across our portfolio, and to offset the competitive pressure in the geographic regions in which we compete.
Retain members by focusing on the member experience.   Our Company’s mission is “Bring the best out of every body.” By building and nurturing a strong consumer centric culture, we are able to provide a clear road map for how we serve our members and deliver a superior 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 and 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 social media to help analyze the areas we can improve upon as well as the areas in which the members are satisfied overall.

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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, 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 zones include a variety of functional training equipment, such as Total Body Resistance Exercise (“TRX” brand) suspension training frame, Kettle Bells, Battle Ropes and Power Sleds. 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 the Company and all of its subsidiaries. The primary objective is to ensure that our brands seize market share and opportunities through well-defined and coordinated go-to-market strategies. We are organized to enable close collaboration between our marketing, sales 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 both existing members and future members. In order to have credible and authentic connections to create such desirability with our audience, we utilize a market segmentation strategy. A marketing segmentation strategy divides our target market into subgroups, whereby consumers in each of these subgroups share one or more characteristics. Using this knowledge, we develop specific plans, including personalized and mass marketing, to reach these targeted customers effectively. We seek to identify and understand consumers’ individual motivations and goals in an effort to create meaningful products, services and experiences that build a lasting impression and brand loyalty.
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. 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 sell individual memberships online for our standard membership types and the websites enable us to sell memberships for pre-established corporate and group programs. The websites also allow 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 websites also provide information about the respective club locations, program offerings, exercise class schedules and sales promotions. Job seekers can also begin the employment application process through the respective websites 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. We offer various types of memberships at our clubs that include either single club or multiple club access and either month-to-month or one-year commitment options.
Our single club memberships are sold in the range of $19.99 and $64.99 per month.
We also offer various multiple-club memberships that include access to certain clusters of clubs, including our Passport Membership which provides access to all of the clubs in our four regions with the exception of certain “Elite” clubs and one “flagship” club. The Passport Membership is currently priced at $89.99 for the month-to-month option and $79.99 for the one-year commitment option. Additionally, the Company offers both Elite and Flagship Memberships. The Flagship Membership provides access to all of our clubs, including our Flagship club and all Elite clubs. The Elite Membership includes access to all clubs, including our Elite clubs, with the exception of our Flagship club. Elite and Flagship memberships range in price generally from $89.99 to $120.00 per month.

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The membership prices above are dependent on club location and whether the member joins under a “month-to-month” or a “commit” contract. Under the commit contract, new members commit to a one year membership, generally at a lower monthly rate than a month-to-month membership. A member may cancel a commit membership at any time for a fee. 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, 2017, approximately 85% 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 $99 while the annual fee generally charged between $59.99 and $69.99 for all memberships. These one-time Joining Fees averaged $60, $61 and $72 per sale for the years ended December 31, 2017, 2016 and 2015, 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 $46, $45 and $50 per month for the years ended December 31, 2017, 2016 and 2015, respectively. Currently, approximately 99% of our members pay their membership dues the first of each month through EFT, with EFT membership revenue constituting approximately 75% of total consolidated revenue for the year ended December 31, 2017.
Usage
Our total club usage, based on the number of member visits, was 30.2 million and 31.7 million member visits for the years ended December 31, 2017 and 2016, respectively. In the year ended December 31, 2017, 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 to use clubs that are not defined in their membership plan.
Non-Membership Revenue
The table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2013 through 2017.
 
For the Years Ended December 31, ($ in thousands)
 
2017
 
%
 
2016
 
%
 
2015
 
%
 
2014
 
%
 
2013
 
%
Total revenue
$
403,042

 
100.0
%
 
$
396,921

 
100.0
%
 
$
424,323

 
100.0
%
 
$
453,842

 
100.0
%
 
$
470,225

 
100.0
%
Non-Membership Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal training revenue
69,735

 
17.3
%
 
66,487

 
16.8
%
 
73,191

 
17.2
%
 
70,338

 
15.5
%
 
66,367

 
14.1
%
Other ancillary club revenue(1)
17,197

 
4.3
%
 
19,642

 
4.9
%
 
22,138

 
5.2
%
 
22,304

 
4.9
%
 
24,720

 
5.3
%
Fees and Other
revenue(2)
5,876

 
1.4
%
 
6,361

 
1.6
%
 
6,254

 
1.5
%
 
5,971

 
1.3
%
 
5,985

 
1.3
%
Total non-membership revenue
$
92,808

 
23.0
%
 
$
92,490

 
23.3
%
 
$
101,583

 
23.9
%
 
$
98,613

 
21.7
%
 
$
97,072

 
20.7
%
 
(1)
Other ancillary club revenue primarily consists of Sports Clubs for Kids, Small Group Training and racquet sports.
(2)
Fees and other revenue primarily consist of rental income, laundry revenue, marketing revenue and management fees. The year ended December 31, 2013 includes $424 for the correction of an accounting error related to out of period rental income.
Club Format and Locations
Our clubs are generally located in middle- or upper-income residential, commercial, urban and suburban neighborhoods within major metropolitan areas that are capable of supporting the development of a cluster of clubs. Our clubs typically have high visibility and are easily accessible. In the New York metropolitan, Boston, Washington, D.C. and Philadelphia regions, 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.

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Approximately 68% 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 19,000 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, 2013 to December 31, 2017, we constructed ten new clubs, acquired 24 clubs and closed or relocated 29 clubs. Currently, 67 of our clubs, or approximately 41% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31, 2017, we acquired 18 clubs, constructed and opened two clubs and closed five clubs, ending the year with 165 total clubs under operation. This compares to constructing and opening of one club, converting of two studio locations to clubs, and closing of five clubs during the year ended December 31, 2016. In both 2017 and 2016, we also upgraded certain existing clubs and plan to continue to do so in 2018.  
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 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 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. 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.

