Town Sports International Holdings, Inc.
Annual Report 2015

Plain-text annual report

TOWN SPORTS INTERNATIONAL HOLDINGS INC FORM 10-K (Annual Report) Filed 03/07/16 for the Period Ending 12/31/15 Address Telephone CIK 5 PENN PLAZA 4TH FLOOR NEW YORK, NY 10001 (212) 246-6700 0001281774 Symbol CLUB SIC Code 7997 - Membership Sports and Recreation Clubs Industry Recreational Activities Sector Fiscal Year Services 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-KþAnnual Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2015¨Transition Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934For the transition period fromCommission file number: 001-36803Town Sports International Holdings, Inc.(Exact name of Registrant as specified in its charter)DELAWARE 20-0640002(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 5 PENN PLAZA — 4 TH FLOORNEW YORK, NEW YORK 10001(Zip code)(Address of principal executive offices) (212) 246-6700(Registrant’s telephone number,including area code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þIndicate 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 þIndicate 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 thepreceding 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 past90 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 besubmitted 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 wasrequired 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 ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part IV of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitionsof “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company þ (Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þThe aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2015 (the last business day of the registrant’s most recentlycompleted second fiscal quarter) was approximately $39.0 million (computed by reference to the last reported sale price on The Nasdaq National Market on that date). Theregistrant does not have any non-voting common stock outstanding.As of March 1, 2016 , there were 25,002,411 shares of Common Stock of the Registrant outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for the 2016 Annual Meeting of Stockholders, to be filed not later than April 29, 2016, are incorporated by referenceinto Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.Table of ContentsTABLE OF CONTENTS PART I Item 1.Business1Item 1A.Risk Factors11Item 1B.Unresolved Staff Comments22Item 2.Properties22Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures27 PART II Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities28Item 6.Selected Financial Data30Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations33Item 7A.Quantitative and Qualitative Disclosures About Market Risk55Item 8.Financial Statements and Supplementary Data55Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure55Item 9A.Controls and Procedures56Item 9B.Other Information56 PART III Item 10.Directors, Executive Officers and Corporate Governance57Item 11.Executive Compensation57Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters57Item 13.Certain Relationships and Related Transactions, and Director Independence57Item 14.Principal Accountant Fees and Services57 PART IV Item 15.Exhibits And Financial Statements58SIGNATURES59INDEX TO FINANCIAL STATEMENTSF-1Exhibit Index Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC.FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, 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 on Form 10-K and in our other reports and documents filed with the Securities and Exchange Commission (“SEC”). You can identify these forward-looking statements by theuse 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 anduncertainties, many of which are outside our control, including, among others, the level of market demand for our services, economic conditions affecting ourbusiness, the success of our pricing model, the geographic concentration of our clubs, competitive pressure, the ability to achieve reductions in operating costs andto continue to integrate acquisitions, outsourcing of certain aspects of our business, environmental matters, the application of Federal and state tax laws andregulations, any security and privacy breaches involving customer data, the levels and terms of the Company’s indebtedness, and other specific factors discussedherein and in other SEC filings by us. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that itis impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, oneshould not place undue reliance on these statements. Forward-looking statements speak only as of the date when made, and we undertake no obligation to updatethese statements in light of subsequent events or developments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.PART IItem 1. BusinessIn this Annual Report, unless otherwise stated or the context otherwise indicates, references to “Town Sports”, “TSI”, “the Company”, “we”, “our” andsimilar references refer to Town Sports International Holdings, Inc. and its subsidiaries, references to “TSI Holdings” refers to Town Sports International Holdings,Inc., and references to “TSI, LLC” refer to Town Sports International, LLC, our wholly-owned operating subsidiary.GeneralBased on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States(“U.S.”) and one of the largest fitness club owners and operators in the U.S. As of December 31, 2015 , the Company, through its subsidiaries, operated 152 fitnessclubs (“clubs”) and three BFX Studio (“studio”) locations. Our clubs collectively served approximately 541,000 members as of December 31, 2015 . We ownedand operated a total of 105 clubs under the “New York Sports Clubs” (“NYSC”) brand name within a 120-mile radius of New York City as of December 31, 2015 ,including 37 locations in Manhattan where we are the largest fitness club owner and operator. We owned and operated 27 clubs in the Boston region under our“Boston Sports Clubs” (“BSC”) brand name, 12 clubs (one of which is partly-owned) in the Washington, D.C. region under our “Washington Sports Clubs”(“WSC”) brand name and five clubs in the Philadelphia region under our “Philadelphia Sports Clubs” (“PSC”) brand name as of December 31, 2015 . In addition,we owned and operated three clubs in Switzerland as of December 31, 2015. We also have one partly-owned club that operated under a different brand name inWashington, D.C. as of December 31, 2015 . We employ localized brand names for our clubs to create an image and atmosphere consistent with the localcommunity 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 highestconcentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban orsuburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the activemature 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 regionand then branching out from these urban centers to suburbs and neighboring communities.Over our 42-year history since 1973, we have developed and refined our club formats, which allows us to cost-effectively construct and efficiently operateour fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately 20,000 square feet, while our multi-recreational clubs average approximately 38,000 square feet.1Table of ContentsThe aggregate average size of our clubs is approximately 27,000 square feet. Our clubs typically have an open fitness area to accommodate cardiovascular andstrength-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, wecarefully examine the potential membership base and the likely demand for supplemental offerings such as swimming, basketball, children’s programs, tennis orsquash 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 clubin a family market may include Sports Clubs for Kids programs, which can include swim lessons and sports camps for children.We completed the introduction of a lower pricing model in the second quarter of 2015, offering reduced monthly dues. As of December 31, 2015, approximately 80% of our clubs were operating under this pricing model, with the remaining clubs principally comprising the Company's passport-only model.The clubs that are operating under the lower pricing model offer a similar level of service and amenities but at a lower price point. This model gives us anopportunity to recapture market share and compete against certain other gyms that opened in our markets. We believe our offerings are compelling because weinclude group exercise classes, top of the line equipment, pools and courts with price of certain memberships, when available. We continue to consider and makepricing adjustments in order to increase revenue while also driving membership growth.We added 64,000 net members in the year ended December 31, 2015 compared to a net member loss of 13,000 in 2014. The ending member count of541,000 included two adjustments decreasing the count during the year. In the third quarter we completed the conversion from our internally developed ClubManagement legacy system to a third-party developed software system which resulted in a one-time adjustment to our historical legacy member count ofapproximately 5,000 members. We believe this adjustment was non-revenue generated and therefore does not impact our consolidated financial statements. Inaddition there are approximately 2,000 members at one partly-owned club operating under a different brand name that were not included in the total member countas of December 31, 2015 however were included as of December 31, 2014 when the club was operating as a Washington Sports Club. We continue to account forthis club as an equity investment.Due to the rise in popularity of private studio offerings, we introduced our BFX Studio brand in 2014. We currently have three studio locations. This three-dimension luxury studio brand takes advantage of the rise in consumer demand for studio experiences. The studios include three unique offerings: Ride Republic,which is indoor cycling, Private Sessions for personal training and Master Class for certain group exercise classes. The studios are also staffed with high caliberinstructors in each of the three core offerings and the studios are designed to appeal to all ages and all experience levels. This studio concept requiresapproximately 9,000 to 12,000 square feet of space per studio which compares to the approximately 27,000 square feet aggregate average size of our clubs.Reportable SegmentsDuring the fourth quarter of 2014, we began managing and reporting operating results through two reportable segments: clubs and BFX Studio. The clubssegment comprised clubs under the NYSC, BSC, PSC and WSC brand names, and the clubs we own and operate in Switzerland. BFX Studio is our private studiobrand that was introduced in 2014 and is reported as a separate reportable segment as it does not meet the aggregation criteria to be aggregated with our fitnessclubs. Previously, we had managed and reported operating results through one reportable segment. We reflect these segments for all the historical periodspresented. For certain financial information relating to our segments, see Note 18 - Reportable Segments to our consolidated financial statements.Industry OverviewAccording to the most recent information released by the International Health, Racquet and Sportsclub Association (“IHRSA”), total U.S. fitness clubindustry revenues increased at a compound annual growth rate of 4.5% from $20.3 billion in 2010 to $24.2 billion in 2014, with an 8.0% increase from 2013 to2014. According to IHRSA, participation in health clubs has been growing steadily with total U.S. fitness club memberships increasing at a compound annualgrowth rate of 1.9% from 50.2 million in 2010 to an all time high of 54.1 million in 2014, with a 2.3% increase from 2013 to 2014. According to the IHRSA, thehealth club industry is witnessing a shift in the preferences of health club members. The club landscape includes traditional, full-service fitness centers that servelocal communities and all age groups as well as affordable fitness centers with basic amenities. Studio concepts, including boxing, yoga, Pilates, group cycling,barre, boot camps, and sports-specific training, also shape the club market.According to the IHRSA, demographic trends have helped drive the growth experienced by the fitness industry over the past decade. The average age of ahealth club member in 2013 was 39 years old and more than one-fourth of health club members were between the ages of 18 and 34 years old. The greatestmembership growth in the past few years has been in the2Table of Contentsunder-18 age group, which has grown 36.1% from 2010 to 2014 and in the over-55 age group, where membership grew 18.3% from 2010 to 2014. These two agegroups made up approximately 38% of total U.S. health club members in 2014. The industry has benefited from the “millennials”, and aging “baby boomer” and“Eisenhower” generations as they place greater emphasis on their health, including a focus on fitness.According to the Centers for Disease Control and Prevention, state prevalence of obesity continues to remain high across the country in 2014, with no statewith a prevalence of obesity less than 20.0%. In 2014, 23 states had a prevalence of 25% or more and 22 of these states had a prevalence of 30% or more. Ashealthcare costs continue to rise in the U.S., some of the focus on combating obesity and other diseases is being directed at prevention. Both government andmedical research has shown that exercise and other physical activity plays a critical role in preventing obesity and other health conditions, thereby reducinghealthcare costs for treating obesity related sicknesses.As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, we believe that we are well positioned to benefit fromthese dynamics as a large operator with recognized brand names, leading regional market shares and an established operating history.Competitive StrengthsWe believe the following competitive strengths are instrumental to our success:Strong market position with leading brands. Based on number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast andMid-Atlantic regions of the United States and one of the largest fitness club owners and operators in the United States. Our strong real estate presence in the NewYork, Boston, Washington D.C. and Philadelphia metropolitan regions enhances convenience to our members. We attribute our positions in these markets in partto the strength of our localized owner and operator brand names, which foster recognition as a local network of quality fitness clubs.Regional clustering strategy provides significant benefits to members and corporations. By operating a network of clubs in a concentrated geographic area,the value of our memberships is enhanced by our ability to offer members access to any of our clubs, which provides the convenience of having fitness clubs near amember’s workplace and home. This is also a benefit to our corporate members, as many corporations have employees that will take advantage of multiple gymlocations. Approximately 280,000, or 52%, of our members currently have a Passport Membership, including our corporate and group Passport Memberships, andbecause these memberships offer enhanced privileges and greater convenience, they typically generate higher monthly dues than our single club memberships ineach respective region. Regional clustering also allows us to provide special facilities to all of our members within a local area, such as swimming pools andsquash, tennis and basketball courts, without offering them at every location. In the year ended December 31, 2015 , 32% of all club usage was by membersvisiting 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 enhancerevenue and earnings growth by providing high-quality, conveniently located fitness facilities on a cost-effective basis. We believe that potential new entrantswould 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 economiesof scale with regard to sales, marketing, purchasing, general operations and corporate administrative expenses and reduces our capital spending needs. Regionalclustering also provides the opportunity for members who relocate within a region to remain members of our clubs, thus aiding in member retention.Expertise in site selection and development process. We believe that our expertise in site selection and development provides an advantage over ourcompetitors given the complex real estate markets in the metropolitan areas in which we operate and the relative scarcity of suitable sites. Before opening oracquiring a new club, we undertake a rigorous process involving demographic and competitive analysis, financial modeling, site selection and negotiation of leaseand acquisition terms to ensure that a potential location meets our criteria for a model club. We believe our flexible club formats are well suited to the challengingreal estate environments in our markets.Business StrategyIn the long-term, we seek to maximize our net member growth, revenues, earnings and cash flows using the following strategies:Grow membership revenues. We seek to grow our membership revenues through driving membership growth and optimizing dues through price and memberretention. In the second quarter of 2015, we completed the introduction of a lower pricing model to our clubs, offering a similar level of service and amenities atour non-passport clubs but at a lower price point. This pricing model gives us an opportunity to recapture market share and compete against certain other gyms thatopened in our3Table of Contentsmarkets. We believe our offerings are compelling because we include group exercise classes, top of the line equipment, pools and courts with price of certainmemberships, when available. Our member count increased 64,000 to 541,000 in 2015 compared to a loss of 13,000 in 2014. We continue to consider and makepricing 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 onincreasing the additional value-added services that we provide to our members. Over the past five years, we have expanded the range of ancillary club servicesprovided to members. Non-membership revenues have increased from $95.6 million , or 20.5% of revenues for the year ended December 31, 2011, to $101.6million , or 24.0% of revenues for the year ended December 31, 2015 . Personal training revenue, in particular, increased 17.3% over this five-year period andincreased as a percentage of total revenue from 13.4% in 2011 to 17.3% in 2015. We offer a multi-session personal training membership product and fee-basedclass offerings to generate additional revenue. The fee-based class offerings include our Ultimate Fitness Experience (“UXF”) class and our fee-based Small GroupTraining programs. The Small Group Training programs include offerings such as Pilates Reformer Technique, Total Body Resistance Exercise (“TRX”) andKettlebells. We also offer Sports Clubs for Kids programs at select clubs. In 2016, we plan to remain focused on increasing our ancillary programs with continuedimprovements in training and hiring and building on ancillary programs such as our personal training membership product. These sources of ancillary and othernon-membership revenues generate incremental profits with minimal capital investment and assist in attracting and retaining members.Optimization of our clubs. We remain committed to optimizing our existing club base, including through club closures when appropriate. During 2015, weopened three locations. We are also considering the sale of clubs or groups of clubs. We also plan to open one additional location in 2016 for a lease we signed inAugust 2014. In the event we build and acquire new clubs, the club expansion is expected to be funded with cash on hand or through internally generated cashflows.Retain members by focusing on the member experience. Our Company’s mission is “Improving Lives Through Exercise.” We enact our mission through our“Ten Essentials,” which provide a clear road map for how we want our clubs to look and how we want to serve our members. This is the core of our memberexperience strategy and allows us to crystallize how we engage our staff to deliver a superior member experience. We tailor the hours of each club to the needs ofthe specific member demographic utilizing each club and offer a variety of ancillary services, including personal training, group classes, Small Group Training,Sports Clubs for Kids programs. We offer a variety of different sports facilities in each regional cluster of clubs; modern, varied and well-maintained exercise andfitness equipment; and an assortment of additional amenities including access to babysitting. Through hiring, developing and training a qualified and diverse teamthat is passionate about fitness and health; maintaining and enhancing our programs and services; and continually increasing our attention to individual memberneeds, we expect to demonstrate our commitment to increase the quality of the member experience, and thereby increase net membership. To better measure themember experience, we utilize member surveys and website feedback to help analyze the areas we can improve upon as well as the areas in which the members aresatisfied overall.Provide state-of-the-art fitness equipment and services. We help educate our members to best practices in their pursuit of fitness, wellness and healthylifestyles and each of our clubs has a large array of cardiovascular machines, resistance training equipment, free weights and functional training zones. We havetechnicians who service and maintain our equipment on a timely basis. In addition, we have personal viewing television screens on most pieces of cardiovascularequipment which accommodate individual preferences and viewing, and many cardio machines now include embedded technology that offers both entertainmentand tracking features that record workout results and communicate with many mobile technologies. Most clubs have between one and three studios used forexercise 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 Pilatesclasses. 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 ateach club allow each member to enjoy the club, whether customizing their own workout or participating in group activities and classes.In addition, as part of our efforts to provide fitness equipment and services, our club formats are flexible and can easily adapt and respond to the changingdemands of our customers. This flexibility allows us to compete against private studios with unique specialty offerings by adapting the space and formats in ourown clubs to match the offerings provided by these private studios. We have a UXF training zone within our clubs that features an array of innovative equipmentdesigned to maximize the member’s workout. The UXF training zone is approximately 1,000 to 1,200 square feet with AstroTurf flooring, a TRX suspensiontraining frame and a variety of functional training equipment including Kettle Bells, Battling Ropes and Power Sleds. The UXF training zone is open to membersfor free self guided workouts and UXF fee-based workout programs. The UXF training zone is also used by our personal trainers for their personal trainingsessions with our members.BFX Studio. Due to the rise in popularity of private studio offerings, we introduced our BFX Studio brand in 2014. We currently have three studio locations.This three-dimension luxury studio brand takes advantage of the rise in consumer demand4Table of Contentsfor studio experiences. The studios include three unique offerings: Ride Republic, which is indoor cycling, Private Sessions for personal training and Master Classfor certain group exercise classes. The studios are also staffed with high caliber instructors in each of the three core offerings and the studios are designed to appealto all ages and all experience levels. This studio concept requires approximately 9,000 to 12,000 square feet of space per studio which compares to theapproximately 27,000 square feet aggregate average size of our clubs.MarketingOur in-house marketing agency is responsible for brand positioning, brand strategy, and product innovation for all of TSI’s regional brands. The primaryobjective is to ensure that our regional brands seize market share and opportunities through well-defined and coordinated go-to-market strategies that focus onbeing a premier network of fitness clubs. We are organized to enable close collaboration between our marketing, sales, fitness and operations staff, which helps toalign efforts around operational objectives and new product development. We seek to inspire brand experiences and in doing so, drive sustainable and qualitygrowth, while building a strong reputation and loyalty with members. In order to have credible and authentic connections to create such desirability with ourmembers, we utilize a market segmentation strategy which includes targeted marketing in addition to mass marketing. We seek to identify and understandconsumers’ individual motivations and goals for exercising in an effort to create meaningful products, services and experiences that build a lasting impression andbrand loyalty.SalesWe sell our memberships through four channels: direct sales at the club level; through corporate and group sales; through our online website; and through ourcall center principally to reach out to former members and to handle specific campaigns. We employ approximately 340 “in-club” membership sales consultantswho are responsible for new membership sales in and around their designated club locations. Each club generally has two membership sales consultants. Theseconsultants report directly to the club general manager, who, in turn, reports to a business director. Additional incentive-based compensation represents a majorityof the compensation for the membership sales consultants. Membership sales consultants complete a classroom based sales training followed by ongoing trainingwithin the club environment. Training includes hands on experience of the entire sales process (from prospecting to after care) and product knowledge in what weconsider a live but supervised environment. Through our corporate and group sales approach we concentrate on building long-term relationships with local andregional companies and other large groups. We also manage private fitness centers for both large and small corporations, colleges and universities, and privateclubs through the Fitcorp Private Fitness Center. These managed sites include three managed university locations, and seven managed sites.We also sell individual memberships online at www.mysportsclubs.com for our standard membership types and the website also enables us to sellmemberships for pre-established corporate and group programs. The website also allows our members to give us direct feedback about our service levels andenables prospective members to sign up for our popular one-week trial membership. The online sales channel offers a high degree of convenience for customerswho know and trust our brand and do not require up-front interaction with a membership sales consultant to make their decision. In addition, selling onlinesignificantly reduces our cost of sale. The web site also provides information about club locations, program offerings, exercise class schedules and salespromotions. Job seekers can also begin the employment application process through the site and investors can access financial information and resources.MembershipsWe believe that clustering clubs allows us to sell memberships based upon the opportunity for members to utilize multiple club locations near theirworkplace and their home. As of December 31, 2015 , we currently offer the following types of memberships at our clubs:•The Premier Membership allow members unlimited use of a single “home club”. Premier members can also elect to pay a per visit fee of $12.95 to usenon-home clubs. Membership dues for Premiere Memberships currently sell in the range of $19.99 to $44.99 per month. The price is dependent on clublocation and whether the member joins under a non-commit or a one-year commit contract.•The Passport Membership entitles members to use any of our clubs in any region at any time. Membership dues for Passport memberships currently sellin the range of $59.99 to $69.99 per month while student Passport memberships sell in the range of $39.99 to $49.99. We also sell Premium PassportMemberships at three of our clubs in Boston that have a greater array of member services and facilities at monthly rates between $79.99 and $179.99depending on the club.5Table of ContentsWe offer both “month-to-month” and “commit” membership options. A member may cancel a month-to-month membership at any time for a fee. Under thecommit model, new members commit to a one year membership, generally at a lower monthly rate than a month-to-month membership. When the members’commit period is over, they retain membership as a month-to-month member until they choose to cancel. As of December 31, 2015, approximately 43% of ourtotal 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”) on the date of enrollmentincluding a one-time initiation fee and the first annual fee. Initiation fees currently range between $0 and $20 while the annual fee currently charged is $59.99 forall memberships. These one-time Joining Fees averaged $72, $75 and $59 per sale for the years ended December 31, 2015, 2014 and 2013, respectively. Theannual fee is also charged on each anniversary of the enrollment date, however is no longer considered a joining fee after the first payment.Monthly EFT of individual membership dues on a per-member basis, including the effect of promotions, averaged approximately $50 per month for the yearended December 31, 2015, and $59 per month for both the years ended December 31, 2014 and 2013. Currently, approximately 98% of our members pay theirmembership dues the first of each month through EFT, with EFT membership revenue constituting approximately 72.3% of total consolidated revenue for the yearended December 31, 2015.UsageOur total club usage, based on the number of member visits, was 30.8 million and 28.7 million member visits for the years ended December 31, 2015 and2014, respectively. In the year ended December 31, 2015, approximately 32% of total usage or club visits was to members’ non-home clubs, indicating that ourmembers take advantage of our network of clubs. Our membership plans allow for club members under the Premier Membership to elect to pay a per visit fee of$12.95 to use non-home clubs. In the aggregate, approximately $719,000 and $2.2 million of usage fees were generated in 2015 and 2014, respectively. Thedecline in usage fees was primarily due to the adoption of our lower pricing strategy as the majority of our members existing at the time of this adoption wereconverted to Passport Membership. Usage fees are reported in membership dues in our consolidated statements of operations.Non-Membership RevenueThe table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2011 through 2015 . For the Years Ended December 31, ($ in thousands) 2015 % 2014 % 2013 % 2012 % 2011 %Total revenue$424,323 100.0% $453,842 100.0% $470,225 100.0% $478,981 100.0% $466,941 100.0%Non-MembershipRevenue: Personal trainingrevenue73,191 17.3% 70,338 15.5% 66,367 14.1% 65,641 13.7% 62,394 13.4%Other ancillaryclub revenue(1)22,138 5.2% 22,304 4.9% 24,720 5.3% 29,897 6.2% 28,297 6.1%Fees and Other revenue(2)6,254 1.5% 5,971 1.3% 5,985 1.3% 5,804 1.2% 4,890 1.0%Total non-membershiprevenue$101,583 24.0% $98,613 21.7% $97,072 20.7% $101,342 21.2% $95,581 20.5% (1)Other ancillary club revenue primarily consists of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes.(2)Fees and other revenue primarily consist of rental income, marketing revenue and management fees. The year ended December 31, 2013 includes $424 for thecorrection of an accounting error related to out of period rental income.Club Format and LocationsOur clubs are generally located in middle- or upper-income residential, commercial, urban and suburban neighborhoods within major metropolitan areas thatare capable of supporting the development of a cluster of clubs. Our clubs typically have6Table of Contentshigh visibility and are easily accessible. In the New York metropolitan, Boston, Washington, D.C. and Philadelphia markets, we have created clusters of clubs inurban areas and their commuter suburban areas aligned with our operating strategy of offering our target members the convenience of multiple locations close towhere they live and work, reciprocal use privileges, and standardized facilities and services.Approximately 64% of our existing clubs are fitness-only clubs and the remaining clubs are multi-recreational. Our fitness-only clubs generally range in sizefrom 15,000 to 25,000 square feet and average approximately 20,000 square feet. Our multi-recreational clubs generally range in size from 20,000 to 65,000 squarefeet, with one club being approximately 200,000 square feet. The average multi-recreational club size is approximately 38,000 square feet. We currently have threestudio locations. The studio generally ranges from 9,000 to 12,000 square feet and consist of three spaces including a cycling studio, group exercise studio and apersonal training area. Our existing club base consists of clubs which we have developed and constructed as well as clubs we have acquired. Over the past five years fromJanuary 1, 2011 to December 31, 2015, we constructed seven new clubs and three studios and acquired six clubs, while closing or relocating 21 clubs. Currently,51 of our clubs, or approximately 34% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year endedDecember 31, 2015, we constructed and opened one club and two studios, and closed seven clubs, ending the year with 152 total clubs under operation. Thiscompares to opening of four clubs and one studio, and closings of eight clubs during the year ended December 31, 2014. In both 2015 and 2014, we also upgradedcertain existing clubs and plan to continue to do so in 2016. 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, UXF functional training zones, babysitting services, and pro-shops. Personal training services are offered at all locations for anadditional charge. Our fee-based programs offered at many of our clubs, include personal training, Small Group Training, children’s programs, and summer campsfor kids.Our clubs also feature personal entertainment units. The units are typically mounted on or near individual pieces of cardiovascular equipment and areequipped 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 choiceduring their cardiovascular workout. Recently most manufacturers are including embedded screens on their newest cardio fitness equipment which offerenhancements to both on-demand entertainment along with workout data tracking and connectivity to most mobile technologies.Club Services and OperationsOur clubs are structured to provide an enhanced member experience through effective execution of our operating plan. Our club and support team membersare the key to delivering a valued member experience and our operations are organized to maximize their overall effectiveness. Our club operations include:Management. We believe that our success is largely dependent on the selection and development of our team members. Our management structure isdesigned 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 specificareas of our clubs’ services, including sales and marketing, fitness and ancillary programming, learning and development, as well as facility management andmember service.Driving excellence in fitness and ancillary programming is critical to our success. Members receive an introductory one-hour assessment session with afitness manager who helps to develop a customized routine that supports the member’s fitness goals. This initial assessment session includes a 30-minute workoutevaluation, cardio, strength and endurance testing, and movement screening. Members who elect to receive personal training can benefit from one-on-one coachingand guidance, with refreshed programs that evolve as the members achieve their fitness goals. All of our fitness clubs offer our personal training membershipproducts where members can select from a package of one to 16 personal training sessions per month. These sessions must be used in each respective month theyare issued. Members who purchase this product commit to a three month period. Members can also purchase prepaid single sessions or multi-session packageswhich are sold at a premium to the personal training membership product. The personal training membership product provides members with a certified personaltrainer who works with the member to create an individualized goal-based program. Our fitness teams are trained to provide superior fitness solutions to addressmember needs. We believe the qualifications of the personal training staff help to ensure7Table of Contentsthat members receive a consistent level of quality service throughout our clubs and that our personal training programs provide valuable guidance to our membersas well as a significant source of incremental revenue for us. We believe that members who participate in personal training programs typically have a longermembership life.Our commitment to providing a quality exercise experience to our members also includes group exercise programming. Our instructors teach a variety ofclasses, including dance, cycling, strength conditioning, boxing, yoga, Pilates and step classes. Instructors report through local club management and are furthersupported by regional managers responsible for ensuring consistency in class content, scheduling, training and instruction. We also provide Small Group Trainingofferings to our members, which are fee-based programs that have smaller groups, with a maximum of four to eight members per class, and provide more focusedand typically more advanced classes. Our fee-based offerings also include UXF classes.In addition to group exercise, we offer a variety of ancillary programming for children under our Sports Clubs for Kids brand. As of December 31, 2015,Sports Clubs for Kids was being offered in 30 locations throughout our New York Sports Clubs, Boston Sports Clubs, Washington Sports Clubs and PhiladelphiaSports Clubs regions. Our Sports Clubs for Kids programming positions our multi-recreational clubs as family clubs, which we believe provides us with acompetitive advantage. Depending upon the facilities available at a location, Sports Clubs for Kids programming can include traditional youth offerings such asday 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 ofperformance 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 ensuringconsistency of policies and procedures across the entire organization that support the member experience.Employee Compensation and BenefitsWe provide performance-based incentives to our management. Senior management compensation, for example, is tied to our overall performance.Departmental directors, business directors and club level managers can achieve bonuses tied to meeting specific revenue profit, member retention and net membergain targets. We offer our employees various benefits including health, dental and disability insurance; pre-tax healthcare, commuting and dependent careaccounts; free gym membership; and a 401(k) plan. We believe the availability of employee benefits provides us with a strategic advantage in attracting andretaining quality managers and staff, program instructors and professional personal trainers and that this strategic advantage in turn translates into a more consistentand higher-quality workout experience for those members who utilize such services.Centralized Information SystemsWe recognize the value of enhancing and extending the uses of information technology (“IT”) in virtually every area of our business. Our IT strategy isaligned to support our business strategy and operating plans. We maintain an ongoing comprehensive program to replace or upgrade key systems and to optimizetheir performance.In 2015, we completed our program to replace our proprietary, internally developed Club Management system with a third-party developed software platform.This new platform processes new memberships, bills members, checks in members, as well as tracks and analyzes sales and membership statistics, the frequencyand timing of member workouts, cross-club utilization, member life, value-added services and demographic profiles by member.We continuously implement infrastructure changes to accommodate growth, provide network redundancy, better manage telecommunications and data costs,increase efficiencies in operations and improve management of all components of our technical architecture, including disaster recovery. Improvements in the ITinfrastructure will continue to be made in the future in order to better serve our business needs.Intellectual PropertyWe have registered various trademarks and service marks with the U.S. Patent and Trademark Office, including , NEW YORK SPORTS CLUBS andNYSC , WASHINGTON SPORTS CLUBS and WSC , BOSTON SPORTS CLUBS and BSC , PHILADELPHIA SPORTS CLUBS and PSC, UXF,SPORTS CLUBS FOR KIDS, C OMPANIESGETFIT.COM, BFX STUDIO, RIDE REPUBLIC, MASTER CLASS, and PRIVATE SESSIONS. Wecontinue to register other trademarks and service marks. We believe that our rights to these properties are adequately protected.8Table of ContentsCompetitionThe fitness club industry is highly competitive and continues to become more competitive. The number of health clubs in the U.S. has increased from 29,890in 2011 to 34,460 in 2015, based on the most recent information available according to the IHRSA. In each of the markets in which we operate, we compete withother fitness clubs, physical fitness and recreational facilities.We consider the following groups to be our primary competitors in the health and fitness industry:•commercial, multi-recreational and fitness-only chains, including, among others, Equinox Holdings, Inc., Lifetime Fitness, Inc., Crunch, New YorkHealth and Racquet, LA Fitness International LLC, 24 Hour Fitness Worldwide, Inc., Retro Fitness, Snap Fitness, Anytime Fitness, David Barton, EdgeFitness, Onelife Fitness, Orange Theory, UFC Gym, Work Out World, XSport Fitness, Planet Fitness and Blink Fitness;•private studios, including, among others, Flywheel, SoulCycle, Barry’s Bootcamp and Cross-Fit, as well as other private studios offering cycling, yogaor Pilates;•the YMCA and similar non-profit organizations;•physical fitness and recreational facilities established by local governments, hospitals and businesses;•exercise and small fitness clubs; racquet, tennis and other athletic clubs;•amenity gyms in apartments, condominiums and offices;•weight-reducing salons;•country clubs; and•the home-use fitness equipment industry.The principal methods of competition include pricing and ease of payment, required level of members’ contractual commitment, level and quality ofservices, training and quality of supervisory staff, size and layout of facility and convenience of location with respect to access to transportation and pedestriantraffic.Historically, our club service offerings were in the mid-tier of the value/service proposition and designed to appeal to a large portion of the population whoutilize fitness facilities. The number of competitor clubs that offer lower pricing and a lower level of service have continued to grow in our markets over the lastfew years. These clubs have attracted, and may continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs. As a means offacing the shift in fitness industry, we introduced a lower pricing model where we believe we have a higher value-to-service proposition.We also face competition from club operators offering comparable or higher pricing with higher levels of service. Larger outer-suburban family fitnesscenters, in areas where suitable real estate is more likely to be available, also compete effectively against our suburban formats. Also, we face competition from therising 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 wewill be able to compete effectively in the future in the markets in which we operate. Competitors, who may include companies that are larger and have greaterresources than us, may enter these markets to our detriment. These competitive conditions may result in increased price competition and limit our ability to attractnew members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition amongparticipants, particularly large multi-facility operators that are able to compete for attractive acquisition candidates and/or newly constructed club locations. Thisincreased competition could increase our costs associated with expansion through both acquisitions and for real estate availability for newly constructed clublocations.We believe that our market leadership, experience and operating efficiencies enable us to provide the consumer with a superior product in terms ofconvenience, quality service and affordability. We believe that there are barriers to entry in our metropolitan areas, including restrictive zoning laws, lengthypermit processes and a shortage of appropriate real estate, which could discourage any large competitor from attempting to open a chain of clubs in these markets.However, such a competitor could enter these markets more easily through one, or a series of, acquisitions. These barriers of entry are significant in our fourmetropolitan regions; however, they are less challenging in our surrounding suburban locations.9Table of ContentsSeasonality of BusinessSeasonal trends have a limited effect on our overall business. Generally, we experience greater membership growth at the beginning of each year andexperience an increased rate of membership attrition during the summer months. In addition, during the summer months, we experience a slight increase inoperating expenses due to our outdoor pool and summer camp operations, generally matched by seasonal revenue recognition from season pool memberships andcamp revenue.Government RegulationOur 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 certainforms and provisions of membership contracts and that govern the advertising, sale, financing and collection of such memberships as well as state and local healthregulations.Statutes and regulations affecting the fitness industry have been enacted in jurisdictions in which we conduct business and other states into which we mayexpand in the future have adopted or may adopt similar legislation. Typically, these statutes and regulations prescribe certain forms and provisions of membershipcontracts, afford members the right to cancel the contract within a specified time period after signing or in certain circumstances, such as for medical reasons orrelocation 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 financialresponsibility and may establish maximum prices for membership contracts and limitations on the term of contracts. The specific procedures and reasons forcancellation 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 varyinginterpretations by a number of state and federal enforcement agencies and courts. We maintain internal review procedures to comply with these requirements andbelieve that our activities are in substantial compliance with all applicable statutes, rules and decisions.We primarily accept payments for our memberships through electronic fund transfers from credit cards, and, therefore, we are subject to both federal andstate legislation and certification requirements, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have consideredlegislation requiring gyms and health clubs to offer non-automatic renewal membership option at all times and/or limit the duration for which gym membershipscan 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 thecompletion of any initial term requirements (if any), and compliance with these laws, regulations, and similar requirements may be onerous and expensive, andvariances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have such health clubstatutes 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, stateand provincial levels as well as by certain financial industry groups, such as the Payment Card Industry Organization and the National Automated Clearing HouseAssociation. Federal, state and financial industry groups may also consider from time to time new privacy and security requirements that may apply to ourbusinesses and may impose further restrictions on our collection, disclosure and use of individually identifiable information that are housed in one or more of ourdatabases.