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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, 2017, Sports Clubs for Kids was being offered in 33 club locations throughout our various regions. Our Sports Clubs for Kids programming positions our multi-recreational clubs as family clubs, which we believe provides us with a competitive advantage. Depending upon the facilities available at a location, Sports Clubs for Kids programming can include traditional youth offerings such as day camps, sports camps, swim lessons, hockey and soccer leagues, gymnastics, dance, and birthday parties. It also can include non-competitive “learn-to-play” sports programs.
Our facilities and equipment management teams are dedicated to ensuring our clubs and fitness equipment are operating at the highest standard of performance for our members. Local teams are deployed to provide on-site support to clubs as needed.
Our club support and member services groups act as a coordinating point for all departments, supporting excellence in program execution and ensuring consistency of policies and procedures across the entire organization that support the member experience.
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 monitor, replace or upgrade key technology services and infrastructure.
All of our clubs use a third-party hosted management system to process memberships, bill members, process point of sales transactions, and track member usage of the clubs. In addition, the management system tracks and analyzes key operating measurements such as membership statistics, cancellations, cross-club utilization, member tenure, and demographics profiles.
We continue to create a more customizable and efficient experience for members through updated digital tools, which included an enhanced website and mobile application. These digital tools enable enable feature 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. We continue to enhance the digital tools accessibility to increase our online presence and member engagement.
Our back-office computer systems are comprised of a variety of technologies designed to assist in the management and analysis of our revenues, costs and key operational metrics, as well as support the daily operations of our clubs and corporate offices. These systems include an on premise financial system, a third-party hosted data warehouse, a third-party hosted telephone system and call center software to manage and track member service experiences.
We regularly implement cost effective technology solutions to accommodate growth, provide network redundancy, secure operating practices, better manage telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical architecture, including business continuity and 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, LUCILLE ROBERTS, TMPL, UXF, SPORTS CLUBS FOR KIDS, COMPANIESGETFIT.COM, BFX STUDIO, RIDE REPUBLIC, and MASTER CLASS. 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 30,500 in 2012 to 36,540 in 2016, based on the most recent information available according to the IHRSA. In each of the regions in which we operate, we compete with other fitness clubs, physical fitness and recreational facilities.

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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;
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 regions 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 regions in which we operate. Competitors, who may include companies that are larger and have greater resources than us, may enter these regions 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 regions. However, such a competitor could enter these regions 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 through increased sales 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.

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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 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, 2017, we had approximately 7,500 employees, of whom approximately 1,600 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.

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Available Information
We make available through our web site at https://www.townsportsinternational.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 https://www.townsportsinternational.com. In addition, you may automatically receive email alerts and other information about the Company by enrolling through the “Email Alerts” section at https://www.townsportsinternational.com.
The foregoing information regarding our website and its content is for convenience only. The content of our website is not deemed to be incorporated by reference into this report nor should it be deemed to have been filed with the SEC.
Item 1A.     Risk Factors
Investors should carefully consider the risks described below and all other information in this Annual Report. 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. 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.

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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 regions in which we operate, we compete with other fitness clubs, private studios, physical fitness and recreational facilities established by local governments, hospitals and businesses for their employees, amenity and condominium clubs, the YMCA and similar organizations and, to a certain extent, with racquet and tennis and other athletic clubs, country clubs, weight reducing salons and the home-use fitness equipment industry. We also compete with other entertainment and retail businesses for the discretionary income in our target demographics. We might not be able to compete effectively in the future in the regions in which we operate. Competitors include companies that are larger and have greater resources than us and also may enter these regions 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 regions. 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 regions in which we operate to open a chain of clubs in these regions through one, or a series of, acquisitions.
The success of our business depends on our ability to retain the value of our brands.
Our ability to maintain our brand image and reputation is integral to our business. Maintaining, promoting and growing our brand will depend largely on the success of our marketing efforts and our ability to provide a consistent, high-quality member experience. Our reputation could be jeopardized if we fail to maintain high standards for member experiences, fail to maintain high ethical, social, and environmental standards for all of our operations and activities, or we fail to appropriately respond to concerns associated with any of the foregoing or any other concerns from our members. We could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us, or by us, could damage our reputation and brand image. Damage to our reputation or loss of consumer confidence for any of these reasons may result in fewer memberships sold or renewed, which in turn could materially and adversely affect our results of operations and financial condition.

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The lower average membership dues have and may in the future negatively impact our comparable club revenue growth and our operating margins.
In the past several 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. Recently, the Company has been increasing monthly dues 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 increases in monthly dues, the pressure on the Company's revenue and result of operations could 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 continue to experience revenue pressure from members as the fitness industry continues to be highly competitive in the geographic regions in which we compete. Also, our previous strategy of converting to a low-cost gym implemented in 2014 resulted in additional revenue pressure for the past few years. New members joined at lower monthly rates and cancellations of members paying higher rates negatively impacted our results and liquidity. In response to this, we implemented cost-savings initiatives in 2015, 2016 and 2017, which mitigated the impact the decline in revenue had on its profitability and cash flow from operations.
We continue to strategize on improving our financial results. We focus on increasing membership in existing clubs to increase revenue. We may consider additional actions within our control, including certain acquisitions, license arrangements, and the closure of unprofitable clubs upon lease expiration and the sale of certain assets. We may also consider additional strategic alternatives, including opportunities to reduce TSI, LLC’s existing debt and further cost-savings initiatives. 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, additional reductions in working capital, debt restructurings and the deferral of capital expenditures. 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 each of the years ended December 31, 2017 and 2016, we closed five clubs. In the year ended December 31, 2017 and 2016, we recognized fixed asset impairment charges of $6.5 million and $742,000, respectively, at underperforming clubs. In addition, we recorded goodwill impairment charges of $31.6 million in the year ended December 31, 2016. The goodwill impairment charges in 2016 was 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, 2017, we operated 119 fitness clubs in the New York metropolitan region, 28 fitness clubs in the Boston region, 10 fitness clubs in the Washington, D.C. region, five fitness clubs in the Philadelphia region and three fitness clubs in Switzerland. Our geographic concentration in the Northeast and Mid-Atlantic regions and, in particular, the New York metropolitan area, heightens our exposure to adverse developments in these areas, including those related to economic and demographic changes in these regions, competition, severe weather, potential terrorist threats or other unforeseen events.
For example, in the year ended December 31, 2012, as a result of flooding and power outages caused by Hurricane Sandy, 131 clubs were closed on October 29, 2012, with one club that closed permanently, 16 clubs that remained closed for over a week and one club that was closed for over a year and reopened in December 2013. We cannot predict the impact that any future severe weather events will have on our ability to avoid wide-spread or prolonged club closures. Any such events affecting the areas in which we operate might result in a material adverse effect on our business, financial condition, cash flows and results of operations in the future.