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 personaltraining sessions. Several others states in which we operate have proposed similar tax legislation. These taxes have the effect of increasing the payments by ourmembers, 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.EmployeesOn December 31, 2015, we had approximately 7,500 employees, of whom approximately 3,000 were employed full-time. We are not a party to any collectivebargaining agreement with our employees. We operate with an open door policy and encourage and welcome the communication of our employees’ ideas,suggestions and concerns, and believe this strengthens our employee relations. We have never experienced any significant labor shortages or had any difficulty inobtaining adequate replacements for departing employees. We consider our relations with our employees to be good.10Table of ContentsAvailable InformationWe make available through our web site at http://investor.mysportsclubs.com/ in the “Investor Relations — SEC Filings” section, free of charge, all reportsand amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).Occasionally, we may use our web site as a channel of distribution of material company information. Financial and other material information regarding theCompany is routinely posted on and accessible at http://investor.mysportsclubs.com/ . In addition, you may automatically receive email alerts and otherinformation about the Company by enrolling through the “Email Alerts” section at http://investor.mysportsclubs.com .The foregoing information regarding our website and its content is for convenience only. The content of our website is not deemed to be incorporated byreference into this report nor should it be deemed to have been filed with the SEC.Item 1A. Risk FactorsInvestors should carefully consider the risks described below and all other information in this Annual Report on Form 10-K. The risks and uncertaintiesdescribed 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 alsoimpair our business and operations. If any of the following risks actually occur, our business, financial condition, cash flows or results of operations could bematerially adversely affected.Risks Related to Our BusinessOur 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 foreseeablefuture, 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 andsubsequent 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 ourmembers hold month-to-month memberships and accordingly, most members can cancel their club membership at any time without penalty. In addition, weexperience attrition and must continually engage existing members and attract new members in order to maintain our membership levels and ancillary sales. Thereare numerous factors that have in the past and could in the future lead to a decline in membership levels or that could prevent us from increasing our membership,including a decline in our ability to deliver quality service at a competitive cost, the presence of direct and indirect competition in the areas in which the clubs arelocated, the public’s interest in fitness clubs and general economic conditions. In order to increase membership levels, we may from time to time offer lowermembership rates and initiation fees. Any decrease in our average membership rates or reductions in initiation fees may adversely impact our results of operations.Negative economic conditions, including increased unemployment levels and decreased consumer confidence, have in the past contributed to and in thefuture could lead to significant pressures and declines in economic growth, including reduced consumer spending. In a depressed economic and consumerenvironment, 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 tostruggle and disposable income declines. Other factors that could influence demand include increases in fuel and other energy costs, conditions in the residentialreal estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spendingbehavior. We believe the challenges to the global economy during the past several years have adversely affected our business and our revenues and profits andcontinuing challenges may result in additional adverse effects. As a result of these factors, membership levels might not be adequate to maintain our operations atcurrent 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 reductionstrategies, to curtail or cancel club membership benefits provided to their respective employees. Any reductions in corporate memberships may lead to membershipcancellations as we cannot assure that employees of11Table of Contentscorporate customers will choose to continue their memberships without employer subsidies. A decline in membership levels may have a material adverse effect onour business, financial condition, results of operations and cash flows.The level of competition in the fitness club industry could negatively impact our revenue growth and profitability.The fitness club industry is highly competitive and continues to become more competitive. In each of the markets in which we operate, we compete withother 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 incomein our target demographics. We might not be able to compete effectively in the future in the markets in which we operate. Competitors include companies that arelarger and have greater resources than us and also may enter these markets to our detriment. These competitive conditions may limit our ability to increase dueswithout a material loss in membership, attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry couldresult in increased competition among participants, particularly large multi-facility operators that are able to compete for attractive acquisition candidates or newlyconstructed club locations, thereby increasing costs associated with expansion through both acquisitions and lease negotiation and real estate availability for newlyconstructed club locations.The number of competitor clubs that offer lower pricing and a lower level of service continue to grow in our markets. These clubs have attracted, and maycontinue 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 smallerstudios 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 theirfitness needs.In addition, large competitors could enter the urban markets in which we operate to open a chain of clubs in these markets through one, or a series of,acquisitions.The conversion of certain of our clubs to our new pricing strategy has and may in the future negatively impact our comparable club revenue growth and ouroperating margins.We have adopted a strategic initiative to convert a substantial majority of our clubs to our new pricing strategy, which depends in substantial part on ourability to attract a significant number of additional new members at each of our clubs. We have initially experienced lower revenues and margin pressure inconnection with these conversions. To the extent we are unable to attract a sufficient number of new members, or if existing members at such clubs convert theirexisting memberships to our new lower cost memberships at higher numbers than we have anticipated, our revenues and results of operations will be materiallyadversely impacted. Our results of operations have been and will continue to be materially impacted by the change in pricing strategy to the extent we do not attractsufficient numbers of new members to offset these lower prices.Declines in revenue have adversely affected our results or operations and cash flow from operations and we may be compelled to take additional actions whichmay not be successful in mitigating such effects.We have been experiencing declining revenue from members for several years as the fitness industry continues to be highly competitive in the geographicregions in which we compete. New members have been joining at lower monthly rates and cancellations of members paying higher rates, primarily from theconversion to the lower pricing model, will continue to negatively impact our liquidity if these trends are not reversed. In response to this, we initiated cost savingsinitiatives in 2015 that have continued into fiscal 2016 to help mitigate the impact the decline in revenue has had on our profitability and cash flow fromoperations.We may consider additional actions within our control, including the sale of certain assets, additional club closures and entering into arrangements withrevenue generating partnerships, some which may utilize a “shop-in-shop” concept. We may also consider additional strategic alternatives including opportunitiesto reduce TSI LLC’s existing debt and further cost savings initiatives, among other possibilities. Our ability to continue to meet our obligations beyond 2016 isdependent on our ability to generate positive cash flow from a combination of initiatives, including those mentioned above. Failure to successfully implement theseinitiatives could have a material adverse effect on our liquidity and our operations and we would need to12Table of Contentsimplement alternative plans that could include additional asset sales, additional reductions in operating costs, deferral of capital expenditures, further reductions inworking capital and debt restructurings. There can be no assurance that such alternatives would be available to us or that we would be successful in theirimplementation.Low consumer confidence levels, increased competition and decreased spending could negatively impact our financial position and result in club closures andfixed asset and goodwill impairments.In the year ended December 31, 2015 , we closed six clubs, while in 2014 we closed eight clubs. We recognized $14.6 million of fixed asset impairments inthe year ended December 31, 2015 and $4.6 million of fixed asset impairments in the year ended December 31, 2014 . In addition, we recorded goodwillimpairment charges of $31.6 million in the year ended December 31, 2015 , primarily due to existing members downgrading their memberships to those with lowermonthly dues and new members enrolling at lower rates. In the year ended December 31, 2014 , we recorded goodwill impairment charges of $137,000 related toone outlier club, in part due to decreased membership. Some of our club closures and impairments were due, in large part, to the economic and consumerenvironment, and increased competition in areas in which our clubs operate. If the economic and consumer environment were to deteriorate or not improve or if weare unable to improve the overall competitive position of our clubs, our operating performance may experience declines and we may need to recognize additionalimpairments 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 ofthe 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 closelyto 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, 2015 , we operated 105 fitness clubs in the New York metropolitan market, 27 fitness clubs in the Boston market, 12 fitness clubs in theWashington, D.C. market, five fitness clubs in the Philadelphia market and three fitness clubs in Switzerland. Our geographic concentration in the Northeast andMid-Atlantic regions and, in particular, the New York metropolitan area, heightens our exposure to adverse developments in these areas, including those related toeconomic 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 October29, 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 inDecember 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. Anysuch events affecting the areas in which we operate might result in a material adverse effect on our business, financial condition, cash flows and results ofoperations in the future.Any condition that causes people to refrain, or prevents people, from visiting our clubs, such as severe weather, outbreaks of pandemic or contagious diseases,or threats of terrorist attacks may adversely affect our business, operating results and financial condition.Our business and operations could be materially and adversely affected by severe weather or outbreaks of pandemic or contagious diseases, threats of terroristattacks or other conditions that cause people to refrain, or prevent people, from visiting our clubs. Our business could be severely impacted by a widespreadregional, 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 ourclubs, 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 negativepublicity relating to these and other health-related matters may affect members’ perceptions of our clubs, reduce member and prospective member visits to ourclubs 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 warmay affect the markets in which we operate, our operating results or the market on which our common stock trades. Our geographic concentration in the majorcities 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 futureterrorist 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 havefor our members, the markets for our services and the market for our common stock are uncertain; however, their occurrence can be expected to further negativelyaffect the U.S. economy generally and specifically the regional markets in which we operate. The consequences of any terrorist attacks or any armed conflicts areunpredictable; and we may not be able to foresee events that could have an adverse effect on our business.13Table of ContentsOur dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and couldadversely affect our revenues and gross profit.Equipment and certain products and services used in our stores, including our exercise equipment and point-of-sale software and hardware, are sourced fromthird-party suppliers. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate our businessefficiently and consistently meet our business requirements. The ability of these third-party suppliers to successfully provide reliable and high-quality services issubject to technical and operational uncertainties that are beyond our control, including, for our overseas suppliers, vessel availability and port delays orcongestion. 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 orat all and thereby generate revenue. If we lose such suppliers or our suppliers encounter financial hardships unrelated to the demand for our equipment or otherproducts 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. Transitioningto new suppliers would be time consuming and expensive and may result in interruptions in our operations. If we should encounter delays or difficulties in securingthe 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 servicesprovided, 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 ourbusiness 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 otherintellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectual propertyrights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could causemembership 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-basedcommunication, which allow individuals' access to a broad audience of consumers and other interested persons. Negative commentary about us may be posted onsocial media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available information about health clubsand often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunityfor redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action against our stores, such asboycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well as physical damage to our stores.We also use social medial platforms as marketing tools. For example, we maintain Facebook and Twitter accounts. As laws and regulations rapidly evolve togovern 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 inthe use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.If we are unable to identify and acquire suitable sites for new clubs, our revenue growth rate and profits may be negatively impacted.To successfully expand our business over the long term, we must identify and acquire sites that meet our site selection criteria. In addition to finding siteswith the right geographical, demographic and other measures we employ in our selection process, we also need to evaluate the penetration of our competitors in themarket. 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 beforced 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 maybe 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 andbuilding the new club.We may experience prolonged periods of losses in our recently opened clubs and when we open new clubs in existing markets our comparable club revenuegrowth and our operating margins may be negatively impacted.Upon opening a club, we typically experience an initial period of club operating losses. Enrollment from pre-sold memberships typically generatesinsufficient 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 ofoperations and substantially lower margins in its second full year of operations than a club opened for more than 24 months. These operating losses and lowermargins will negatively14Table of Contentsimpact our future results of operations. This negative impact will be increased by the initial expensing of pre-opening costs, which include legal and other costsassociated with lease negotiations and permitting and zoning requirements, as well as depreciation and amortization expenses, which will further negatively impactour results of operations. We may, at our discretion, accelerate or expand our plans to open new clubs, which may adversely affect results from operations.We currently operate clubs throughout the Northeast and Mid-Atlantic regions of the United States. In the case of existing markets, our experience has beenthat opening new clubs may attract some memberships away from other clubs already operated by us in those markets and diminish their revenues. In addition, as aresult of new club openings in existing markets and because older clubs will represent an increasing proportion of our club base over time, our mature club revenueincreases 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 membershipbase. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly opened clubs to affect our club operatingmargins 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 regulationsAny 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, includingexercise 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 tosuccessfully 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 levelof 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 ourconsolidated financial position, results of operations and cash flows. At any given time there may be one or more civil actions initiated against us, including thematters disclosed under “Legal Proceedings” in this Form 10-K. If one or more of these pending lawsuits, or any lawsuits in the future are adjudicated in a manneradverse 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 consolidatedfinancial position, results of operations and cash flows. In addition, any litigation, regardless of the outcome, may distract our management from the operation ofour business.Security and privacy breaches may expose us to liability and cause us to lose customers.Federal and state law requires us to safeguard our customers’ financial information, including credit card information. Although we have established securityprocedures and protocol, including credit card industry compliance procedures, to protect against identity theft and the theft of our customers’ financialinformation, our security and testing measures may not15Table of Contentsprevent security breaches and breaches of our customers’ privacy may occur, which could harm our business. For example, a significant number of our usersprovide 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 toobtain 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 usor one of our vendors to protect customer data. We may be unable to anticipate these techniques or to implement adequate preventive or reactive measures. Severalrecent, highly publicized data security breaches at other companies have heightened consumer awareness of this issue. Further, a significant number of statesrequire the customers be notified if a security breach results in the disclosure of their personal financial account or other information. Additional states andgovernmental 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 securitymeasures 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 protectagainst security breaches or to remedy problems caused by any breaches. Actual or perceived vulnerabilities may lead to claims against us. To the extent themeasures taken by us or our third party vendors prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, whichcould 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 impactour business.We primarily accept payments for our memberships through electronic fund transfers from members’ bank accounts and, therefore, we are subject to federal,state and provincial legislation and certification requirements governing electronic funds transfer (“EFT”), including the Electronic Funds Transfer Act. Somestates, 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 limitthe 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 ona month-to-month basis after the completion of any initial term requirements, and compliance with these laws and regulations and similar requirements may beonerous 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 fullywith 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 toaccept EFT payments, which would have a material adverse effect on our business, results of operations and financial condition. In addition, any such costs, whichmay 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 orlimit 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, wepay 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 ourmemberships, 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 ourmember 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 ourbilling 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 orat all, we could lose membership revenue, which would harm our operating results.If we fail to adequately control fraudulent ACH, credit card and debit card transactions, we may face civil liability, diminished public perception of oursecurity measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financial condition andresults of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card would significantly impairour ability to operate our business.16Table of ContentsRegulatory changes in the terms of credit and debit card usage, including any existing or future regulatory requirements, could have an adverse effect on ourbusiness.Our business relies heavily on the use of credit and debit cards in sales transactions. Regulatory changes to existing rules or future regulatory requirementsaffecting 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 anadverse 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 administrativefunctions.The continuing and uninterrupted performance of our information systems is critical to our success. We use a fully-integrated information system to processnew 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 programofferings. We believe that, without investing in enhancements, this system was approaching the end of its life cycle. Thus, in 2011, we began the process ofreplacing this system with a new system through a multi-year phase in implementation program which was completed in 2015. Correcting any disruptions orfailures that affect our proprietary system or the new system, as it is implemented, could be difficult, time-consuming and expensive because we would need to usecontracted 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 becomedissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or failures that affect our billing and otheradministrative 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 othersimilar disruptive problems could also adversely affect our sites. Any system disruption or failure, security breach or other damage that interrupts or delays ouroperations could cause us to lose members, damage our reputation, and adversely affect our business and results of operations.Our growth could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.Future expansion will place increased demands on our administrative, operational, financial and other resources. Any failure to manage growth effectivelycould 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 divertmanagement 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 paysolutions. 