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Any condition that causes people to refrain, or prevents people, from visiting our clubs, such as severe weather, outbreaks of pandemic or contagious diseases, or threats of terrorist attacks may adversely affect our business, operating results and financial condition.
Our business and operations could be materially and adversely affected by severe weather or outbreaks of pandemic or contagious diseases, threats of terrorist attacks or other conditions that cause people to refrain, or prevent people, from visiting our clubs. Our business could be severely impacted by a widespread regional, national or global health epidemic. A widespread health epidemic or perception of a health epidemic (such as Ebola), whether or not traced to one of our clubs, may cause members and prospective members to avoid public gathering places or otherwise change their behaviors and impact our ability to staff our clubs. Outbreaks of disease, such as influenza, could reduce traffic in our clubs. Any of these events would negatively impact our business. In addition, any negative publicity relating to these and other health-related matters may affect members’ perceptions of our clubs, reduce member and prospective member visits to our clubs and negatively impact demand for our club offerings.
Further, terrorist attacks, such as the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect our markets, 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 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.

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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 fail to comply with applicable privacy, security, and data laws, regulations and standards, our business could be materially and adversely affected.
We use electronic mail (“email”), text messages and phone calls to market our services to potential members and as a means of communicating with our existing members. The laws and regulations governing the use of telephonic communication, including but not limited to emails, text messages and phone calls, for commercial purposes continue to evolve. Because messaging and phone calls are important to our business, if we are unable to successfully deliver messages or make phone calls to existing members and potential members, if there are legal restrictions on delivering these messages to consumers, or if consumers do not or cannot receive our messages or phone calls, our revenues and profitability could be adversely affected. If new laws or regulations are adopted, or existing laws and regulations are interpreted, to impose additional restrictions on our ability to call or send email or text messages to our members or potential members, we may not be able to communicate with them in a cost-effective manner and it may limit our ability to utilize such forms of communication. In addition to legal restrictions on the use of emails, text messages and phone calls for commercial purposes, service providers and others attempt to block the transmission of unsolicited messages, commonly known as “spam.” Many service providers have relationships with organizations whose purpose it is to detect and notify the service providers of entities that the organization believes is sending unsolicited messages. If a service provider identifies messaging from us as “spam” as a result of reports from these organizations or otherwise, we could be placed on a restricted list that will block our messages to members or potential members. If we are restricted or unable to communicate through emails, text messages or phone calls with our members and potential members as a result of legislation, regulation, blockage or otherwise, our business, operating results and financial condition could be adversely effected.
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 region. 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.
Acquisitions could result in operating difficulties, dilution, and other consequences that may adversely impact our business and results of operations.
Part of our key strategy is to grow through acquisitions. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. There can be no assurance that we will continue to be able to successfully integrate these acquisitions into our existing business without substantial costs, delays or other operational or financial difficulties. The areas where we face risks include:
diversion of management time and focus from operating our business to acquisition integration challenges;
difficulties in the transition of acquired members onto our systems;
the acquired businesses failing to provide, or delays in realizing, the benefits originally anticipated;
integration of the acquired company's accounting, human resource, and other administrative systems, and coordination of sales and marketing functions;
challenges related to the lack of experience in operating in the geographical regions of the acquired business;
unanticipated contract or regulatory issues and the assumption of, and exposure to, unknown or contingent liabilities of the acquired businesses.
    

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We anticipate that any future acquisitions we pursue as part of our business strategy may be financed through a combination of cash on hand, operating cash flow and availability under our existing credit facility. If new debt is added to current debt levels, or if we incur other liabilities, including contingent liabilities, in connection with an acquisition, the debt or liabilities could impose additional constraints and requirements on our business and financial performance, which could materially adversely affect our financial condition and operations.
If an acquisition is not successfully completed or integrated into our existing operations or does not result in the benefits we expect, as a result of the factors mentioned above or otherwise, our business, financial condition or results of operations may be adversely affected. In addition, failure to integrate successfully or realize the anticipated business opportunities and growth prospects from our acquisitions, could result in unanticipated expenses and losses and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing operations. Accordingly, in connection with any acquisition, there can be no assurance as to whether or when any benefits or cost synergies we hope to achieve will occur, or the extent to which they actually will be achieved.
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, 2018 through December 31, 2022, we have leases for 25 club locations that are due to expire without any renewal options, eight of which expire in 2018, and 61 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 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 regions 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.

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We currently operate clubs throughout the Northeast and Mid-Atlantic regions of the United States. In the case of existing regions, our experience has been that opening new clubs may attract some memberships away from other clubs already operated by us in those regions and diminish their revenues. In addition, as a result of new club openings in existing regions 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 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.

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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 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.

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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 or changes in the industry could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.
Future expansion or changes in the industry will place increased demands on our administrative, operational, financial and other resources. Any failure to manage such growth or changes effectively could seriously harm our business. To be successful, we will need to continue to improve management information systems and our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management attention.
Outsourcing certain aspects of our business could result in disruption and increased costs.
We have outsourced certain aspects of our business to third party vendors that subject us to risks, including disruptions in our business and increased costs. For example, we have engaged third parties to host and manage certain aspects of our data center, information and technology infrastructure and electronic pay solutions. Accordingly, we are subject to the risks associated with the vendor's ability to provide these services to meet our needs. If the cost of these services is more than expected, if the vendor is not able to handle the volume of activity or perform the quality of service that we expect, if we or the vendor are unable to adequately protect our data and information is lost, if our ability to deliver our services is interrupted, or if our third party vendors face financial or other difficulties, then our business and results of operations may be negatively impacted.

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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, 2017 totaled $19.9 million. During 2017, in any one month, the amount held in one commercial bank has been as high as approximately $45.2 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 stockholders 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. As of December 31, 2017, we had approximately $12.5 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 this amount is subject to the escheatment or abandoned property laws of any of the jurisdictions in which we conduct our business, including the State of New York. It is possible however, 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. 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. For a total of six of the jurisdictions in which we operate, we have concluded, based on opinions from outside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. In 2010, for three jurisdictions, we concluded, based on opinions from outside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. As a result, we recorded approximately $2.7 million as personal training revenue in the fourth quarter of 2010. This amount was previously recorded in deferred revenue. In 2017, for another three jurisdictions, we concluded, based on opinions from outside counsel, that money held by a company for unused and expired personal training sessions are not escheatable. As a result, we recorded approximately $3.6 million as personal training revenue in the fourth quarter of 2017. This amount was previously recorded in deferred revenue, which was primarily related to sessions purchased prior to the year ended December 31, 2015.

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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, 2017, 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, we disagree with the proposed assessment dated December 12, 2016 from the State of New York and attended a conciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached at the conference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, we received from the State of New York a revised assessment related to tax years 2006-2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. We currently are in the process of appealing the assessment with the New York State Division of Tax Appeals. 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. Additionally, on November 17, 2017, we were notified that the State of New York proposed an adjustment in the amount of approximately $3.9 million for the years 2010 to 2014, inclusive of approximately $757,000 in interest.
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, 2017, our total outstanding consolidated debt was $199.9 million under our 2013 Term Loan Facility. The 2013 Term Loan Facility expires on November 15, 2020. In addition, as of December 31, 2017, under the 2013 Revolving Loan Facility there were no outstanding borrowings and outstanding letters of credit issued totaled $7.0 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, 2017 was $38.0 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;

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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.
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 $39.9 million of our outstanding debt under our 2013 Senior Credit Facility as of December 31, 2017, 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 $199.9 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.
Credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt.
Future disruption and volatility in credit market conditions could have a material adverse impact on our ability to refinance debt when it comes due on terms similar to our current credit facilities, or to draw upon existing lines of credit or incur additional debt if needed as a result of unanticipated downturns in the markets for our products and services, which may require us or our subsidiaries to seek other funding sources to meet our cash requirements. We cannot be certain that alternative sources of financing would be available in the future on terms and conditions that are acceptable.
Our outstanding indebtedness and the inability to renew or refinance our 2013 Senior Credit Facility could materially adversely affect our financial condition and our ability to operate our business.
We will need to refinance our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing may not be as favorable as the terms of our existing debt or refinance our existing debt at all. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities, which could adversely affect our ability to refinance existing debt or raise additional capital. These risks could impair the Company's liquidity and would likely have a material adverse effect on our businesses, financial condition and results of operations.
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;

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make investments and extend credit;
engage in transactions with affiliates;
engage in sale-leaseback transactions;
consummate certain asset sales;
effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of our assets; and
create liens on our assets.
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, 2017, TSI, LLC had outstanding letters of credit of $7.0 million and a total leverage ratio that was below 4.50:1.00. Other than these outstanding letters of credit, TSI, LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. 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 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.
We will need to repay any indebtedness under the 2013 Revolving Loan Facility in the event the 2013 Revolving Loan Facility is not extended, restructured or refinanced.
The 2013 Revolving Loan Facility will mature on November 15, 2018. Given that the 2013 Senior Credit Facility contains a restrictive covenant on obtaining secured debt, if we are unable to extend, restructure or refinance the 2013 Revolving Loan Facility prior to maturity, all letters of credit that remain outstanding under the 2013 Revolving Loan Facility will become immediately due and payable upon maturity. As of December 31, 2017, the Company had a total of approximately $7.0 million letters of credit outstanding under the 2013 Revolving Loan Facility. This acceleration of payment related to the letters of credit could have a material adverse effect on our businesses, financial condition and results of operations.
Risks Related to Our Common Stock
The stock ownership of certain large stockholders will likely limit your ability to influence corporate matters.
As of February 23, 2018, the Company had two 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 13.7% and 31.2% of our outstanding common stock, respectively, based on public filings made by such stockholders. 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:

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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.
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

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Item 2.    Properties
We own our 1000 Sunrise Highway location in Massapequa, New York, which houses one of our clubs and a retail tenant. This property was acquired in November 2017. We lease the remainder of our fitness clubs pursuant to long-term leases (generally 15 to 20 years, including options). In the next five years, or the period from January 1, 2018 through December 31, 2022, we have leases for 25 club locations that are due to expire without any renewal options, eight of which are due to expire in 2018, and 61 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 office space in Jupiter, Florida and New York City, both used 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 the New York Sports Clubs offering towel service, and for construction and equipment storage. This space also serves as corporate office space. Total square footage related to the laundry facility is 42,000 and total square footage related to the corporate office and warehouse space is 40,000.

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The following table provides information regarding our club locations:
Location
  
Address
  
Date Opened or Management Assumed
New York region (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
  
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
 
February 2017
Manhattan, NY
 
4 Astor Place
 
May 2017
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
Brooklyn, NY
  
147 Greenpoint Avenue
  
June 2014
Queens, NY
  
69-33 Austin Street
  
April 1997


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Table of Contents

Location
  
Address
  
Date Opened or Management Assumed
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 Boulevard
  
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
Great Neck, NY
  
15 Barstow Road
  
July 1989
East Meadow, NY
  
625 Merrick Avenue
  
January 1999
Commack, NY
  
6136 Jericho Turnpike
  
January 1999
Massapequa, NY
 
1000 Sunrise Highway
 
November 2017
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
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
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 Road
  
February 2005
Hoboken, NJ
  
210 14th Street
  
December 2006

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Table of Contents

Location
  
Address
  
Date Opened or Management Assumed
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
New York region (Lucille Roberts):
Manhattan, NY
 