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 ismore 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 toadequately 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 otherdifficulties, then our business and results of operations may be negatively impacted.Our cash and cash equivalents are concentrated in a small number of banks.Our cash and cash equivalents are held, primarily, in a small number of commercial banks. These deposits are not collateralized. In the event these banksbecome insolvent, we would be unable to recover most of our cash and cash equivalents deposited at the banks. Cash and cash equivalents held in two commercialbanks as of December 31, 2015 totaled $64.8 million. During 2015, in any one month, this amount has been as high as approximately $110.8 million.17Table of ContentsBecause 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 toobtain 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 fromavailable sources is insufficient or unavailable due to restrictive credit markets, or if cash is used for unanticipated needs, we may require additional capital soonerthan 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 costof debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities. If we issue new equitysecurities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those ofexisting 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 futureopportunities or respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans andoperating 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 toour 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 toachieve our targeted return. We cannot assure that we can offset cost increases by increasing our membership dues and other fees and improving profitabilitythrough 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 sessionsexpire after a set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. The State of New York has informed usthat 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 asunclaimed property. As of December 31, 2015, we had approximately $15.0 million of unused and expired personal training sessions that had not been recognizedas revenue and was recorded as deferred revenue. We do not believe that these amounts are subject to the escheatment or abandoned property laws of anyjurisdiction, including the State of New York. However, it is possible that one or more of these jurisdictions may not agree with our position and may claim that wemust remit all or a portion of these amounts to such jurisdiction. This could have a material adverse effect on our cash flows.Our growth and profitability could be negatively impacted if we are unable to renew or replace our current club leases on favorable terms, or at all, and wecannot find suitable alternate locations.We currently lease substantially all of our fitness club locations pursuant to long-term leases (generally 15 to 20 years, including option periods). During thenext five years, or the period from January 1, 2016 through December 31, 2020, we have leases for 20 club locations that are due to expire without any renewaloptions, three of which expire in 2016, and 53 club locations that are due to expire with renewal options. For leases with renewal options, several of them providefor our unilateral option to renew for additional rental periods at specific rental rates (for example, based on the consumer price index or stated renewal termsalready 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 favorableterms on leases with renewal options, or conversely for a suitable alternate location, could depend on conditions in the real estate market, competition for desirableproperties 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 factorsand conditions could negatively impact our revenue, growth and profitability.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 costsin defending any claims that may arise. For example, as of December 31, 2015, certain of our state and local tax returns from years 2006 through 2012 werecurrently being examined by certain state and local jurisdictions and it is difficult to predict the final outcome or timing of resolution of any particular matterregarding these examinations. In particular, on January 13, 2016, we received from the State of New York a revised assessment related to tax years 2006-2009 for$4.1 million , inclusive of $1.6 million of interest. We continue to evaluate the merits of the proposed assessment as new information becomes available duringcontinued discussions with the State of New York. We have not recorded a tax reserve related to the proposed assessment. It is difficult to predict the ultimateoutcome 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 andfinancial condition.18Table of ContentsRisks Related to Our Leverage and Our IndebtednessOn November 15, 2013, TSI, LLC entered into a $370.0 million senior secured credit facility (“2013 Senior Credit Facility”). The 2013 Senior CreditFacility 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 sufficientliquidity, 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 fundsgenerated from operating activities, available cash and cash equivalents and borrowings under our 2013 Revolving Loan Facility. If our current resources do notsatisfy 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 consumerspending 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, 2015 , our total outstanding consolidated debt was $275.4 million. In addition, as ofDecember 31, 2015 , under the 2013 Revolving Loan Facility there were no outstanding borrowings and outstanding letters of credit issued totaled $2.9 million.The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2015 was $42.1 million and the available unutilized portion, based on theCompany’s total leverage ratio exceeding 4.50:1.00 as of December 31, 2015 , was $11.3 million . 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 generalcorporate 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 LoanFacility and partially variable on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing our ability to useour 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 atvariable interest rates;•limiting our ability to refinance our existing indebtedness on favorable terms, or at all; and•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they currently face could intensify.The current debt under the 2013 Senior Credit Facility has a floating interest rate and an increase in interest rates may negatively impact our financial results.Interest rates applicable to our debt are expected to fluctuate based on economic and market factors that are beyond our control. In particular, the unhedgedportion of $115.4 million , of our outstanding debt under our 2013 Senior Credit Facility as of December 31, 2015 has a floating interest rate. Any significantincrease 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 couldnegatively impact our net income and cash flows.19Table of ContentsThe 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 suchfluctuations on the Company’s cash flows, the Company may enter into derivative financial instruments, such as interest rate swaps. The Company’s currentinterest rate swap arrangement is with one financial institution and covers $160.0 million of our current $275.4 million outstanding term loan principal balancewith 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, afailure on our part to effectively hedge against interest rate changes may adversely affect our financial condition and results of operations. We are required torecord 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 ourfinancial position.Covenant restrictions under our indebtedness may limit our ability to operate our business and, in such an event, we may not have sufficient assets to settle ourindebtedness.Our 2013 Senior Credit Facility and the agreements related thereto contain, among other things, covenants that may restrict our ability to finance futureoperations or capital needs or to engage in other business activities and that may impact our ability and the ability of our restricted subsidiaries to:•incur debt;•pay dividends or make distributions;•purchase or redeem stock;•make investments and extend credit;•engage in transactions with affiliates;•engage in sale-leaseback transactions;•consummate certain asset sales;•effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of our assets; and•create liens on our assets.The 2013 Senior Credit Facility provides for a financial covenant in the situation where the total utilization of the revolving loan commitments (other thanletters of credit up to $5.5 million at any time outstanding) exceeds 25% of the aggregate amount of those commitments. In such event, our subsidiaries arerequired to maintain a total leverage ratio of no greater than 4.50:1.00. While not subject to the total leverage ratio covenant as of December 31, 2015 as theCompany’s only utilization of the 2013 Revolving Loan Facility at that date was $2.9 million of issued and outstanding letters of credit thereunder, because theCompany’s total leverage ratio as of that date was in excess of 4.50:1.00, the Company is currently not able to utilize more than 25% of the 2013 Revolving LoanFacility. The Company will continue not to be able to utilize more than 25% of the 2013 Revolving Loan Facility until it has a total leverage ratio of no greaterthan 4.50:1.00.Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet certain financial ratios under the2013 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 thesetests 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 SeniorCredit 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 andmeet our other obligations, which would have a material adverse effect on our business, financial condition and results of operations.Risks Related to Our Common StockThe stock ownership of certain large shareholders will likely limit your ability to influence corporate matters.As of March 1, 2016 , the Company had three stockholders (including Patrick Walsh, the Executive Chairman of our board of directors) which, together witheach such stockholder's affiliates, beneficially owned 12.3%, 18.6% and 16.2% of our outstanding common stock, respectively, based on public filings made bysuch shareholders. Each of these stockholders may vote their stock with respect to certain matters, including any determinations with respect to mergers or otherbusiness20Table of Contentscombinations, the acquisition of assets for stock consideration or disposition of all or substantially all of our assets, and the issuance of any additional commonstock 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 besimilarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreasesunrelated 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 widefluctuations in response to a number of factors, including those described elsewhere in this report and others such as:•actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;•changes in the market’s expectations about our operating results;•success of competitors;•our operating results failing to meet the expectation of securities analysts or investors in a particular period;•changes in financial estimates and recommendations by securities analysts concerning us or our industry in general;•operating and stock price performance of other companies that investors deem comparable to the Company;•our ability to market new and enhanced services on a timely basis;•changes in laws and regulations affecting our business;•our ability to meet compliance requirements;•commencement of, or involvement in, litigation involving us;•changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;any major change in our board of directors or management;•sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales couldoccur; 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 oflitigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfyjudgments 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 stockholdersvote.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 commonstock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or votingpreferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result inyour 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 unlessyou 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 theforeseeable future. Any decision to declare and pay dividends in the future will be made at the21Table of Contentsdiscretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractualrestrictions 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 existingand 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 ourcommon stock unless you sell our common stock for a price greater than that which you paid for it.Item 1B. Unresolved Staff CommentsNoneItem 2. PropertiesWe lease our fitness clubs pursuant to long-term leases (generally 15 to 20 years, including options). In the next five years, or the period from January 1,2016 through December 31, 2020, we have leases for 20 club locations that are due to expire without any renewal options, three of which are due to expire in 2016,and 53 club locations that are due to expire with renewal options. Renewal options include terms for rental increases based on the consumer price index, fairmarket rates or stated renewal terms already set in the lease agreements.We lease approximately 20,000 square feet of office space in New York City and have smaller regional offices in Fairfax, VA and Boston, MA, foradministrative and general corporate purposes.We lease approximately 82,000 square feet in Elmsford, NY for the operation of a centralized laundry facility for New York Sports Clubs offering towelservice, and for construction and equipment storage. This space also serves as corporate office space. Total square footage related to the laundry facility is 42,000and total square footage related to the corporate office and warehouse space is 40,000.On September 12, 2014, we completed the legal sale of our property (building and land) on East 86th Street, New York City, to an unaffiliated third-party forgross proceeds of $85.7 million , which included $150,000 of additional payments to the Company. Concurrent with the closing of the transaction, we leased backthe portion of the property comprising our health club (“Initial Lease”) and had agreed to vacate the property in connection with the Purchaser's futuredevelopment of a new luxury, high-rise multi-use building. In connection with vacating the property, we had agreed to enter into a new lease (“New Club Lease”)for approximately 24,000 square feet in the new building for the purpose of operating a health club upon completion of construction by the purchaser/landlord.This sale-leaseback transaction was characterized as a financing arrangement for accounting purposes rather than a sale until any continuing involvement hasceased. As of December 31, 2014, the total financing arrangement was $83.4 million , which was net of $1.8 million held in escrow for our former tenant in thebuilding. As part of the transaction, we incurred $3.2 million of real property transfer taxes, broker fees and other costs which were deferred and were beingamortized over the term of the Initial Lease of 25 years, which included option periods. The net fees were included in Other assets on the accompanyingconsolidated balance sheets as December 31, 2014.On December 23, 2015, we terminated the Initial Lease and the agreement to enter into the New Club Lease and received gross proceeds of $3.5 million inconnection with the termination. We must vacate the currently leased area by March 12, 2016 or we will be required to return the gross proceeds of the leasetermination to the purchaser/landlord. Because the lease was terminated with no continuing involvement, this sale-leaseback transaction was accounted for as acompleted sale as of December 23, 2015. Under this treatment, we have recorded a $77.1 million gain on the sale of the property, recorded in Gain on sale ofbuilding in our consolidated statements of operations for the year ended December 31, 2015. As of December 23, 2015, the net book value of the building andbuilding improvements was $2.8 million and the book value of the land was $986,000 and the net book value of the deferred building financing costs was $3.0million . The gain on the sale of the building is also net of $3.5 million of deferred lease receivable related to our former tenant.22Table of ContentsThe following table provides information regarding our club locations:Location Address Date Opened or Management AssumedNew York Sports Clubs: Manhattan 151 East 86th Street January 1977Manhattan 61 West 62nd Street July 1983Manhattan 614 Second Avenue July 1986Manhattan 1601 Broadway September 1991Manhattan 349 East 76th Street April 1994Manhattan 248 West 80th Street May 1994Manhattan 502 Park Avenue February 1995Manhattan 117 Seventh Avenue South March 1995Manhattan 303 Park Avenue South December 1995Manhattan 30 Wall Street May 1996Manhattan 1635 Third Avenue October 1996Manhattan 575 Lexington Avenue November 1996Manhattan 278 Eighth Avenue December 1996Manhattan 200 Madison Avenue February 1997Manhattan 2162 Broadway November 1997Manhattan 633 Third Avenue April 1998Manhattan 217 Broadway March 1999Manhattan 23 West 73rd Street April 1999Manhattan 34 West 14th Street July 1999Manhattan 503-511 Broadway July 1999Manhattan 1372 Broadway October 1999Manhattan 300 West 125th Street May 2000Manhattan 19 West 44th Street August 2000Manhattan 128 Eighth Avenue December 2000Manhattan 2527 Broadway August 2001Manhattan 3 Park Avenue August 2001Manhattan 10 Irving Place November 2001Manhattan 230 West 41st Street November 2001Manhattan 1221 Avenue of the Americas January 2002Manhattan 200 Park Avenue December 2002Manhattan 232 Mercer Street September 2004Manhattan 225 Varick Street August 2006Manhattan 885 Second Avenue February 2007Manhattan 301 West 145th Street October 2007Manhattan 1400 5th Avenue December 2007Manhattan 75 West End Avenue April 2013Manhattan 28-30 Avenue A March 2015Bronx, NY 1601 Bronxdale Avenue November 2007Brooklyn, NY 110 Boerum Place October 1985Brooklyn, NY 1736 Shore Parkway June 1998Brooklyn, NY 179 Remsen Street May 2001Brooklyn, NY 324 Ninth Street August 2003Brooklyn, NY 1630 E 15th Street August 2007Brooklyn, NY 7118 Third Avenue May 2004Brooklyn, NY 439 86th Street April 200823Table of ContentsLocation Address Date Opened or Management AssumedBrooklyn, NY 147 Greenpoint Avenue June 2014Queens, NY 69-33 Austin Street April 1997Queens, NY 153-67 A Cross Island Parkway June 1998Queens, NY 2856-2861 Steinway Street February 2004Queens, NY 8000 Cooper Avenue March 2007Queens, NY 99-01 Queens Boulevard June 2007Queens, NY 39-01 Queens Blvd December 2007Staten Island, NY 300 West Service Road June 1998Scarsdale, NY 696 White Plains Road October 1995Mamaroneck, NY 124 Palmer Avenue January 1997Croton-on-Hudson, NY 420 South Riverside Drive January 1998Larchmont, NY 15 Madison Avenue December 1998Nanuet, NY 58 Demarest Mill Road May 1998Great Neck, NY 15 Barstow Road July 1989East Meadow, NY 625 Merrick Avenue January 1999Commack, NY 6136 Jericho Turnpike January 1999Oceanside, NY 2909 Lincoln Avenue May 1999Long Beach, NY 265 East Park Avenue July 1999Garden City, NY 833 Franklin Avenue May 2000Huntington, NY 350 New York Avenue February 2001Syosset, NY 49 Ira Road March 2001West Nyack, NY 3656 Palisades Center Drive February 2002Woodmere, NY 158 Irving Street March 2002Hartsdale, NY 208 E. Hartsdale Avenue September 2004Somers, NY Somers Commons, 80 Route 6 February 2005White Plains, NY 4 City Center September 2005Hawthorne, NY 24 Saw Mill River Road January 2006Dobbs Ferry, NY 50 Livingstone Avenue June 2008Smithtown, NY 5 Browns Road December 2007Carmel, NY 1880 Route 6 July 2007Hicksville, NY 100 Duffy Avenue November 2008New Rochelle, NY Trump Plaza, Huguenot Street March 2008Deer Park, NY 455 Commack Avenue March 2009Garnerville, NY 20 W. Ramapo Road October 2011Stamford, CT 106 Commerce Road January 1998Danbury, CT 38 Mill Plain Road January 1998Greenwich, CT 6 Liberty Way May 1999Westport, CT 427 Post Road, East January 2002West Hartford, CT 65 Memorial Road November 2007Princeton, NJ 301 North Harrison Street May 1997Matawan, NJ 450 Route 34 April 1998Marlboro, NJ 34 Route 9 North April 1998Ramsey, NJ 1100 Route 17 North June 1998Mahwah, NJ 7 Leighton Place June 1998Springfield, NJ 215 Morris Avenue August 1998Colonia, NJ 1250 Route 27 August 1998Hoboken, NJ 59 Newark Street October 1998West Caldwell, NJ 913 Bloomfield Avenue April 199924Table of ContentsLocation Address Date Opened or Management AssumedJersey City, NJ 147 Two Harborside Financial Center June 2002Newark, NJ 1 Gateway Center October 2002Ridgewood, NJ 129 S. Broad Street June 2003Westwood, NJ 35 Jefferson Avenue June 2004Livingston, NJ 39 W. North Field Rd. February 2005Hoboken, NJ 210 14th Street December 2006Englewood, NJ 34-36 South Dean Street December 2006Clifton, NJ 202 Main Avenue March 2007Montclair, NJ 56 Church Street January 2008Butler, NJ 1481 Route 23 January 2009East Brunswick, NJ 300 State Route 18 March 2009Bayonne, NJ 550 Route 440 North December 2011Boston Sports Clubs: Boston, MA 1 Bulfinch Place August 1998Boston, MA 201 Brookline Avenue June 2000Boston, MA 361 Newbury Street November 2001Boston, MA 350 Washington Street February 2002Boston, MA 505 Boylston Street January 2006Boston, MA 560 Harrison Avenue February 2006Boston, MA 695 Atlantic Avenue October 2006Boston, MA One Beacon Street May 2013Boston, MA 800 Boylston Street May 2013Boston, MA 100 Summer Street May 2013Boston, MA 540 Gallivan Road October 2014Boston, MA 95 Washington Street November 2014Allston, MA 15 Gorham Street July 1997Wellesley, MA 140 Great Plain Avenue July 2000Lynnfield, MA 425 Walnut Street July 2000Lexington, MA 475 Bedford Avenue July 2000Cambridge, MA 625 Massachusetts Avenue January 2001West Newton, MA 1359 Washington Street November 2001Waltham, MA 840 Winter Street November 2002Watertown, MA 311 Arsenal Street January 2006Newton, MA 135 Wells Avenue August 2006Somerville, MA 1 Davis Square December 2007Medford, MA 70 Station Landing December 2007Westborough, MA 1500 Union Street September 2008Woburn, MA 300 Presidential Way December 2008Wayland, MA Wayland Town Center November 2014Providence, RI 131 Pittman Street December 2008Washington Sports Clubs: Washington, D.C. 1835 Connecticut Avenue, N.W . January 1990Washington, D.C. 2251 Wisconsin Avenue, N.W May 1994Washington, D.C. 1211 Connecticut Avenue, N.W July 2000Washington, D.C. 1345 F Street, N.W August 2002Washington, D.C. 783 Seventh Street, N.W October 2004Washington, D.C. 3222 M Street, N.W February 2005Washington, D.C. 14th Street, N.W June 2008North Bethesda, MD 10400 Old Georgetown Road June 199825Table of ContentsLocation Address Date Opened or Management AssumedSilver Spring, MD 8506 Fenton Street November 2005Bethesda, MD 6800 Wisconsin Avenue November 2007Fairfax, VA 11001 Lee Highway October 1999Clarendon, VA 2700 Clarendon Boulevard November 2001Philadelphia Sports Clubs: Philadelphia, PA 220 South 5th Street January 1999Philadelphia, PA 2000 Hamilton Street July 1999Chalfont, PA One Highpoint Drive January 2000Philadelphia, PA 1735 Market Street October 2000Radnor, PA 555 East Lancaster Avenue December 2006Swiss Sports Clubs: Basel, Switzerland St. Johanns-Vorstadt 41 August 1987Zurich, Switzerland Glarnischstrasse 35 August 1987Basel, Switzerland Gellerstrasse 235 August 2001BFX Studio: Manhattan, NY 555 Sixth Avenue September 2014Manhattan, NY 30 Broad Street March 2015Boston, MA 699 Boylston Street June 2015Future openings: Manhattan, NY 1231 Third Avenue 26Table of ContentsItem 3. Legal ProceedingsOn 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 fitnessclubs filed a lawsuit in state court against it and two of its health club subsidiaries alleging, among other things, breach of lease in connection with the decision toclose 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 leasedby 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 trialcourt’s award of damages, and on August 29, 2011, an additional award (amounting to approximately $900,000 ) (the “Additional Award”), was entered againstthe tenant, which has recorded a liability. Separately, TSI, LLC is party to an agreement with a third-party developer, which by its terms provides indemnificationfor 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 theAdditional Award, and the tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord are currentlylitigating 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 , plusinterest, 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 forany amount of the Additional Award.On or about October 4, 2012, in an action styled James Labbe, et al. v. Town Sports International, LLC, plaintiff commenced a purported class action in NewYork State court on behalf of personal trainers employed in New York State. Labbe is seeking unpaid wages and damages from TSI, LLC and alleges violations ofvarious provisions of the New York State labor law with respect to payment of wages and TSI, LLC’s notification and record-keeping obligations. The Companycompleted settlement negotiations, pursuant to which TSI will pay its trainers the aggregate sum of $165,000 in exchange for full releases. The settlementagreement is currently in the process of being executed by the parties, which will become effective upon approval of the court and the class.On January 21, 2016, in an action styled Triangle 17 Center, LLC v. Town Sports International Holdings (NJ), LLC, ET AL., a Landlord of one of TSI’scompetitors filed an action, claiming that TSI engaged in sham litigation to prevent the opening of a competitor’s facility in close proximity to TSI’s location inRamsey, New Jersey. As this matter is in its infancy stage, it is difficult to determine what, if any, liability TSI may have in connection with this suit, howeverupon the initial advice of counsel TSI believes it has meritorious defenses to the claims asserted and as such TSI does not believe it is probable that TSI will berequired to pay any amounts in connection with this litigation.In addition to the litigation discussed above, the Company is involved in various other lawsuits, claims and proceedings incidental to the ordinary course ofbusiness, including personal injury, employee relations claims and landlord tenant disputes. The results of litigation are inherently unpredictable. Any claimsagainst the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and resultin diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot be predicted with certainty. The Company establishesaccruals 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 suchaccruals are adjusted thereafter as appropriate to reflect changes in circumstances. We currently believe that the ultimate outcome of such lawsuits, claims andproceedings 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 aparticular period.Item 4. Mine Safety DisclosuresNot applicable.27Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity SecuritiesPrice Range of Common StockOur common stock currently trades on The NASDAQ Global Market, under the symbol CLUB. The following table sets forth, for each quarterly period inthe 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 LowYear ended December 31, 2015: First Quarter$7.69 $6.00Second Quarter$7.01 $2.54Third Quarter$3.13 $1.92Fourth Quarter$3.08 $1.12Year ended December 31, 2014: First Quarter$14.70 $8.14Second Quarter$8.78 $5.65Third Quarter$7.36 $4.01Fourth Quarter$7.00 $5.37HoldersAs of March 1, 2016 , there were approximately 109 holders of record of our common stock. There are additional holders who are not “holders of record” butwho beneficially own stock through nominee holders such as brokers and benefit plan trustees.Dividends PolicyOn each of March 5, 2014 and June 5, 2014 the Company paid a quarterly cash dividend of $0.16 per share to common stock holders. The Company did notpay any dividends in 2015. The cash dividends were funded by available cash on hand.The board of directors does not currently intend to pay dividends. The declaration and payment of dividends to holders of our common stock by us, if any,are subject to the discretion of our board of directors. Our board of directors will take into account such matters as general economic and business conditions, ourstrategic plans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us and our subsidiaries and suchother 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 $30.3million at December 31, 2015 , and distributions received from our subsidiaries to provide the funds necessary to pay dividends on our common stock. The existingcredit 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 dividendsexcept (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 leverageratio 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 excesscash 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 orcontinuing under the credit agreement.Issuer Purchases of Equity SecuritiesWe did not purchase any equity securities during the fourth quarter ended December 31, 2015 .Recent Sales of Unregistered SecuritiesWe did not sell any securities during the year ended December 31, 2015 that were not registered under the Securities Act of 1933, as amended, other than aspreviously reported in a Current Report on Form 8-K.28Table of ContentsStock Performance GraphThe graph depicted below compares the annual percentage change in our cumulative total stockholder return with the cumulative total return of the Russell2000 and the NASDAQ composite indices. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Town Sports International Holdings, Inc, the NASDAQ Composite Index,and the Russell 2000 Index*$100 invested on 12/31/10 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. December 31, 2010 2011 2012 2013 2014 2015Town Sports International Holdings, Inc$100.00 $181.03 $342.49 $479.68 $202.11 $40.42NASDAQ Composite$100.00 $100.53 $116.92 $166.19 $188.78 $199.95Russell 2000$100.00 $95.82 $111.49 $154.78 $162.35 $155.18Notes :(1)The graph covers the period from December 31, 2010 to December 31, 2015 .(2)The graph assumes that $100 was invested at the market close on December 31, 2010 in our common stock, in the Russell 2000 and in the NASDAQcomposite indexes and that all dividends were reinvested.(3)A special cash dividend of $3.00 per share of common stock was declared by our board of directors on November 16, 2012 to shareholders of record onNovember 30, 2012, paid on December 11, 2012. On each of November 26, 2013, March 5, 2014 and June 5, 2014, we paid a quarterly cash dividend of $0.16per 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 areadily definable peer group that is publicly traded.29Table of ContentsNotwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended, that might incorporate by reference this Annual Report on Form 10-K or future filings made by the Company under thosestatutes, the Stock Performance Graph is not deemed filed with the Securities and Exchange Commission, is not deemed soliciting material and shall not bedeemed 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 theCompany specifically incorporates such information by reference into a previous or future filing, or specifically requests that such information be treated assoliciting material, in each case under those statutes.Item 6. Selected Financial DataSELECTED 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, 2015 and 2014 and the selected consolidated statement of operations and cash flow data forthe years ended December 31, 2015 , 2014 and 2013 have been derived from our audited consolidated financial statements included elsewhere herein. The selectedconsolidated balance sheet data as of December 31, 2013 , 2012 and 2011 and the selected consolidated statement of operations and cash flow data for the yearsended December 31, 2012 and 2011 have been derived from our audited consolidated financial statements not included herein. Other data and club andmembership data for all periods presented have been derived from our unaudited books and records. Our historical results are not necessarily indicative of resultsfor 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 financialstatements and the related notes appearing at the end of this Annual Report. Year Ended December 31, 20152014201320122011Statement of Operations Data: Revenues $424,323 $453,842 $470,225 $478,981 $466,941Operating expenses: Payroll and related 175,898 177,009 174,894 181,632 177,528Club operating 196,725 192,716 179,683 178,950 176,463General and administrative 30,683 31,352 28,431 24,139 25,799Depreciation and amortization 47,887 47,307 49,099 49,391 51,536Impairment of fixed assets 14,571 4,569 714 3,436 —Impairment of goodwill 31,558 137 — — —Gain on sale of building(1) (77,146) — — — —Gain on lease termination(2)(2,967) — — — —Insurance recovery related to damaged property(3) — — (3,194) — —Operating (loss) income 7,114 752 40,598 41,433 35,615(Gain) loss on extinguishment of debt(4) (17,911) 493 750 1,010 4,865Interest expense, net of interest income 20,579 19,039 22,616 24,597 24,127Equity in the earnings of investees and rental income (2,361) (2,402) (2,459) (2,461) (2,391)Income (loss) before (benefit) provision for corporate incometaxes 6,807 (16,378) 19,691 18,287 9,014(Benefit) provision for corporate income taxes(5) (14,351) 52,611 7,367 6,321 2,699Net loss (income) $21,158 $(68,989) $12,324 $11,966 $6,315Earnings (loss) per share: Basic $0.86 $(2.84) $0.51 $0.51 $0.28Diluted $0.84 $(2.84) $0.50 $0.50 $0.27Dividends declared per common share(6) $— $0.32 $0.16 $3.00 $—30Table of Contents As of December 31, 20152014201320122011Balance Sheet Data: Cash and cash equivalents $76,217 $93,452 $73,598 $37,758 $47,880Working capital surplus (deficit) 27,947 52,280 27,830 (11,825) (18,311)Total assets 305,360 409,833 413,792 404,770 450,402Long-term debt, including current installments 268,999 299,871 314,909 310,339 288,994Total stockholders’ (deficit) equity (96,245) (118,084) (43,516) (55,496) 354Net debt(7) 199,200 214,832 251,402 277,985 243,870 Year Ended December 31, 20152014201320122011Cash Flow Data: Cash provided by (used in): Operating activities $24,870 $4,758 $67,388 $60,053 $74,885Investing activities (31,571) (42,054) (30,606) (22,490) (30,907)Financing activities (10,511) 57,503 (975) (47,722) (35,349)Other Data: Non-cash rental income, net of non-cash rentalexpense (3,647) (5,399) (5,692) (4,037) (3,663)Non-cash share-based compensation expense 1,386 1,911 2,204 1,306 1,412 Year Ended December 31, 201520142013 2012 2011Club and Membership Data: New clubs opened 1 4 — — 2Clubs acquired — — 6 — —Clubs closed (6) (8) (4) — (2)Wholly-owned clubs operated at end of period 151 156 160 158 158Total clubs operated at end of period(8) 152 158 162 160 160BFX Studio at end of period 3 1 — — —Total members at end of period(9) 541,000 484,000 497,000 510,000 523,000Restricted members at end of period(10) — 20,000 41,000 38,000 38,000Comparable club revenue (decrease)increase(11) (5.6)% (4.2)% (1.8)% 1.6% 1.8%Revenue per weighted average club(in thousands)(12) $2,777 $2,842 $2,971 $3,032 $2,934Average revenue per member(13) $823 $941 $934 $922 $915Average Joining Fees collected per member(14) $72 $75 $59 $57 $55Annual attrition(15) 46.9 % 44.3 % 41.9 % 41.0% 39.9%(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 10 – Gain onSale 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 future lease for a planned club opening thatwas not yet effective.31Table of Contents(3)The $3,194 of insurance recovery related to damaged property in the year ended December 31, 2013 related to property damaged by Hurricane Sandy.(4)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 debtdiscount of $249 and $707 , respectively. In the year ended December 31, 2015, TSI Holdings purchased $29,829 principal amount of debt outstanding underthe 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 anddebt 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 debtdiscount in connection with the November 15, 2013 debt refinancing. The proceeds from the 2013 Senior Credit Facility were used to repay the remainingoutstanding principal amounts of the 2011 Senior Credit Facility of $315,743 plus accrued and unpaid interest.The $1,010 loss on extinguishment of debt recorded for the year ended December 31, 2012 is comprised of a $464 write-off of net deferred financing costs anddebt discount related to the August 22, 2012 debt repricing and a write-off of $546 of net deferred financing costs and debt discount in connection with theAugust 28, 2012 voluntary prepayment of $15,000 on our term loan facility.The $4,865 loss on extinguishment of debt recorded for the year ended December 31, 2011 resulted from a debt refinancing on May 11, 2011. The proceedsfrom our 2011 Senior Credit Facility were used to repay the remaining outstanding principal amount of our 2007 Senior Credit Facility of $164,000 and theremaining outstanding principal amount of our senior discount notes due 2014 of $138,450. We incurred $2,538 of call premium on the senior discount notestogether with the write-off of $2,327 of net deferred financing costs related to the debt extinguishment.(5)Corporate income taxes for the year ended December 31, 2015 and 2014 included non-cash charges of $43,681 and $60,368, respectively, related to taxvaluation allowances. Corporate income taxes for the year ended December 31, 2013, 2012 and 2011 included income tax benefits totaling $16, $483 and$343, respectively, related to the correction of accounting errors. For the year ended December 31, 2015, 2014 and 2013, see Note 15 — Corporate IncomeTaxes to the Company’s consolidated financial statements 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 quarterlydividend was discontinued in the second quarter of 2014.In the year ended December 31, 2012, the board of directors of the Company declared a special cash dividend of $3.00 per share.(7)Net debt represents the total principal balance of long-term debt outstanding, net of cash and cash equivalents.(8)Includes wholly-owned and partly-owned clubs. Not included in the total club count are locations that are managed by us in which we do not have an equityinterest. These managed sites include three fitness clubs located in colleges and universities and nine managed sites.(9)Represents members (including restricted members) at wholly-owned and partly-owned clubs. Restricted members primarily include students and teachers.(10)Restricted members ("Restricted Memberships") primarily include students and teachers. This membership allowed for club usage at restricted times, at adiscount to other memberships offered. The Restricted Membership was discontinued as clubs transitioned to the lower pricing model and the Companyaggregates all members beginning in fiscal 2015.(11)Total revenue for a club is included in comparable club revenue increase (decrease) beginning on the first day of the thirteenth full calendar month of theclub’s operation.(12)Revenue per weighted average club is calculated as total revenue divided by the product of the total number of clubs and their weighted average months inoperation as a percentage of the period.(13)Average revenue per member is total revenue from wholly-owned clubs for the period divided by the average number of memberships from wholly-ownedclubs for the period, including Restricted Memberships prior to 2015, summer student32Table of Contentsand summer pool memberships, where average number of memberships for the period is derived by dividing the sum of the total memberships at the end ofeach month during the period by the total number of months in the period.(14)Average joining fees collected per member is calculated as total initiation and annual fees divided by the number of new members during each respective year.New members exclude pre-sold and summer pool membership, and include Restricted Memberships prior to 2015.(15)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. Themember count excludes pre-sold and summer pool memberships and includes Restricted Memberships prior to 2015.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction with the “SelectedConsolidated Financial and Other Data” section of this Annual Report and our consolidated financial statements and the related notes appearing at the end of thisAnnual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties andassumptions (see “ FORWARD-LOOKING STATEMENTS ” discussion). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in “Item 1A. Risk Factors” of this Annual Report.OverviewBased on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States(“U.S.”) and one of the largest fitness club owners and operators in the U.S. As of December 31, 2015 , the Company, through its subsidiaries, operated 152 fitnessclubs (“clubs”) and three BFX Studio (“studio”) locations. Our clubs collectively served approximately 541,000 members as of December 31, 2015 . We ownedand operated a total of 105 clubs under the “New York Sports Clubs” (“NYSC”) brand name within a 120-mile radius of New York City as of December 31, 2015 ,including 37 locations in Manhattan where we are the largest fitness club owner and operator. We owned and operated 27 clubs in the Boston region under our“Boston Sports Clubs” (“BSC”) brand name, 12 clubs (one of which is partly-owned) in the Washington, D.C. region under our “Washington Sports Clubs”(“WSC”) brand name and five clubs in the Philadelphia region under our “Philadelphia Sports Clubs” (“PSC”) brand name as of December 31, 2015 . In addition,we owned and operated three clubs in Switzerland as of December 31, 2015 . We also have one partly-owned club that operated under a different brand name inWashington, D.C. as of December 31, 2015 . We employ localized brand names for our clubs to create an image and atmosphere consistent with the localcommunity 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 highestconcentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban orsuburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the activemature 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 regionand then branching out from these urban centers to suburbs and neighboring communities.We completed the introduction of a lower pricing model in the second quarter of 2015, offering reduced monthly dues. As of December 31, 2015, approximately 80% of our clubs were operating under this pricing model, with the remaining clubs principally comprising the Company's passport-only model.The clubs that are operating under the lower pricing model offer a similar level of service and amenities but at a lower price point. This model gives us anopportunity to recapture market share and compete against certain other gyms that opened in our markets. We believe our offerings are compelling because weinclude group exercise classes, top of the line equipment, pools and courts with price of certain memberships, when available. The effect of new members enrollingat lower monthly dues combined with members who cancelled who were paying higher monthly dues was only partially offset by an increase in membership salesvolume. We continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth.We added 64,000 net members in the year ended December 31, 2015 compared to a net member loss of 13,000 in 2014. The ending member count of541,000 included two adjustments decreasing the count during the year. In the third quarter we completed the conversion from our internally developed ClubManagement legacy system to a third-party developed software system which resulted in a one-time adjustment to our historical legacy member count ofapproximately 5,000 members. We believe this adjustment was non-revenue generated and therefore does not impact our consolidated financial statements. Inaddition there are approximately 2,000 members at one partly-owned club operating under a different brand name that were not33Table of Contentsincluded in the total member count as of December 31, 2015 however were included as of December 31, 2014 when the club was operating as a Washington SportsClub. We continue to account for this club as an equity investment.Due to the rise in popularity of private studio offerings, we introduced our BFX Studio brand in 2014. We currently have three studio locations. This three-dimension luxury studio brand takes advantage of the rise in consumer demand for studio experiences. The studios include three unique offerings: Ride Republic,which is indoor cycling, Private Sessions for personal training and Master Class for certain group exercise classes. The studios are also staffed with high caliberinstructors in each of the three core offerings and the studios are designed to appeal to all ages and all experience levels. This studio concept requiresapproximately 9,000 to 12,000 square feet of space per studio which compares to the approximately 27,000 square feet aggregate average size of our clubs.In September 2014, we completed the previously announced legal sale of our East 86th Street property for gross proceeds of $85.7 million to an unaffiliatedthird-party, which housed one of our New York Sports Clubs as well as a retail tenant that generated rental income for us. This sale-leaseback transaction wascharacterized for accounting purposes as a financing rather than a sale until any continuing involvement in the property ceased. In December 2015, we terminatedour current lease and the agreement to enter into our future lease with the purchaser/landlord, and received gross proceeds of $3.5 million in connection with thetermination. Because the lease was terminated with no continuing involvement, this sale-leaseback transaction was accounted for as a completed sale. Under thistreatment, we have recorded a $77.1 million gain, previously accounted for as a financing, on the sale of the property and, recorded in Gain on sale of building inour consolidated statements of operations for the year ended December 31, 2015. Refer to Note 10 – Sale of Building to our consolidated financial statements forfurther details.In December 2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under the 2013 Senior Credit Facility in the open market for$10.9 million , and such debt was transferred to TSI, LLC and cancelled, which resulted in a gain on extinguishment of debt of $17.9 million , including the write-off of related deferred financing costs and debt discount of $249,000 and $707,000 , respectively.Revenue and Operating ExpensesWe have two principal sources of revenue:•Membership revenue: Our largest sources of revenue are dues inclusive of monthly membership fees, annual maintenance fees, initiation andprocessing 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 duesand fees comprised 76.0% of our total revenue for the year ended December 31, 2015 . We recognize revenue from membership dues in the month whenthe services are rendered. Approximately 98% of our members pay their monthly dues by Electronic Funds Transfer, or EFT, while the balance is paidannually in advance. We recognize revenue from initiation and processing fees over the estimated average membership life and annual fees over atwelve month period.•Ancillary club revenue: For the year ended December 31, 2015 , we generated 17.3% of our revenue from personal training and 5.2% of our revenuefrom other ancillary programs and services consisting of Sports Club for Kids, racquet sports, Small Group Training and studio classes, as well as salesof miscellaneous sports products. We continue to grow ancillary club revenue by building on ancillary programs such as our personal trainingmembership product and our fee-based Small Group Training programs.We also receive revenue (approximately 1.5% of our total revenue for the year ended December 31, 2015 ) from the rental of space in our facilities tooperators who offer wellness-related offerings, such as physical therapy and juice bars. In addition, we sell in-club advertising and sponsorships and generatemanagement fees from certain club facilities that we do not wholly own. We also collect laundry related revenue for the laundering of towels for third parties. Werefer 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, 2015 and 2014 ,our attrition rate was 46.9% and 44.3%, respectively.Our operating and selling expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other salary and relatedexpenses, 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 andcommunication systems, purchasing, member relations, legal and consulting fees and real estate34Table of Contentsdevelopment expenses. Payroll and related expenses are included in a separate line item on the consolidated statement of operations and are not included in generaland administrative expenses. Approximately 40% of general and administrative expenses relate directly to club operations including phone and data lines,computer maintenance, business licenses, office and sales supplies, general liability insurance, recruiting and training.As clubs mature and increase their membership base, fixed costs are typically spread over an increasing revenue base and operating margins tend to improve.Conversely, when our membership base declines, our operating margins are negatively impacted.Our primary capital expenditures relate to the construction or acquisition of new club facilities and upgrading and expanding our existing clubs. Theconstruction 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 1%of projected annual revenue. Expansions of certain facilities are also performed from time to time, when incremental space becomes available on acceptable termsand utilization and demand for the facility dictate. In this regard, facility remodeling is also considered where appropriate.Operating income is impacted by certain charges and benefits which can fluctuate year to year. In 2015, operating income included goodwill impairmentcharges of $31.6 million associated with the NYSC and BSC regions, and fixed asset impairment charges of $14.6 million related to underperforming clubs,partially offset by a gain on lease termination of $3.0 million . In 2014, operating income was impacted by fixed asset impairment charges of $4.6 million related tounderperforming clubs. In 2013, operating income included benefits of $3.2 million resulting from insurance proceeds collected primarily in connection withproperty damaged by Hurricane Sandy and $424,000 related to the recognition of out of period non-cash rental income, partially offset by fixed asset impairmentcharges totaling $714,000. Year Ended December 31, 2015 2014 2013 ($ amounts in thousands)Operating income $7,114 $752 $40,598Increase (decrease) over prior period 846.0% (98.1)% (2.0)%Net income (loss) $21,158 $(68,989) $12,324Increase (decrease) over prior period 130.7% (659.8)% 3.0 %Cash flows provided by operating activities $24,870 $4,758 $67,388Increase (decrease) over prior period 422.7% (92.9)% 12.2 %Historically, we have focused on building or acquiring clubs in areas where we believe the market is underserved or where new clubs are intended to replaceexisting clubs at their lease expiration. Based on our experience, a new club tends to experience a significant increase in revenues during its first three years ofoperation as it reaches maturity. Because there is relatively little incremental cost associated with such increasing revenue, there is a greater proportionate increasein profitability. We believe that the revenues and operating income of our immature clubs will increase as they mature. In contrast, operating income margins maybe negatively impacted in the near term in our recent and planned club openings. In most cases, we are able to transfer many of the members of closed clubs toother clubs thereby enhancing overall profitability. During 2015, we opened one club and two studio locations. We also plan to open one additional location in2016 for a lease signed in August 2014. In addition, our operating income margins have been, and may continue to be negatively affected by our conversion to thelower pricing model in a substantial majority of our clubs.As of December 31, 2015 , 151 of our fitness clubs were wholly-owned by us and our consolidated financial statements include the operating results of allsuch clubs. One location in Washington, D.C. was partly-owned by us, with our profit sharing percentage approximating 45%, and is treated as an unconsolidatedaffiliate for which we apply the equity method of accounting. We also partly owned another location in Washington D.C. that is not part of the WSC with a profitsharing percentage approximating 20% (after priority distributions) for which the equity accounting is also applied. In addition, we provide management services atlocations where we do not have an equity interest which include three fitness clubs located in colleges and universities and nine managed sites.35Table of ContentsComparable Club RevenueWe 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 RevenueIncrease (Decrease) Quarter Full-Year2013 First Quarter (2.4)% Second Quarter (1.7)% Third Quarter (1.7)% Fourth Quarter (a) (1.3)% (1.8)%2014 First Quarter (4.7)% Second Quarter (4.5)% Third Quarter (4.5)% Fourth Quarter (3.9)% (4.2)%2015 First Quarter (3.5)% Second Quarter (5.4)% Third Quarter (7.1)% Fourth Quarter (6.7)% (5.6)%(a)Comparable club revenue for the fourth quarter of 2013 excludes $424,000 of out of period rental income recognized resulting from the correction of anaccounting error.Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary revenue increases(decreases).Our member count increased 64,000 to 541,000 in 2015. The effect of new members enrolling at lower monthly dues combined with members who cancelledwho were paying higher monthly dues was only partially offset by an increase in membership sales volume. We continue to consider and make pricing adjustmentsin order to increase revenue while also driving membership growth. The comparable club revenue declines experienced in 2013 and 2014 were primarily due to theimpact of membership declines. We experienced an overall member loss of 13,000 in each of 2013 and 2014.36Table of ContentsHistorical Club Count Year Ended December 31, 201520142013Wholly-owned clubs operated at beginning of period 156 160 158New clubs opened 1 4 —Clubs acquired — — 6Clubs closed (6) (8) (4)Wholly-owned clubs operated at end of period 151 156 160Partly-owned clubs operated at end of period(1) 1 2 2Total clubs operated at end of period(1)(2)(3) 152 158 162(1)Excludes one partly-owned club that operated under a different brand name in our Washington, D.C. region.(2)Includes wholly-owned and partly-owned clubs. Not included in the total club count are locations that are managed by us in which we do not have an equityinterest. These managed sites include three fitness clubs located in colleges and universities and nine managed sites.(3)Excludes three studio locations.Consolidated Results of OperationsThe following table sets forth certain operating data as a percentage of revenue for the periods indicated: Year Ended December 31, 2015 2014 2013Revenues100.0 % 100.0 % 100.0 %Operating expenses: Payroll and related41.5 39.0 37.2Club operating46.4 42.5 38.2General and administrative7.2 6.9 6.0Depreciation and amortization11.3 10.4 10.5 106.4 98.8 91.9Impairment of fixed assets3.4 1.0 0.2Impairment of goodwill7.4 — —Gain on sale of building(18.2) — —Gain on lease termination(0.7) — —Insurance recovery related to damaged property— — (0.7) (8.1) 1.0 (0.5)Operating income1.7 0.2 8.6(Gain) loss on extinguishment of debt(4.2) 0.1 0.1Interest expense4.9 4.2 4.8Equity in the earnings of investees and rental income(0.6) (0.5) (0.5)Income (loss) before (benefit) provision for corporate income taxes1.6 (3.6) 4.2(Benefit) provision for corporate income taxes(3.4) 11.6 1.6Net income (loss)5.0 % (15.2)% 2.6 %37Table of ContentsYear ended December 31, 2015 compared to year ended December 31, 2014RevenueRevenue (in thousands) was comprised of the following for the periods indicated: Year Ended December 31, 2015 2014 Revenue % Revenue Revenue % Revenue % VarianceMembership dues$309,096 72.8% $343,185 75.6% (9.9)%Initiation and processing fees13,644 3.2% 12,044 2.7% 13.3 %Membership revenue322,740 76.0% 355,229 78.3% (9.1)%Personal training revenue73,191 17.3% 70,338 15.5% 4.1 %Other ancillary club revenue22,138 5.2% 22,304 4.9% (0.7)%Ancillary club revenue95,329 22.5% 92,642 20.4% 2.9 %Fees and other revenue6,254 1.5% 5,971 1.3% 4.7 %Total revenue$424,323 100.0% $453,842 100.0% (6.5)%Total revenue decreased $29.5 million , or 6.5% , for the year ended December 31, 2015 compared to the year ended December 31, 2014 , as a result oflower membership revenue partially offset by higher ancillary club revenue. Revenue decreased approximately $25.5 million at our clubs opened or acquired priorto December 31, 2013 and $11.7 million at clubs that closed subsequent to December 31, 2013 . These decreases were partially offset by a $7.7 million increase inrevenue from our clubs that were opened or acquired subsequent to December 31, 2013 .Membership dues revenue decreased $34.1 million in the year ended December 31, 2015 compared to the year ended December 31, 2014 . The effect of newmembers enrolling at lower monthly dues combined with members who cancelled who were paying higher monthly dues was only partially offset by an increase inmembership sales volume. The decline was also partially offset by an increase in annual fees recognized of $9.9 million. Beginning in the third quarter of 2014,new memberships charge an annual fee beginning on the first day of membership and on each annual anniversary date thereafter and are deferred and recognized,on a straight-line basis over 12 months. We continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth.Initiation and processing fees revenue increased $1.6 million in the year ended December 31, 2015 compared to the year ended December 31, 2014 ,primarily reflecting an increased amount of initiation fees charged during the first half of 2015 associated with an increase in membership sales volume, partiallyoffset by a reduction in these fees charged during the second half of 2015 due to sales promotion. Our total member count increased 64,000 to 541,000 in 2015compared to a decrease of 13,000 members in 2014 primarily due to the implementation of the lower pricing model. Initiation and processing fees are recognizedinto revenue over the estimated average membership life.Personal training revenue increased $2.9 million to $73.2 million in the year ended December 31, 2015 compared to the year ended December 31, 2014 .Personal training revenue increased as a percentage of total revenue from 15.5% in 2014 to 17.3% in 2015. Our long-term goal is to generate approximately 20%of revenue from personal training. We offer a multi-session personal training membership product and fee-based class offerings to generate additional revenue.Other ancillary club revenue decreased $166,000 in the year ended December 31, 2015 compared to the year ended December 31, 2014 , primarily driven bydecreased revenue from guest fees as these fees were not charged in most of our clubs for the majority of the year ended December 31, 2015. These decreases werepartially offset by increased revenue from our studio classes.Comparable club revenue decreased 5.6% in the year ended December 31, 2015 compared to the prior year. The price of our membership dues and feesdecreased which was partially offset by an increase in memberships at our comparable clubs.38Table of ContentsOperating ExpensesOperating expenses (in thousands) were comprised of the following for the periods indicated: Year Ended December 31, 2015 2014 $ Variance % VariancePayroll and related $175,898 $177,009 $(1,111) (0.6)%Club operating 196,725 192,716 4,009 2.1 %General and administrative 30,683 31,352 (669) (2.1)%Depreciation and amortization 47,887 47,307 580 1.2 %Impairment of fixed assets 14,571 4,569 10,002 >100%Impairment of goodwill 31,558 137 31,421 >100%Gain on sale of building (77,146) — (77,146) N/MGain on lease termination (2,967) — (2,967) N/MOperating expenses $417,209 $453,090 $(35,881) (7.9)%N/M - not meaningfulOperating expenses increased due to the following factors:Payroll and related . Payroll and related expenses for the year ended December 31, 2015 decreased $1.1 million , or 0.6% , compared to the prior year.Personal training payroll increased $2.4 million which was related to the increase in personal training revenue. The increase also included $3.0 million separationobligations related to the departure of certain executive officers and severance charges of $817,000 associated with certain employees. These increases were morethan offset by decreased overhead expenses and club expenses of $7.3 million associated with headcount reductions and other cost savings initiatives. These costreductions primarily occurred in the second half of 2015.Club operating . Club operating expenses increased $4.0 million or 2.1% compared to the year ended December 31, 2014 . This increase was principallyattributable to the following:•Marketing expenses increased $3.2 million in the year ended December 31, 2015 compared to the prior year principally due to increased advertisingspend associated with the lower pricing model.•Rent and occupancy expenses increased $2.5 million in the year ended December 31, 2015 compared to the prior year principally due to the following:◦Mature clubs expenses increased $3.1 million resulting from rent escalations.◦Expenses associated with newly opened and future clubs and studio locations had increased $919,000.◦In the year ended December 31, 2014, we recognized $2.9 million of gains related to the reversal of deferred rent in connection with leasesterminated early which decreased rent and occupancy expenses in that period.Offsetting the above increases were savings of $4.6 million for closed clubs.•The above increases were partially offset by the results of our cost savings initiatives.General and administrative . General and administrative expense decreased $669,000 , or 2.1% , in the year ended December 31, 2015 compared to theyear ended December 31, 2014 , primarily reflecting the results of our cost savings initiatives of $2.2 million, partially offset by increased general liabilityinsurance expenses of $577,000 associated with an increase in reserves for claims related to prior periods. In addition, in 2015 there was an increase in costs of$200,000 associated with stock awards granted to the new members of the Board of Directors and $699,000 associated with the changes to our Board of Directorsand other related expenses.Depreciation and amortization . In the year ended December 31, 2015 compared to the year ended December 31, 2014 , depreciation and amortizationexpense increased $580,000 , or 1.2% , principally due to the addition of new locations during 2014 and 2015.Impairment of fixed assets . In the year ended December 31, 2015 , we recorded fixed asset impairment charges of $14.6 million compared to $4.6 millionin the year ended December 31, 2014 , all related to underperforming clubs.Impairment of goodwill. As a result of the significant decrease in market capitalization and a decline in our current performance primarily due to existingmembers downgrading their memberships to those with lower monthly dues and new members enrolling at lower rates that occurred between February 28, 2015and May 31, 2015, we performed an interim impairment test as of May 31, 2015. We concluded that there would be no remaining implied fair value of goodwillattributable39Table of Contentsto the NYSC and BSC regions. Accordingly, as of May 31, 2015, we wrote off $31.6 million of goodwill associated with these reporting units. The February 28,2014 annual impairment test resulted in a goodwill impairment charge of $137,000 associated with the Outlier Clubs in the year ended December 31, 2014 .Gain on Sale of Building. On September 12, 2014, we completed the legal sale of our property (building and land) on East 86th Street, New York City, to anunaffiliated third-party for gross proceeds of $85.7 million , which included $150,000 of additional payments to the Company. Concurrent with the closing of thetransaction, we leased back the portion of the property comprising our health club (“Initial Lease”) and had agreed to vacate the property in connection with thePurchaser's future development of a new luxury, high-rise multi-use building. In connection with vacating the property, we had agreed to enter into a new lease(“New Club Lease”) for approximately 24,000 square feet in the new building for the purpose of operating a health club upon completion of construction by thepurchaser/landlord. This sale-leaseback transaction was characterized as a financing arrangement for accounting purposes rather than a sale until any continuinginvolvement has ceased.On December 23, 2015, we terminated the Initial Lease and the agreement to enter into the New Club Lease and received gross proceeds of $3.5 million inconnection with the termination. We must vacate the currently leased area by March 12, 2016 or we will be required to return the gross proceeds of the leasetermination to the purchaser/landlord. Because the lease was terminated with no continuing involvement, this sale-leaseback transaction was accounted for as acompleted sale as of December 23, 2015. Under this treatment, we have recorded a $77.1 million gain, previously accounted for as a financing, on the sale of theproperty, recorded in Gain on sale of building in our consolidated statements of operations for the year ended December 31, 2015. Refer to Note 10 – BuildingFinancing Arrangement to our consolidated financial statements for further details.Gain on lease termination. In the year ended December 31, 2015 , we recorded a $3.0 million net gain on lease termination related to the termination of afuture lease for a planned club opening that was not yet effective.Gain (Loss) on Extinguishment of DebtIn the year ended December 31, 2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under the 2013 Senior Credit Facility inthe open market for $10.9 million , and such debt was transferred to TSI, LLC and cancelled, which resulted in a gain on extinguishment of debt of $17.9 million ,including the write-off of related deferred financing costs and debt discount of $249,000 and $707,000 , respectively.In the year ended December 31, 2014, loss on extinguishment of debt was $493,000 , comprised of the write-off of unamortized debt issuance costs and debtdiscount in connection with the November 2014 mandatory prepayment of $13.5 million on the 2013 Term Loan Facility. This mandatory payment was related tothe sale of the East 86th Street property pursuant to the terms of the 2013 Senior Credit Facility as described in the Liquidity and Capital Resources section.Interest ExpenseInterest expense increased by $1.5 million in the year ended December 31, 2015 compared to the year ended December 31, 2014 , primarily reflecting thenon-cash rental income related to our former tenant at the East 86th Street property. Because the legal sale of our East 86th Street property was characterized foraccounting purposes as a financing rather than a sale, the rental payments following the sale during portions of the years ended December 31, 2014 and 2015 weretreated as interest on the financing arrangement until any continuing involvement in the property ceased. In December 2015, we terminated our current lease andthe agreement to enter into our future lease with the purchaser/landlord, so this sale-leaseback transaction was accounted for as a completed sale in December2015. This was partially offset by a decrease in interest expense due to principal payments made on and purchases of debt outstanding under our 2013 Term LoanFacility.(Benefit) Provision for Corporate Income TaxesWe recorded income tax benefit of $14.4 million during the year ended December 31, 2015, which included a decrease of $17.3 million (net of theelimination of federal effect of state deferred taxes) to the full valuation allowance against the U.S. net deferred tax assets. For year ended December 31, 2014, wehad recorded a tax provision of $52.6 million. Our 2015 and 2014 effective tax rates were (211)% and (321)% in the years ended December 31, 2015 and 2014,respectively. Separate from the impact of valuation allowance, our 2015 and 2014 effective tax rate were 38% and 48%, respectively. Our effective tax rates for2015 and 2014 were favorably impacted by tax benefits derived from the captive insurance arrangement by approximately 14% and 7%, respectively. Additionally,our effective rate was adversely impacted to 369% in connection with recording a valuation allowance against U.S. deferred tax assets during the year endedDecember 31, 2014 and by 249% for the change in valuation allowance against U.S. deferred tax assets during the year ended December 31, 2015.40Table of ContentsAs of December 31, 2015, we have a net deferred tax liability of $61,000 as there is a full valuation allowance recorded against the U.S. net deferred taxassets. The state net deferred tax liability balance as of December 31, 2015 is $17,000 . For the year ended December 31, 2014 we had a net deferred tax liability of$11.6 million as there was a full valuation allowance recorded against the U.S. net deferred tax assets. The state net deferred tax liability balance at December 31,2014 was $3.3 million . The decrease in deferred tax liabilities was due to the impairment of goodwill and purchase of debt during 2015.In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of the deferred taxassets will be realized. A valuation allowance, if needed reduces the deferred tax assets to the amount expected to be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losscarry 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 thannot to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategiesand projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at eachreporting 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 deferredtax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than notrealizable, we establish a valuation allowance. We have recorded valuation allowances in the amounts of $43.7 million and $60.4 million at December 31, 2015and 2014, respectively.In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets generally cannot be used as a source of incometo realize deferred tax assets with a definitive loss carry forward period. We do not amortize goodwill for book purposes but have amortized goodwill with taxbasis for tax purposes. The deferred tax liabilities recorded at December 31, 2015 and 2014 relate to the tax effect of differences between the book and tax basis ofgoodwill that is not expected to reverse until some indefinite future period. The deferred tax liability recorded at December 31, 2014 related to the tax effect ofdifferences between the book and tax basis of goodwill was reversed in 2015 due to the impairment of goodwill associated with the NYSC and BSC regions.We are currently under examination in New York State (2006 through 2012). In September 2015, we consented to extend the assessment period for tax years2006 - 2011 through March 31, 2016 and tax year 2011 through September 14, 2016. Related to this examination, on January 13, 2016, we received a revisedassessment from the State of New York related to tax years 2006-2009 for $4.1 million, inclusive of $1.6 million of interest. We continue to evaluate the merits ofthe proposed assessment as new information becomes available during continued discussions with the State of New York. We have not recorded a tax reserverelated to the proposed assessment. It is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. Anestimate of the reasonably possible change to unrecognized tax benefits within the next 12 months cannot be made. Additionally, we are also under examination inNew York City (2006 through 2012), which we have consented to extend the assessment period through December 31, 2016.Year ended December 31, 2014 compared to year ended December 31, 2013RevenueRevenue (in thousands) was comprised of the following for the periods indicated: Year Ended December 31, 2014 2013 Revenue % Revenue Revenue % Revenue % VarianceMembership dues $343,185 75.6% $358,761 76.3% (4.3)%Initiation and processing fees 12,044 2.7% 14,392 3.0% (16.3)%Membership revenue 355,229 78.3% 373,153 79.3% (4.8)%Personal training revenue 70,338 15.5% 66,367 14.1% 6.0 %Other ancillary club revenue 22,304 4.9% 24,720 5.3% (9.8)%Ancillary club revenue 92,642 20.4% 91,087 19.4% 1.7 %Fees and other revenue 5,971 1.3% 5,985 1.3% (0.2)%Total revenue $453,842 100.0% $470,225 100.0% (3.5)%41Table of ContentsTotal revenue decreased $16.4 million, or 3.5%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result ofdecreases in membership revenue. For the year ended December 31, 2014, revenue decreased approximately $19.2 million at our clubs opened or acquired prior toDecember 31, 2012 combined with the decrease of revenue related to corporate sales and $4.6 million at clubs that closed subsequent to December 31, 2012. Thesedecreases were partially offset by a $7.5 million increase in revenue from our clubs and studio that were opened or acquired subsequent to December 31, 2012.Membership dues revenue decreased $15.6 million in the year ended December 31, 2014 compared to the year ended December 31, 2013 primarily driven bya decline in membership. The overall member loss of 13,000 in each of 2014 and 2013 largely contributed to the decline in membership and membership dues.Initiation and processing fees revenue decreased $2.3 million in the year ended December 31, 2014 compared to the year ended December 31, 2013,primarily reflecting a decline in membership sales. The decrease was partially offset by the effect of the lower estimated average membership life of 22months during each of the quarters of 2014, versus 25 months and 24 months for the three month periods ended March 31, 2013 and June 30, 2013, respectively,and 23 months for the second half of 2013. The lower amortizable life in the current year period resulted in higher initiation and processing fees revenuerecognition as initiation and processing fees were amortized over a shorter estimated average membership life.Personal training revenue increased $4.0 million in the year ended December 31, 2014 compared to the year ended December 31, 2013, driven by increasedpricing on our multi-session personal training membership products as well as increased interest in those products.Other ancillary club revenue decreased $2.4 million in the year ended December 31, 2014 compared to the year ended December 31, 2013 driven primarilyby a decline in revenue from our Sports Club for Kids and Small Group Training programs.Comparable club revenue decreased 4.2% in the year ended December 31, 2014 compared to the prior year, primarily reflecting a decrease in ourmembership, our membership dues and fees, as well as a decline in the combined effect of ancillary club revenue, joining fees and other revenue.Operating ExpensesOperating expenses (in thousands) were comprised of the following for the periods indicated: Year Ended December 31, 2014 2013 $ Variance % VariancePayroll and related $177,009 $174,894 $2,115 1.2 %Club operating 192,716 179,683 13,033 7.3 %General and administrative 31,352 28,431 2,921 10.3 %Depreciation and amortization 47,307 49,099 (1,792) (3.6)%Impairment of fixed assets 4,569 714 3,855 (539.9)%Impairment of goodwill 137 — 137 N/MInsurance recovery related to damaged property — (3,194) 3,194 100.0 %Operating expenses $453,090 $429,627 $23,463 5.5 %N/A - not meaningfulOperating expenses increased $23.5 million, or 5.5%, in the year ended December 31, 2014 compared to the prior year. The operating expenses comparisonwas impacted by $3.2 million of insurance proceeds received in 2013 in connection with property damaged by Hurricane Sandy which reduced 2013 operatingexpenses, as well as an increased fixed asset and goodwill impairment charges of $4.0 million in 2014. Separate from these items, operating expensesincreased $16.3 million, or 3.8%, $10.7 million of which related to our newly opened clubs and a studio. The remaining increase primarily reflected general costescalations, including increased utilities costs, and higher marketing expenses due to the conversion to the new pricing strategy further described below.Payroll and related. Payroll and related expenses for the year ended December 31, 2014 increased $2.1 million, or 1.2%, compared to the year endedDecember 31, 2013. The increase related to 2013 and 2014 openings, including a studio, was approximately $4.1 million. This increase was offset by the decreaserelated to 2013 and 2014 club closures of $1.9 million.42Table of ContentsAs a percentage of total revenue, payroll and related expenses increased to 39.0% in the year ended December 31, 2014 from 37.2% in the year endedDecember 31, 2013.Club operating. Club operating expenses increased $13.0 million or 7.3% compared to the year ended December 31, 2013. This increase was principallyattributable to the following:•Rent and occupancy expenses increased $6.2 million in the year ended December 31, 2014 compared to the prior year principally due to the following:◦Mature clubs expenses increased $2.4 million resulting from rent escalations.