50 East 42nd Street
 
September 2017
Manhattan, NY
 
1387 Nicholas Avenue
 
September 2017
Bronx, NY
 
2449 Morris Avenue
 
September 2017
Brooklyn, NY
 
430 89th Street
 
September 2017
Brooklyn, NY
 
925 Kings Highway
 
September 2017
Brooklyn, NY
 
1950 Ralph Avenue
 
September 2017
Queens, NY
 
32-62 Steinway Street
 
September 2017
Queens, NY
 
135-39 38th Avenue
 
September 2017
Queens, NY
 
70-20 Austin Street
 
September 2017
Commack, NY
 
6534 Jericho Turnpike
 
September 2017
Bay Shore, NY
 
1850 Sunrise Highway
 
September 2017
Holbrook, NY
 
5801 Sunrise Highway
 
September 2017
Rockville Centre, NY
 
298 Sunrise Highway
 
September 2017
Valley Stream, NY
 
225 West Merrick Road
 
September 2017
Clifton, NJ
 
1075 Bloomfield Avenue
 
September 2017
Jersey City, NJ
 
338 Central Avenue
 
September 2017
New York region (TMPL):
Manhattan, NY
 
355 West 49th Street
 
December 2017
Boston region (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

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Table of Contents

Location
  
Address
  
Date Opened or Management Assumed
Westborough, MA
 
35 Chauncy Street
 
January 2018
Woburn, MA
  
300 Presidential Way
  
December 2008
Wayland, MA
  
Wayland Town Center
  
November 2014
Providence, RI
  
131 Pittman Street
  
December 2008
Washington, D.C. region (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.
  
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
Silver Spring, MD
  
8506 Fenton Street
  
November 2005
Bethesda, MD
  
6800 Wisconsin Avenue
  
November 2007
Clarendon, VA
  
2700 Clarendon Boulevard
  
November 2001
Philadelphia region (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
Florida region (Christi's Fitness):
 
 
 
 
Vero Beach, FL
 
1250 Old Dixie Highway
 
January 2018
Switzerland region:
  
 
  
 
Basel, Switzerland
  
St. Johanns-Vorstadt 41
  
August 1987
Zurich, Switzerland
  
Glarnischstrasse 35
  
August 1987
Basel, Switzerland
  
Gellerstrasse 235
  
August 2001




28


Table of Contents

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.
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.


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Table of Contents

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, 2017:
 
 
 
 
 
First Quarter
$
4.20

 
$
2.45

Second Quarter
$
4.90

 
$
3.15

Third Quarter
$
7.15

 
$
4.28

Fourth Quarter
$
7.10

 
$
5.00

Year ended December 31, 2016:
 
 
 
 
 
First Quarter
$
3.02

 
$
0.92

Second Quarter
$
3.97

 
$
2.38

Third Quarter
$
3.45

 
$
2.43

Fourth Quarter
$
3.16

 
$
2.10

Holders
As of February 23, 2018, there were approximately 110 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
The Company did not declare any dividends in 2017, 2016 or 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 $17.6 million at December 31, 2017, 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. In October 2017, TSI, LLC made a dividend distribution of $35.0 million to TSI Holdings, Inc.
Issuer Purchases of Equity Securities
We did not purchase any equity securities during the fourth quarter ended December 31, 2017.
Recent Sales of Unregistered Securities
We did not sell any securities during the year ended December 31, 2017 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.

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Table of Contents

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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12093488&doc=14
*
$100 invested on 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ended December 31.
 
 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Town Sports International Holdings, Inc
$
100.00

 
$
140.06

 
$
59.01

 
$
11.82

 
$
24.83

 
$
55.13

NASDAQ Composite
$
100.00

 
$
141.63

 
$
162.09

 
$
173.33

 
$
187.19

 
$
242.29

Russell 2000
$
100.00

 
$
138.82

 
$
145.62

 
$
139.19

 
$
168.85

 
$
193.58

Notes :
(1)
The graph covers the period from December 31, 2012 to December 31, 2017.
(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)
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 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.

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Table of Contents

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, 2017 and 2016 and the selected consolidated statement of operations and cash flow data for the years ended December 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements included elsewhere herein. The selected consolidated balance sheet data as of December 31, 2015, 2014 and 2013 and the selected consolidated statement of operations and cash flow data for the years ended December 31, 2014 and 2013 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,
 
 
2017
 
2016
 
2015
 
2014
 
2013
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
403,042

 
$
396,921

 
$
424,323

 
$
453,842

 
$
470,225

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Payroll and related
 
145,612

 
149,029

 
175,898

 
177,009

 
174,894

Club operating
 
180,467

 
185,104

 
196,725

 
192,716

 
179,683

General and administrative
 
22,680

 
24,702

 
30,683

 
31,352

 
28,431

Depreciation and amortization
 
40,849

 
43,727

 
47,887

 
47,307

 
49,099

Impairment of fixed assets
 
6,497

 
742

 
14,571

 
4,569

 
714

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 income (loss)
 
6,937

 
(6,383
)
 
7,114

 
752

 
40,598

(Gain) loss on extinguishment of debt(4)
 

 
(37,893
)
 
(17,911
)
 
493

 
750

Interest expense, net of interest income
 
12,587

 
13,938

 
20,579

 
19,039

 
22,616

Equity in the earnings of investees and rental income
 
(333
)
 
(242
)
 
(2,361
)
 
(2,402
)
 
(2,459
)
(Loss) income before provision (benefit) for corporate income taxes
 
(5,317
)
 
17,814

 
6,807

 
(16,378
)
 
19,691

(Benefit) provision for corporate income taxes(5)
 
(9,686
)
 
9,771

 
(14,351
)
 
52,611

 
7,367

Net income (loss)
 
$
4,369

 
$
8,043

 
$
21,158

 
$
(68,989
)
 
$
12,324

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.16

 
$
0.31

 
$
0.86

 
$
(2.84
)
 
$
0.51

Diluted
 
$
0.16

 
$
0.31

 
$
0.84

 
$
(2.84
)
 
$
0.50

Dividends declared per common share(6)
 
$

 
$

 
$

 
$
0.32

 
$
0.16


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Table of Contents

 
 
As of December 31,
 
 
2017

2016

2015

2014

2013
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
30,321

 
$
45,596

 
$
76,217

 
$
93,452

 
$
73,598

Working capital surplus (deficit)
 
5,398

 
(6,323
)
 
27,947

 
52,280

 
27,830

Total assets(7)
 
236,671

 
235,878

 
303,101

 
407,150

 
410,588

Long-term debt, including current installments(7)
 