◦Expenses associated with newly opened and future clubs and studio locations increased $4.7 million.◦Net decrease of $790,000 in the year ended December 31, 2013 related to three early lease terminations and the write-off of the remainingdeferred rent at two of those locations.◦Partially offsetting the above increases was a decrease of $1.7 million related to clubs closed in 2014. Of this amount, $1.4 million was a netoccupancy gain related to the 2014 club closures which includes penalty payments to landlords and the write-offs of deferred rent at clubs withearly terminations.•Utilities expense increased $2.3 million in the year ended December 31, 2014 compared to the year ended December 31, 2013 principally due to higherenergy costs. Energy costs were negatively impacted by the severe cold experienced in our markets during the first quarter of 2014.•Marketing expenses increased $2.0 million in the year ended December 31, 2014 compared to the year ended December 31, 2013 principally due toincreased advertising spend at locations converting to the new pricing strategy.•Repair and maintenance expenses increased $1.0 million in the year ended December 31, 2014 compared to the year ended December 31, 2013, reflectingan increase in overall club maintenance, in particular, repairs of heating, ventilation and air conditioning system.As a percentage of total revenue, club operating expenses increased to 42.5% in the year ended December 31, 2014 from 38.2% in the yearended December 31, 2013.General and administrative. General and administrative expense increased $2.9 million, or 10.3%, in the year ended December 31, 2014 compared to theyear ended December 31, 2013. This increase was primarily due to increases in licensing fees related to the implementation of our new club operating system ofapproximately $1.4 million and general liability insurance expense of $567,000. We also experienced increased professional fees of approximately $845,000 andadministrative club closure expenses of $262,000. These increases were partially offset by a decrease of $324,000 in club acquisition related fees from thoseincurred in the year ended December 31, 2013.As a percentage of total revenue, general and administrative expenses increased to 6.9% in the year ended December 31, 2014 from 6.0% in the yearended December 31, 2013.Depreciation and amortization. In the year ended December 31, 2014 compared to the year ended December 31, 2013, depreciation and amortizationexpense decreased $1.8 million, or 3.6%, due to a decline in our depreciable fixed asset base and certain fixed asset write-offs in the last half of 2013.Impairment of fixed assets. In the year ended December 31, 2014, we recorded fixed asset impairment charges of $4.6 million compared to $714,000 in theyear ended December 31, 2013 all related to underperforming clubs.Insurance recovery related to damaged property. In the year ended December 31, 2013, we collected $3.2 million of insurance cash proceeds relatedprimarily due to property damaged by Hurricane Sandy. There were no such proceeds collected in the year ended December 31, 2014.Loss on Extinguishment of DebtIn the year ended December 31, 2014, loss on extinguishment of debt was $493,000, comprised of the write-off of unamortized debt issuance costs and debtdiscount in connection with the November 2014 mandatory prepayment of $13.5 million on the 2013 Term Loan Facility. This mandatory payment was related tothe sale of the East 86th Street property pursuant to the terms of the 2013 Senior Credit Facility as described in the Liquidity and Capital Resources section. In theyear ended December 31, 2013, loss on extinguishment of debt was $750,000 comprised of the write-off of net deferred financing costs and debt discount related tothe debt refinancing in November 2013.43Table of ContentsInterest ExpenseInterest expense decreased by $3.6 million in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to lowerinterest rates resulting from the November 15, 2013 refinancing, which were lower by approximately 125 basis points on the non-hedged debt principal and 80basis points on the hedged debt principal.Provision for Corporate Income TaxesWe recorded income tax expense of $52.6 million during the year ended December 31, 2014, which included $60.4 million (net of the elimination of federaleffect of state deferred taxes) to recognize a full valuation allowance against the US net deferred tax assets. For year ended December 31, 2013, we had recorded atax provision of $7.4 million. Our 2014 and 2013 effective tax rates were (321)% and 37% in the years ended December 31, 2014 and 2013, respectively. Separatefrom the impact of valuation allowance, our 2014 effective tax rate was 48%. Our effective tax rates for 2014 and 2013 were favorably impacted by tax benefitsderived from the captive insurance arrangement by approximately 7% and 5%, respectively. Additionally, our effective rate was adversely impacted to 369% inconnection with recording a valuation allowance against U.S. deferred tax assets during the year ended December 31, 2014.As of December 31, 2014, we had a net deferred tax liability of $11.6 million as there was a full valuation allowance recorded against the U.S. net deferredtax assets. The state net deferred tax liability balance as of December 31, 2014 was $3.3 million. In assessing the realizability of deferred tax assets, we evaluatedwhether it was 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, reducesthe deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets was dependent upon the generation of future taxableincome in those periods in which temporary differences become deductible and/or net operating loss carry forwards can be utilized. We assessed all positive andnegative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence included, but was notlimited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significantweight was given to positive and negative evidence that was objectively verifiable.As of December 31, 2014, we were not in a three year cumulative loss position. However, we were projected to be in a cumulative loss position during thethree year period ending in December 31, 2015, which was considered to be a significant piece of negative evidence. We determined that it was appropriate toconclude that there were losses that were projected in the near term due to the conversion to the new pricing strategy, which included increased marketing spendand lower membership revenue during initial months of conversion. We believed the conversion to the new pricing strategy will significantly increase membershipat the clubs in future periods and related income. However, because the accounting guidance for income taxes considered a projection of future earnings inherentlysubjective, it did not carry significant weight to overcome the objectively verifiable evidence of cumulative losses in recent years. Based on the weighting ofavailable evidence, both positive and negative evidence, most notably the projected three year cumulative loss, we recorded a $60.4 million non-cash charge toincome tax expense to establish a full valuation allowance against our U.S. net deferred tax assets. Although recognition of the valuation allowance for our netdeferred tax assets was a non-cash charge, it did have a direct negative impact on net loss and shareholder’s deficit for the quarter and fiscal year ended December31, 2014.In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets generally cannot be used as a source of incometo realize deferred tax assets with a definitive loss carry forward period. We did not amortize goodwill for book purposes but had amortized goodwill with tax basisfor tax purposes. The deferred tax liability recorded at December 31, 2014 related to the tax effect of differences between the book and tax basis of goodwill thatwas not expected to reverse until some indefinite future period.The following state and local jurisdictions were examining our respective returns for the years indicated: New York State (2006 through 2012), New YorkCity (2006, 2007, and 2008), and the Commonwealth of Massachusetts (2009, 2010). On March 26, 2014, we received from the State of New York a revisedassessment related to tax years 2006-2009 for $3.5 million, inclusive of $1.2 million of interest. We had subsequently received a request for additional informationfrom the State of New York. All of the information was submitted by January 2015. We continued to evaluate the merits of the proposed assessment as newinformation becomes available during continued discussions with the State of New York. We had not recorded a tax reserve related to the proposed assessment. Itwas difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of the reasonably possiblechange to unrecognized tax benefits within the next 12 months cannot be made.In 2014, we filed Form 3115, Application for Change in Accounting Method (“Application”), with the IRS requesting a change in accounting for thetreatment of landlord contributions. Accordingly, we reduced our unrecognized tax benefits by $12.7 million for the landlord contributions positions taken in prioryears. The reduction in unrecognized tax benefits didn’t affect our effective tax rate since the position related to a temporary difference; however, we recognized atax benefit of $334,000 primarily related to the reversal of accrued interest.44Table of ContentsThe results for the year ended December 31, 2013 also included the correction of errors that resulted in an increase in tax benefits for corporate income taxesand a related increase in deferred tax assets in our consolidated statement of operations and consolidated balance sheet, respectively. In the fourth quarter of 2013,we identified corrections related to temporary differences in fixed assets for state depreciation resulting in the recognition of an income tax benefit of $225,000.Also, in the fourth quarter of 2013, we identified corrections related to temporary differences in landlord allowances resulting in the recognition of out of periodexpense of $209,000 for a net benefit to the provision for corporate income taxes of $16,000 in the year ended December 31, 2013.Segment Results of OperationsThe following discussion sets forth our financial performance by reportable segment for the years ended December 31, 2015, 2014 and 2013. We presentearnings (loss) before interest expense (net of interest income), provision (benefit) for corporate income taxes, and depreciation and amortization (“EBITDA”) asthe primary measure of profit and loss for our operating segments in accordance with FASB guidance for segment reporting.Clubs (New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs, Washington Sports Clubs, and Swiss Sports Clubs) Year ended December 31, 2015 2014 2013Revenue$422,090 $453,516 $470,225EBITDA (1)$79,232 $53,524 $91,770(1) Includes significant items affecting comparability. See discussion below.Year ended December 31, 2015 compared to year ended December 31, 2014Clubs revenue decreased $31.4 million , or 6.9% , in the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease wasprimarily at our comparable clubs which decreased 5.6%. The effect of new members enrolling at lower monthly dues combined with members who cancelled whowere paying higher monthly dues was only partially offset by an increase in membership sales volume. The decline was also partially offset by an increase inannual fees recognized of $9.9 million. Our total member count increased 64,000 to 541,000 in 2015 compared to a decrease of 13,000 members in 2014. Wecontinue to consider and make pricing adjustments in order to increase revenue while also driving membership growth.Clubs EBITDA increased $25.7 million for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily reflecting a $77.1million gain on sale of building in 2015, a net increase of $18.4 million gain on extinguishment of debt and a $3.0 million gain on lease termination in 2015. Theseincreases were partially offset by increased fixed asset and goodwill impairment charges of $41.4 million and the decline in revenue.Year ended December 31, 2014 compared to year ended December 31, 2013Clubs revenue decreased $16.7 million, or 3.6%, in the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result of declinein membership revenue. Comparable club revenue decreased 4.2% in the year ended December 31, 2014 compared to the prior year, primarily reflecting a decreasein our membership, our membership dues and fees, as well as a decline in the combined effect of ancillary club revenue, joining fees and other revenue.Clubs EBITDA decreased $38.2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily reflecting lowermembership revenues, and increased club operating expense mainly due to higher rent and occupancy expense, utilities expense, and marketing costs.Comparability in 2014 was also negatively impacted by $3.2 million of insurance proceeds received in 2013 in connection with property damaged by HurricaneSandy, as well as an increased fixed asset and goodwill impairment charges of $4.0 million in 2014.45Table of ContentsStudio (BFX Studio) Year ended December 31, 2015 2014 2013Revenue$2,233 $326 $—EBITDA$(3,959) $(3,556) $(364)Year ended December 31, 2015 compared to year ended December 31, 2014Studio revenue increased $1.9 million in the year ended December 31, 2015 compared to the year ended December 31, 2014, reflecting revenue of our threestudios opened in September 2014, March 2015 and June 2015.Studio had an EBITDA loss of $4.0 million and $3.6 million in the year ended December 31, 2015 and 2014, respectively, primarily reflecting the rent andoccupancy costs, start-up costs and overhead payroll for our locations.Year ended December 31, 2014 compared to year ended December 31, 2013Studio reported revenue of $326,000 for the year ended December 31, 2014, primarily reflecting revenue of our first studio that was opened in September2014.Studio reported EBITDA loss of $3.6 million in 2014 and $364,000 in 2013 primarily reflecting the rent and occupancy costs, start-up costs and overheadpayroll for our first studio location and additional locations with leases executed and development underway as of December 31, 2014.Liquidity and Capital ResourcesWe have been experiencing declining revenue from members for several years as the fitness industry continues to be highly competitive in the geographicregions in which we compete. New members have been joining at lower monthly rates and cancellations of members paying higher rates, primarily from theconversion to the lower pricing model, will continue to negatively impact our liquidity if these trends are not reversed. In response to this, we initiated cost savingsinitiatives in 2015 that have continued into fiscal 2016 to help mitigate the impact the decline in revenue has had on our profitability and cash flow fromoperations. We also purchased $29.8 million principal amount of our debt at a significant discount in 2015.Our ability to fund operations and capital expenditures in 2016 is dependent upon our ability to generate sufficient cash from operations coupled with cash onhand. We believe we have sufficient liquidity from a combination of cash on hand and cash to be generated from operations during 2016 to fund anticipated capitalexpenditures and currently scheduled debt service for the year ending December 31, 2016. As further described below, we maintain a senior credit facility with ourlenders which contains a term loan facility and a revolving loan facility. The terms of the senior credit facility include a financial covenant under which we arecurrently not able to utilize more than 25% , or $11.3 million , of the revolving loan facility. We will continue not to be able to utilize more than 25% of therevolving loan facility until we have a total leverage ratio, as defined, of no greater than 4.50 :1.00. The revolving loan facility is scheduled to mature in November2018. Based upon our current cash balance as of December 31, 2015 of $76.2 million and projected cash from operations, we do not anticipate the need to utilizethe revolving loan facility during 2016.We may consider additional actions within our control, including the sale of certain assets, additional club closures and entering into arrangements withrevenue generating partnerships, some which may utilize a “shop-in-shop” concept. We may also consider additional strategic alternatives including opportunitiesto reduce TSI LLC’s existing debt and further cost savings initiatives, among other possibilities. Our ability to continue to meet our obligations beyond 2016 isdependent on our ability to generate positive cash flow from a combination of initiatives, including those mentioned above. Failure to successfully implement theseinitiatives could have a material adverse effect on our liquidity and our operations and we would need to implement alternative plans that could include additionalasset sales, additional reductions in operating costs, deferral of capital expenditures, further reductions in working capital and debt restructurings. There can be noassurance that such alternatives would be available to us or that we would be successful in their implementation.As of December 31, 2015 , we had $76.2 million of cash and cash equivalents. Financial instruments that potentially subject us to concentrations of creditrisk consist of cash and cash equivalents. Although we deposit our cash with more than one financial institution, as of December 31, 2015 , $64.8 million was heldat two financial institutions. We have not experienced any losses on cash and cash equivalent accounts to date and we do not believe that, based on the creditratings of the aforementioned institutions, we are exposed to any significant credit risk related to cash at this time.46Table of ContentsHistorically, we have satisfied our liquidity needs through cash generated from operations and various borrowing arrangements. Principal liquidity needshave included the acquisition and development of new clubs, debt service requirements, debt purchases and other capital expenditures necessary to upgrade,expand and renovate existing clubs. In December 2013, March 2014 and June 2014, we paid a cash dividend of $0.16 per share. Any determination to pay futuredividends will be made by the board of directors and will take into account such matters as cash on hand, general economic and business conditions, our strategicplans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us and our subsidiaries and such otherfactors as our board of directors may consider to be relevant. We believe that our existing cash and cash equivalents, cash generated from operations and ourexisting credit facility will be sufficient to fund capital expenditures, working capital needs and other liquidity requirements associated with our operations throughat least the next 12 months.Operating Activities. Net cash provided by operating activities for the year ended December 31, 2015 increased $20.1 million compared to the prior yearprimarily due to the following.•Cash paid for income taxes decreased $23.4 million primarily related to the legal sale of the East 86th Street property in the year ended December 31,2014, which was treated as a financing arrangement for accounting purposes, but recognized as of the date of sale for Federal and State income taxes atthe time of the legal sale. We also received an income tax refund of $7.8 million in the year ended December 31, 2015.•Cash collected for member enrollment, including the initial annual fee paid upon joining, increased $10.8 million related to the increase in membershipssold, and recurring annual and rate lock fees collected increased $1.6 million.•Cash collected for personal training memberships increased $2.7 million.•In the year ended December 31, 2015, we received cash proceeds of $3.1 million for the termination of a lease that was not yet effective for a plannedclub opening.•Accrued payroll expenses decreased $4.9 million in 2014 and increased $1.3 million in 2015 generating a favorable cash flow variance of $6.2 million.Accrued payroll was unusually high as of December 31, 2013 principally due to timing differences in payroll payments.•The differences in the timing of other collections and payments made associated with accounts receivable, prepaid expenses, accounts payable andaccrued expenses generated a favorable cash flow variance of approximately $8.4 million.