196,029

 
196,825

 
266,740

 
297,188

 
311,705

Total stockholders’ deficit
 
(77,957
)
 
(85,670
)
 
(96,245
)
 
(118,084
)
 
(43,516
)
Net debt(8)
 
169,597

 
156,404

 
199,200

 
214,832

 
251,402

 
 
Year Ended December 31,
 
 
2017

2016

2015

2014

2013
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
28,199

 
$
21,190

 
$
24,870

 
$
4,758

 
$
67,388

Investing activities
 
(41,531
)
 
(20,003
)
 
(31,571
)
 
(42,054
)
 
(30,606
)
Financing activities
 
(1,980
)
 
(31,763
)
 
(10,511
)
 
57,503

 
(975
)
 
 
Year Ended December 31,
 
 
2017

2016

2015
 
2014
 
2013
Club and Membership Data:
 
 
 
 
 
 
 
 
 
 
New clubs opened
 
2

 
1

 
1

 
4

 

Clubs acquired
 
18

 

 

 

 
6

Studio locations converted to clubs
 

 
2

 

 

 

Clubs closed
 
(5
)
 
(5
)
 
(6
)
 
(8
)
 
(4
)
Wholly-owned clubs operated at end of period
 
164

 
149

 
151

 
156

 
160

Total clubs operated at end of period(9)
 
165

 
150

 
152

 
158

 
162

Studio locations at end of period
 

 

 
3

 
1

 

Total members at end of period(10)
 
587,000

 
544,000

 
541,000

 
484,000

 
497,000

Restricted members at end of period(11)
 

 

 

 
20,000

 
41,000

Comparable club revenue increase (decrease)(12)
 
1.6
%
 
(4.1
)%
 
(5.6
)%
 
(4.2
)%
 
(1.8
)%
Revenue per weighted average club (in thousands)(13)
 
$
2,641

 
$
2,634

 
$
2,777

 
$
2,842

 
$
2,971

Average revenue per member(14)
 
$
713

 
$
728

 
$
823

 
$
941

 
$
934

Average Joining Fees per member(15)
 
$
60

 
$
61

 
$
72

 
$
75

 
$
59

Annual attrition(16)
 
47.0
%
 
44.3
 %
 
46.9
 %
 
44.3
 %
 
41.9
 %

(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 9 – 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.
(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

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Table of Contents

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.
(5)
Corporate income taxes for the years ended December 31, 2017, 2016 and 2015 included non-cash charges of $38,769, $54,193 and $52,637, respectively, related to tax valuation allowances. Corporate income taxes for the year ended December 31, 2013 included income tax benefits totaling $16 related to the correction of accounting errors. For the years ended December 31, 2017, 2016 and 2015, see Note 15 — 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.
(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 and 2013, the Company reclassified $2,259, $2,683 and $3,204, 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 four locations that are managed by us in which we do not have an equity interest.
(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.
(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 per member is calculated as the first annual fees and total initiation 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction with the “Selected Consolidated Financial and Other Data” section of this Annual Report and our consolidated financial statements and the related notes appearing at the end of this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. 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 region of the U.S. As of December 31, 2017, the Company, through its subsidiaries, owned and operated 165 clubs. Our clubs collectively served approximately 587,000 members as of December 31, 2017. As of December 31, 2017, we owned and operated a total of 119 clubs in the New York metropolitan region (102 of which were under the “New York Sports Clubs” brand name, 16 of which were under the “Lucille Roberts” brand name and one of which was under the “TMPL” brand name), including 39 locations in Manhattan where we are one of the largest fitness club owners and operators. Additionally, we owned and operated 28 clubs in the Boston metropolitan region under our “Boston Sports Clubs” brand name, 10 clubs (one of which is partly-owned) in the Washington, D.C. metropolitan region under our “Washington Sports Clubs” brand name and five clubs in the Philadelphia metropolitan region under our “Philadelphia Sports Clubs” brand name, and three clubs in Switzerland. In addition, as of December 31, 2017, we have one partly-owned club that operates 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.
We focus on opening and acquiring clubs in areas where we believe the region is underserved or where new clubs are intended to replace existing clubs at lease expiration. Prior to 2017, our focus was on building new clubs. Based on our experience, a new club tends to experience a significant increase in revenue during the first three years of operation until it reaches maturity and because there is relatively little incremental cost associated with increasing such revenue, there is a greater proportionate increase in profitability. In contrast, operating income margins may be negatively impacted at these locations until the club matures. More recently, our focus has been on acquiring health clubs that have already reached maturity and therefore operating results are more established and stable upon acquisition.
In 2017, we acquired a total of 18 clubs. We acquired Lucille Roberts, which added 16 clubs to our portfolio. These 16 clubs continue to operate as women only clubs under the Lucille Roberts trade name. We also acquired one existing club in Massapequa, NY, currently operating under the New York Sports Clubs brand name, including the land and the building such club occupies, as well as TMPL Gym (“TMPL”), an existing club in Manhattan, which continues to operate under the TMPL brand name. TMPL is the Company’s luxury brand that the Company plans to expand. All 18 acquisitions were additions to our portfolio in the New York metropolitan region. The results of operations of the clubs acquired have been included in our consolidated financial statements from the respective dates of such acquisitions.
Revenue and Operating Expenses
We have two principal sources of revenue:
Membership revenue:    Our largest sources of revenue are dues inclusive of monthly membership fees, annual maintenance fees, and initiation and processing fees paid by our members. In addition, we collect usage fees on a per visit basis for non-passport members using non-home clubs. These dues and fees comprised 77.0% of our total revenue for the year ended December 31, 2017. 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.

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Ancillary club revenue:    For the year ended December 31, 2017, we generated 17.3% of our revenue from personal training and 4.3% of our revenue from other ancillary programs and services consisting of Sports Clubs for Kids, racquet sports and Small Group Training programs. We continue to grow ancillary club revenue by building on ancillary programs such as our personal training membership product and our fee-based Small Group Training programs.
We also receive revenue (approximately 1.4% of our total revenue for the year ended December 31, 2017) 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, provide laundry services to third parties, and generate management fees from certain club facilities that we do not wholly own. 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, 2017 and 2016, our attrition rate was 47.0% and 46.9%, respectively.
Our operating expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other salary and related expenses, occupancy costs, including 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 routine improvements at our clubs, the construction or acquisition of new club facilities and the upgrade and renovation of our existing clubs. The construction and equipment costs vary based on the costs of construction labor, as well as the planned service offerings and size and configuration of the facility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for which we are currently budgeting approximately 2% of projected annual revenue. 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 2017 and 2016, operating income was impacted by fixed asset impairment charges of $6.5 million and $742,000, respectively, 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 New York and Boston regions, and fixed asset impairment charges of $14.6 million related to underperforming clubs.
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
 
 
($ amounts in thousands)
Operating income (loss)
 
$
6,937

 
$
(6,383
)
 
$
7,114

Increase (decrease) over prior period
 
208.7
 %
 
(189.7
)%
 
846.0
%
Net income
 
$
4,369

 
$
8,043

 
$
21,158

(Decrease) increase over prior period
 
(45.7
)%
 
(62.0
)%
 
130.7
%
Cash flows provided by operating activities
 
$
28,199

 
$
21,190

 
$
24,870

Increase (decrease) over prior period
 
33.1
 %
 
(14.8
)%
 
422.7
%
As of December 31, 2017, 164 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 Washington Sports Clubs brand, with a profit sharing percentage approximating 20% (after priority distributions) for which the equity accounting method is also applied. In addition, we provide management services at four locations where we do not have an equity interest.

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Comparable Club Revenue
We define comparable club revenue as revenue at those clubs that were operated by us for over 12 months and comparable club revenue increase (decrease) as revenue for the 13th month and thereafter as applicable as compared to the same period of the prior year.
 
 
Comparable Club Revenue
Increase (Decrease)
 
 
Quarter
 
Full-Year
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
)%
2017
 
 
 
 
First Quarter
 
0.7
 %
 
 
Second Quarter
 
1.2
 %
 
 
Third Quarter
 
1.8
 %
 
 
Fourth Quarter
 
2.8
 %
 
1.6
 %
Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary revenue increases (decreases).
The comparable club revenue increase in 2017 was primarily due to higher average dues per membership and an increase in member count in comparable clubs, partially offset by decreased initiation and processing fees and other ancillary club revenue. 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 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.
Historical Club Count
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Wholly-owned clubs operated at beginning of period
 
149

 
151

 
156

Acquired clubs
 
18

 

 

New clubs opened
 
2

 
1

 
1

Studio locations converted to clubs
 

 
2

 

Clubs closed
 
(5
)
 
(5
)
 
(6
)
Wholly-owned clubs operated at end of period
 
164

 
149

 
151

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

 
1

 
1

Total clubs operated at end of period(1)(2)
 
165

 
150

 
152


(1)
Excludes one partly-owned club that operates under a different brand name in our Washington, D.C. region.
(2)
Excludes locations that are managed by us in which we do not have an equity interest.

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Table of Contents

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,
 
2017
 
2016
 
2015
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
Payroll and related
36.1

 
37.5

 
41.5

Club operating
44.8

 
46.7

 
46.4

General and administrative
5.6

 
6.2

 
7.2

Depreciation and amortization
10.2

 
11.0

 
11.3

Impairment of fixed assets
1.6

 
0.2

 
3.4

Impairment of goodwill

 

 
7.4

Gain on sale of building

 

 
(18.2
)
Gain on lease termination

 

 
(0.7
)
 
98.3

 
101.6

 
98.3

Operating income (loss)
1.7

 
(1.6
)
 
1.7

Gain on extinguishment of debt

 
(9.5
)
 
(4.2
)
Interest expense
3.1

 
3.5

 
4.9

Equity in the earnings of investees and rental income
(0.1
)
 
(0.1
)
 
(0.6
)
(Loss) income before (benefit) provision for corporate income taxes
(1.3
)
 
4.5

 
1.6

(Benefit) provision for corporate income taxes
(2.4
)
 
2.5

 
(3.4
)
Net income
1.1
 %
 
2.0
 %
 
5.0
 %
Year ended December 31, 2017 compared to year ended December 31, 2016
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
 
Year Ended December 31,
 
 
 
2017
 
2016
 
 
 
Revenue
 
% Revenue
 
Revenue
 
% Revenue
 
% Variance
Membership dues
$
307,966

 
76.4
%
 
$
296,795

 
74.8
%
 
3.8
 %
Initiation and processing fees
2,268

 
0.6
%
 
7,636

 
1.9
%
 
(70.3
)%
Membership revenue
310,234

 
77.0
%
 
304,431

 
76.7
%
 
1.9
 %
Personal training revenue
69,735

 
17.3
%
 
66,487

 
16.8
%
 
4.9
 %
Other ancillary club revenue
17,197

 
4.3
%
 
19,642

 
4.9
%
 
(12.4
)%
Ancillary club revenue
86,932

 
21.6
%
 
86,129

 
21.7
%
 
0.9
 %
Fees and other revenue
5,876

 
1.4
%
 
6,361

 
1.6
%
 
(7.6
)%
Total revenue
$
403,042

 
100.0
%
 
$
396,921

 
100.0
%
 
1.5
 %
Revenue increased $6.1 million, or 1.5%, for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflecting an increase in membership dues, the favorable impact from the newly opened and acquired clubs. These increases were partially offset by the impact of club closures and decline in initiation and processing fees. In the year ended December 31, 2017 compared to the year ended December 31, 2016, revenue increased approximately $8.8 million from our clubs that were opened in the last 24 months and $7.8 million at our clubs operating longer than 24 months, partially offset by a $10.5 million decrease in revenue as a result of closed clubs.
Comparable club revenue increased 1.6% in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to higher average dues per membership and an increase in member count in comparable clubs. The comparable club revenue increase was partially offset by decreased initiation and processing fees, and other ancillary club revenue.

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Table of Contents

Membership dues revenue increased $11.2 million, or 3.8% in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflecting higher average dues per membership, increased annual fees and the impact of new club openings. These increases were partially offset by the impact of club closures.
Initiation and processing fees revenue decreased $5.4 million, or 70.3% in the year ended December 31, 2017 compared to the year ended December 31, 2016. The high initiation fees that were initially collected with the conversion to the lower pricing model in 2014 and early 2015 were substantially recognized into income in 2016 and prior, which resulted in a decrease in revenue recognized in the year ended December 31, 2017. Initiation and processing fees are amortized over the estimated average membership life. Additionally, the average membership life was 26 months for the full year of 2017 versus 25 months for the full year of 2016, which resulted in the amortization of initiation and processing fees over the longer time period in 2017.
Personal training revenue increased $3.2 million, or 4.9% in the year ended December 31, 2017 compared to the year ended December 31, 2016.  Personal training revenue in 2017 included revenue recognition of $3.6 million related to unused and expired sessions in three of our states discussed further below. Personal training revenue on a comparable club basis increased $1.0 million. The increase in personal training revenue was also due to the impact of newly opened clubs, partially offset by the impact of club closures.
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. As of December 31, 2017, we had approximately $12.5 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 this amount is subject to the escheatment or abandoned property laws of any of the jurisdictions in which we conduct our business, including the State of New York. It is possible however, 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. 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. For a total of six of the jurisdictions in which we operate, we have concluded, based on opinions from outside counsel, that money held by a company for unused and expired personal training sessions are not escheatable. In 2010, for three jurisdictions, we concluded, based on opinions from outside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. As a result, we recorded approximately $2.7 million as personal training revenue in the fourth quarter of 2010. This amount was previously recorded in deferred revenue. In 2017, for another three jurisdictions, we concluded, based on opinions from outside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. As a result, we recorded approximately $3.6 million as personal training revenue in the fourth quarter of 2017. This amount was previously recorded in deferred revenue, which was primarily related to sessions purchased prior to the year ended December 31, 2015.
Other ancillary club revenue decreased $2.4 million, or 12.4%, in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily related to decreased membership cancellation fee and decreased revenue from our Sports Clubs for Kids programs.
Operating Expenses
Operating expenses (in thousands) were comprised of the following for the periods indicated:
 
 
Year Ended December 31,
 
 
 
 
 
 
2017
 
2016
 
$ Variance
 
% Variance
Payroll and related
 
$
145,612

 
$
149,029

 
$
(3,417
)
 
(2.3
)%
Club operating
 
180,467

 
185,104

 
(4,637
)
 
(2.5
)%
General and administrative
 
22,680

 
24,702

 
(2,022
)
 
(8.2
)%
Depreciation and amortization
 
40,849

 
43,727

 
(2,878
)
 
(6.6
)%
Impairment of fixed assets
 
6,497

 
742

 
5,755

 
>100%

Operating expenses
 
$
396,105

 
$
403,304

 
$
(7,199
)
 
(1.8
)%

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Table of Contents

Operating expenses increased due to the following factors:
Payroll and related. Payroll and related expenses for the year ended December 31, 2017 decreased $3.4 million, or 2.3%, compared to the year ended December 31, 2016, primarily reflecting savings from commissions, labor optimization, and the effect of club closures. These decreases were partially offset by minimum wage increases, effective January 1, 2017, in most of the states we operate, and the impact of newly opened clubs.
Club operating. Club operating expenses decreased $4.6 million or 2.5% in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflecting expense savings of $3.6 million in marketing, $1.1 million in repair and maintenance and $1.0 million in utilities, all mainly due to our continued cost-savings initiatives.  These savings were partially offset by a net increase in rent and occupancy expenses of $1.2 million primarily due to rent escalations of $3.4 million at mature clubs, increases of $3.1 million for newly opened and acquired clubs, partially offset by savings of $5.3 million mainly due to closed clubs.
General and administrative. General and administrative expense decreased $2.0 million, or 8.2%, in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflecting the results of our cost-savings initiatives.
Depreciation and amortization. In the year ended December 31, 2017 compared to the year ended December 31, 2016, depreciation and amortization expense decreased $2.9 million, or 6.6%, primarily due to the impact of closed locations and a decrease at our mature clubs. These decreases were offset by depreciation of assets at our new clubs.
Impairment of fixed assets.  We recorded fixed asset impairment charges of $6.5 million and $742,000 at underperforming clubs in the year ended December 31, 2017 and 2016, respectively.
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.
Interest Expense
Interest expense decreased by $1.3 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflecting the effect of principal payments made on, and purchases of debt outstanding under, the 2013 Term Loan Facility since December 31, 2016.
(Benefit) Provision for Corporate Income Taxes
We recorded income tax benefit of $9.7 million during the year ended December 31, 2017. For year ended December 31, 2016, we recorded an income tax expense of $9.8 million. Our effective tax rate was 182% and 55% for the years ended December 31, 2017 and 2016, respectively. Separate from the impact of valuation allowance, our effective tax rate was 31% and 37% for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017 and 2016, we have a net deferred tax liability of $93,000 and $61,000, respectively, as there is a full valuation allowance recorded against the U.S. net deferred tax assets. The state net deferred tax liability balance was $37,000 and $17,000, respectively, as of December 31, 2017 and 2016.
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 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.

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Table of Contents

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 $38.8 million and $54.2 million as of December 31, 2017 and 2016, 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, 2017 and 2016 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 and asset acquisitions of clubs in the U.S. during 2017.
We are currently under examination in New York State (2006 through 2014). In August 2017, we consented to extend the assessment period for tax years 2010 - 2013 through September 15, 2018. In particular, we disagree with the proposed assessment dated December 12, 2016 from the State of New York and attended a conciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached at the conference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, we received from the State of New York a revised assessment related to tax years 2006-2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. We currently are in the process of appealing the assessment with the New York State Division of Tax Appeals. 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, on November 17, 2017, we were notified that the State of New York proposed an adjustment in the amount of approximately $3.9 million for the years 2010 to 2014, inclusive of approximately $757,000 in interest. We are also under examination in New York City (2006 through 2014), which we have consented to extend the assessment period through December 31, 2018. Lastly, we are under examination by the Internal Revenue Service regarding our federal income tax returns for the years ended December 31, 2014 and 2015.
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