•These increases were partially offset by a decrease in membership dues collected of $43.9 million in 2015.Net cash provided by operating activities for the year ended December 31, 2014 decreased $62.6 million compared to the prior year. In the year endedDecember 31, 2014, cash received from membership dues and cash collected for member enrollment decreased $10.9 million and for-pay programs decreased$18.8 million, principally related to lower membership volume in 2014 compared with 2013. The cash decrease also reflected an increase in cash paid for incometaxes of $23.2 million (after utilization of net operating losses and carryforward) primarily related to the legal sale of the East 86th Street property, which is treatedas a financing arrangement for accounting purposes, but recognized as of the date of sale for Federal and State income taxes. In addition, there were increasedpayments for rent of $6.2 million and utilities of $2.9 million. The decrease in accrued payroll expenses also generated an unfavorable cash flow variance of $4.9million in 2014 principally due to timing differences in payroll payment. These cash decreases were partially offset by the decline in cash paid for interest of $2.6million in 2014.Investing Activities. Net cash used in investing activities decreased $10.5 million in the year ended December 31, 2015 compared to the prior year. Thedecrease was primarily due to the decreased activity in the building of new clubs. Investing activities in the year ended December 31, 2015 included capitalexpenditures related to expanding and remodeling existing clubs, and the purchase of new fitness equipment. The 2015 amount includes approximately $9.1million related to 2015 and 2016 openings. Total capital expenditures also includes approximately $14.4 million to continue to enhance or upgrade existing clubs,and $4.5 million principally related to major renovations at clubs with recent lease renewals. In addition, we invested $2.5 million to enhance our managementinformation and communication systems. These capital expenditures are funded by cash flow from operations and available cash on hand. The decrease alsoincluded a $1.1 million executive separation obligation related to our former Executive Chairman in 2015.Net cash used in investing activities increased $11.4 million in the year ended December 31, 2014 compared to the prior year. Investing activities in the yearended December 31, 2014 consisted of capital expenditures for the building of new clubs, remodeling of existing clubs, the purchase of new fitness equipment andcapital investment in information technology. The 2014 amount included approximately $18.6 million related to 2014 and 2015 openings, including both clubs andstudios. Total capital expenditures also included approximately $20.7 million to continue to enhance or upgrade existing clubs, and $661,000 principally related tomajor renovations at clubs with recent lease renewals. In addition, in the year ended December 31, 2014, we invested $2.1 million to enhance our managementinformation and communication systems. These capital expenditures were funded by available cash on hand and the after-tax proceeds from the legal sale of theEast 86th Street property.47Table of ContentsFinancing Activities. Net cash used in financing activities for the year ended December 31, 2015 was $10.5 million compared to net cash provided byfinancing activities of $57.5 million for the prior year. In the year ended December 31, 2015, TSI Holdings purchased $29.8 million principal amount of debtoutstanding under the 2013 Senior Credit Facility in the open market for $10.9 million and such debt was transferred to TSI, LLC and cancelled. The total principalpayments made on the 2013 Term Loan Facility were $3.0 million in the year ended December 31, 2015 compared to $16.7 million in the prior year. In the yearended December 31, 2015 and 2014, financing activities also consisted of gross cash proceeds from the sale of the East 86th Street property of $4.0 million and$83.4 million, respectively. The 2014 cash proceeds was partially offset by $3.2 million of real property transfer taxes, broker fees and other costs associated withthis property sale. In addition, we paid cash dividends to common stockholders of $213,000 in the year ended December 31, 2015 compared to $7.9 million ofdividends in the prior year. In the year ended December 31, 2015, we paid a $246,000 redemption price to the holders of the rights pursuant to a stockholder rightsplan.Net cash provided by financing activities for the year ended December 31, 2014 was $57.5 million compared to net cash used in financing activities of$975,000 for the year ended December 31, 2013. In the year ended December 31, 2014, financing activities consisted of $83.4 million in gross cash proceeds fromthe sale of the East 86th Street property, accounted for as a building financing arrangement, partially offset by $3.2 million of real property transfer taxes, brokerfees and other costs associated with the property sale. Pursuant to the terms of the 2013 Senior Credit Facility, we are required to apply net proceeds in excess of$30.0 million from sales of assets in any fiscal year towards mandatory prepayments of outstanding borrowings. Accordingly, we re-paid $13.5 million of principalof the 2013 Term Loan Facility in November 2014. The total principal payments made on the 2013 Term Loan Facility in the year ended December 31, 2014 was$16.7 million. In addition, we paid cash dividends to common stockholders of $7.9 million in the year ended December 31, 2014 compared to $4.1 million ofdividends in the year ended December 31, 2013.2013 Senior Credit FacilityOn November 15, 2013, TSI, LLC, an indirect, wholly-owned subsidiary, entered into a $370.0 million senior secured credit facility (“2013 Senior CreditFacility”), among TSI, LLC, TSI Holdings II, LLC, a newly-formed, wholly-owned subsidiary of the Company (“Holdings II”), as a Guarantor, the lenders partythereto, Deutsche Bank AG, as administrative agent, and Keybank National Association, as syndication agent. The 2013 Senior Credit Facility consists of a $325.0million term loan facility maturing on November 15, 2020 (“2013 Term Loan Facility”) and a $45.0 million revolving loan facility maturing on November 15,2018 (“2013 Revolving Loan Facility”). Proceeds from the 2013 Term Loan Facility of $323.4 million were issued, net of an original issue discount (“OID”) of0.5% , or $1.6 million . Debt issuance costs recorded in connection with the 2013 Senior Credit Facility were $5.1 million and are being amortized as interestexpense and are included in other assets in the accompanying consolidated balance sheets. We also recorded additional debt discount of $4.4 million related tocreditor fees. The proceeds from the 2013 Term Loan Facility were used to pay off amounts outstanding under our previously outstanding long-term debt facilityoriginally entered into on May 11, 2011 (as amended from time to time), and to pay related fees and expenses. None of the revolving loan facility was drawn uponas of the closing date on November 15, 2013, but loans under the 2013 Revolving Loan Facility may be drawn from time to time pursuant to the terms of the 2013Senior Credit Facility. The borrowings under the 2013 Senior Credit Facility are guaranteed and secured by assets and pledges of capital stock by Holdings II, TSI,LLC, and, subject to certain customary exceptions, the wholly-owned domestic subsidiaries of TSI, LLC.Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI, LLC’s option, bear interest at either the administrative agent’sbase rate plus 2.5% or a LIBOR rate adjusted for certain additional costs (the “Eurodollar Rate”) plus 3.5% , each as defined in the 2013 Senior Credit Facility.With respect to the outstanding initial term loans, the Eurodollar Rate has a floor of 1.00% and the base rate has a floor of 2.00% . Commencing with the lastbusiness day of the quarter ended March 31, 2014, TSI, LLC is required to pay 0.25% of the principal amount of the term loans each quarter, which may bereduced by voluntary prepayments. As of December 31, 2015 , we have made a total of $19.8 million in principal payments on the 2013 Term Loan Facility.On January 30, 2015, the 2013 Senior Credit Facility was amended (the "Amendment") to permit TSI Holdings to purchase term loans under the CreditAgreement. Any term loans so purchased by TSI Holdings will be cancelled in accordance with the terms of the Credit Agreement, as amended by theAmendment. We may from time to time purchase term loans in market transactions, privately negotiated transactions or otherwise; however we are under noobligation to make any such purchases. Any such transactions, and the amounts involved, will depend on prevailing market conditions, liquidity requirements,contractual restrictions and other factors. The amounts involved may be material. In December 2015, TSI Holdings purchased $29.8 million principal amount ofdebt outstanding under the 2013 Senior Credit Facility in the open market for $10.9 million and such debt was transferred to TSI, LLC and cancelled, whichresulted in a gain on extinguishment of debt of $17.9 million , including the write-off of related deferred financing costs and debt discount of $249,000 and$707,000 , respectively.48Table of ContentsThe 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 isrequired to maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.50:1.00. While not subject to the total leverage ratiocovenant as of December 31, 2015 as our only utilization of the 2013 Revolving Loan Facility as of December 31, 2015 was $2.9 million of issued and outstandingletters of credit thereunder, because the Company’s total leverage ratio as of December 31, 2015 was in excess of 4.50 :1.00, we are currently not able to utilizemore than 25% of the 2013 Revolving Loan Facility. We will continue not to be able to utilize more than 25% of the 2013 Revolving Loan Facility until we have atotal leverage ratio of no greater than 4.50 :1.00. The 2013 Senior Credit Facility also contains certain affirmative and negative covenants, including covenants thatmay limit or restrict TSI, LLC and Holdings II’s ability to, among other things, incur indebtedness and other liabilities; create liens; merge or consolidate; disposeof assets; make investments; pay dividends and make payments to shareholders; make payments on certain indebtedness; and enter into sale leaseback transactions,in each case, subject to certain qualifications and exceptions. In addition, at any time when the total leverage ratio is greater than 4:50:1.00, there are additionallimitations on the ability of TSI, LLC and Holdings II to, among other things, make certain distributions of cash to TSI Holdings. The 2013 Senior Credit Facilityalso includes customary events of default (including non-compliance with the covenants or other terms of the 2013 Senior Credit Facility) which may allow thelenders to terminate the commitments under the 2013 Revolving Loan Facility and declare all outstanding term loans and revolving loans immediately due andpayable and enforce its rights as a secured creditor.TSI, LLC may prepay the 2013 Term Loan Facility and 2013 Revolving Loan Facility without premium or penalty in accordance with the 2013 SeniorCredit Facility. Mandatory prepayments are required relating to certain asset sales, insurance recovery and incurrence of certain other debt and commencing in2015 in certain circumstances relating to excess cash flow (as defined) for the prior fiscal year, as described below, in excess of certain expenditures. Pursuant tothe terms of the 2013 Senior Credit Facility, we are required to apply net proceeds in excess of $30.0 million from sales of assets in any fiscal year towardsmandatory prepayments of outstanding borrowings. In connection with the sale of the East 86th Street property, accounted for as a building financing arrangement,described in Note 10 - Building Financing Arrangement, we received approximately $43.5 million in net sales proceeds (after taxes, before giving effect toutilization of net operating losses and carryforward). Accordingly, we made a mandatory prepayment of $13.5 million on the 2013 Term Loan Facility inNovember 2014. In connection with this mandatory prepayment, during the year ended December 31, 2014, we recorded loss on extinguishment of debt of$493,000 , consisting of the write-off of unamortized debt issuance costs and debt discount of $119,000 and $374,000 , respectively, and was included in loss onextinguishment of debt in the accompanying consolidated statements of operations for the year ended December 31, 2014. To the extent the proceeds of the sale ofthe East 86th Street property are not reinvested, we may be required to use such amounts, other than amounts used in 2014 to repay debt, to pay down ouroutstanding debt, as provided under the terms of our 2013 Senior Credit Facility. Based on increased capital expenditures related to the building of locations, we donot expect to be required to make a payment at any time.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined, to be applied against outstanding 2013Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days after the fiscal year end. Theapplicable excess cash flow repayment percentage is applied to the excess cash flow when determining the excess cash flow payment. Earnings, changes inworking capital and capital expenditure levels all impact the determination of any excess cash flow. The applicable excess cash flow repayment percentage is 50%when the total leverage ratio, as defined in the 2013 Senior Credit Facility, exceeds or is equal to 2.50 :1.00; 25% when the total leverage ratio is greater than orequal to 2.00 :1.00 but less than 2.50:1.00 and 0% when the total leverage ratio is less than 2.00:1.00. The first excess cash flow payment would have been due inApril 2015. The excess cash flow calculation performed as of December 31, 2015 did not result in any required payments.As of December 31, 2015 , the 2013 Term Loan Facility has a gross principal balance of $275.4 million and a balance of $269.0 million net of unamortizeddebt discount of $6.4 million which is comprised of the unamortized portions of the OID recorded in connection with the May 11, 2011 debt issuance and theunamortized balance of the additional debt discounts recorded in connection with the first amendment and second amendment to the 2011 Senior Credit Facility.The unamortized debt discount balance is recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortizedas interest expense using the effective interest method. As of December 31, 2015 , the unamortized balance of debt issuance costs of $3.0 million is beingamortized as interest expense, and is included in other assets in the accompanying consolidated balance sheets.As of December 31, 2015 , there were no outstanding 2013 Revolving Loan Facility borrowings and outstanding letters of credit issued totaled $2.9 million .The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2015 was $42.1 million and the available unutilized portion, based on theCompany’s total leverage ratio exceeding 4.50 :1.00, was $11.3 million .49Table of ContentsRepayment of 2011 Senior Credit FacilityTSI, LLC’s previously outstanding senior secured credit facility was originally entered into on May 11, 2011 and consisted of a $350.0 million seniorsecured credit facility (“2011 Senior Credit Facility”) comprised of a $300.0 million term loan facility (“2011 Term Loan Facility”) scheduled to mature onMay 11, 2018 and a $50.0 million revolving loan facility scheduled to mature on May 11, 2016 (“2011 Revolving Loan Facility”).Contemporaneously with entry into the 2013 Senior Credit Facility, TSI, LLC repaid the outstanding principal amount of the 2011 Term Loan Facility of$315.7 million . The 2011 Term Loan Facility was set to expire on May 11, 2018. There were no outstanding amounts under the 2011 Revolving Loan Facility asof November 15, 2013, the date of the initial borrowing under the 2013 Senior Credit Facility. The 2011 Term Loan Facility was repaid at face value of $315.7million plus accrued and unpaid interest of $807,000 and letter of credit fees and commitment fees of $67,000 . The total cash paid in connection with thisrepayment was $316.6 million as of November 15, 2013 with no early repayment penalty. We determined that the 2013 Senior Credit Facility was not substantiallydifferent than the 2011 Senior Credit Facility for certain lenders based on the less than 10% difference in cash flows of the respective debt instruments. A portionof the transaction was therefore accounted for as a modification of the 2011 Senior Credit Facility and a portion was accounted for as an extinguishment. As ofNovember 15, 2013, we recorded loss on extinguishment of debt of approximately $750,000 , representing the write-off of the remaining unamortized debt costsand debt discount related to the portion of the 2011 Senior Credit Facility that was accounted for as an extinguishment, and was included in loss on extinguishmentof debt in the accompanying consolidated statements of operations for the year ended December 31, 2013.Financial InstrumentsIn our normal operations, we are exposed to market risks relating to fluctuations in interest rates. In order to minimize the possible negative impact of suchfluctuations on our cash flows we may enter into derivative financial instruments (“derivatives”), such as interest-rate swaps. Any instruments are not entered intofor trading purposes and we only use commonly traded instruments. Currently, we have used derivatives solely relating to the variability of cash flows frominterest rate fluctuations.We originally entered into an interest rate swap arrangement on July 13, 2011 in connection with the 2011 Senior Credit Facility. In connection with enteringinto the 2013 Senior Credit Facility, we amended and restated the interest rate swap agreement initially entered into (and amended in August 2012 and November2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rate swap arrangement had a notional amount of $160.0million and will mature on May 15, 2018. The swap effectively converts $160.0 million of the $325.0 million total variable-rate debt under the 2013 Senior CreditFacility to a fixed rate of 5.384% , when including the applicable 3.50% margin. As permitted by ASC 815, Derivatives and Hedging, we have designated thisswap as a cash flow hedge, the effects of which have been reflected in our consolidated financial statements as of and for the years ended December 31, 2015 ,2014 and 2013 . The objective of this hedge is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debtdesignated as being hedged.When our derivative instrument was executed, hedge accounting was deemed appropriate and it was designated as a cash flow hedge at inception with re-designation being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps are designated as cash flow hedges for accounting purposes since theyare being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt). On an ongoing basis, we perform aquarterly assessment of the hedge effectiveness of the hedge relationship and measure and recognize any hedge ineffectiveness in our consolidated statements ofoperations. For the years ended December 31, 2015 , 2014 and 2013 , hedge ineffectiveness was evaluated using the hypothetical derivative method. There was nohedge ineffectiveness in the years ended December 31, 2015 , 2014 and 2013 .The counterparty to our derivatives is a major banking institution with a credit rating of investment grade or better and no collateral is required, and there areno significant risk concentrations. We believe the risk of incurring losses on derivative contracts related to credit risk is unlikely.Consolidated DebtAs of December 31, 2015 , our total principal amount of debt outstanding was $275.4 million . This substantial amount of debt could have significantconsequences, 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;50Table of Contents•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and other generalcorporate 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 LoanFacility and partially variable on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing our ability to useour 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 atvariable interest rates;•limiting our ability to refinance our existing indebtedness on favorable terms, or at all; and•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.We believe that we have, or will be able to, obtain or generate sufficient funds to finance our current operating and growth plans through the next 12 months.Any material acceleration or expansion of our plans through newly constructed clubs or acquisitions (to the extent such acquisitions include cash payments) mayrequire us to pursue additional sources of financing. There can be no assurance that such financing will be available, or that it will be available on acceptable terms.Gain on Sale of BuildingOn September 12, 2014, we completed the legal sale of our property (building and land) on East 86th Street, New York City, to an unaffiliated third-party forgross proceeds of $85.7 million , which included $150,000 of additional payments to the Company. Concurrent with the closing of the transaction, we leased backthe portion of the property comprising our health club and had agreed to vacate the property in connection with the Purchaser's future development of a newluxury, high-rise multi-use building. In connection with vacating the property, we had agreed to the New Club Lease for approximately 24,000 square feet in thenew building for the purpose of operating a health club upon completion of construction by the purchaser/landlord. This sale-leaseback transaction wascharacterized as a financing arrangement for accounting purposes rather than a sale until any continuing involvement has ceased. As of December 31, 2014, thetotal financing arrangement was $83.4 million , which was net of $1.8 million held in escrow for our former tenant. As part of the transaction, we incurred $3.2million of real property transfer taxes, broker fees and other costs which were deferred and were being amortized over the term of the Initial Lease of 25 years,which included the option periods. The net fees are included in Other assets on the accompanying consolidated balance sheets as December 31, 2014.On December 23, 2015, we terminated the New Club Lease and received gross proceeds of $3.5 million in connection with the termination. We must vacatethe currently leased area by March 12, 2016 or we will be required to return the gross proceeds of the lease termination to the purchaser/landlord. Because the leasewas terminated with no continuing involvement, this sale-leaseback transaction was accounted for as a completed sale as of December 23, 2015. Under thistreatment, we have recorded a $77.1 million gain, previously accounted for as a financing, on the sale of the property, recorded in Gain on sale of building in ourconsolidated statements of operations for the year ended December 31, 2015. As of December 23, 2015, the net book value of the building and buildingimprovements was $2.8 million and the book value of the land was $986,000 and the net book value of the deferred building financing costs was $3.0 million . Thegain on the sale of the building is also net of $3.5 million of deferred lease receivable related to our former tenant.51Table of ContentsContractual Obligations and CommitmentsAs of December 31, 2015 , our contractual obligations listed in the table below and payments by period were as follows: Payments Due by Period (in thousands)Contractual Obligations(4) Total Less than1 Year 1-3 Years 3-5 Years More than5 YearsLong-term debt(1) $275,417 $2,810 $5,621 $4,918 $262,068Interest payments on long-term debt(2) 62,943 13,945 26,367 22,631 —Operating lease obligations(3) 601,882 89,359 162,013 134,377 216,133Total contractual obligations $940,242 $106,114 $194,001 $161,926 $478,201Notes:(1)Principal amounts paid each year may increase if annual excess cash flow amounts are required (as described above). Excess cash flow was calculated as ofDecember 31, 2015 and no payments are currently required in 2016 or any future period.(2)Based on interest rates pursuant to the 2013 Term Loan Facility and the interest swap agreement as of December 31, 2015 .(3)Operating lease obligations include base rent only. Certain leases provide for additional rent based on real estate taxes, common area maintenance and definedamounts based on our operating results.(4)The table above does not reflect payments related to planned club closures.The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes (including uncertain taxpositions or benefits), insurance accruals and other accruals. We are unable to estimate the timing of payments for these items.We had working capital of $27.9 million and $52.3 million at December 31, 2015 and December 31, 2014 , respectively. Major components of our workingcapital on the current assets side are cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, and the current portion of deferredtax assets. As of December 31, 2015 , these current assets more than offset the current liabilities, which consist of deferred revenues, accounts payable, accruedexpenses (including, among others, accrued construction in progress and equipment, payroll and occupancy costs), the current portion of deferred tax liabilities andthe current portion of long-term debt. The deferred revenue that is classified as a current liability relates to dues and services paid-in-full in advance and fees paidat the time of enrollment and totaled $40.2 million and $37.0 million at December 31, 2015 and December 31, 2014 , respectively. Initiation and processing feesreceived are deferred and amortized over the estimated average membership life of a club member and all annual fees are deferred and amortized over a 12 monthperiod. Prepaid dues and fees for prepaid services are generally realized over a period of up to 12 months. In periods when we increase the number of members andconsequently increase the level of payments received in advance, we would expect to see increased deferred revenue balances. By contrast, any decrease in demandfor our services or reductions in initiation fees collected would have the effect of reducing deferred revenue balances, which would likely require us to rely moreheavily on other sources of funding. In either case, a significant portion of the deferred revenue is not expected to constitute a liability that must be funded withcash. At the time a member joins our club, we incur enrollment costs, a portion of which are deferred over the estimated average membership life or 12 months tothe extent these costs are related to the first annual fee paid at the time of enrollment. These costs are recorded as a long-term asset and as such do not affectworking capital. We believe our cash and cash equivalents and our 2013 Revolving Loan Facility, which had $11.3 million of remaining availability atDecember 31, 2015 based on our leverage ratio and utilization at that date, are sufficient to fund our operating, investing and financing requirements for the nexttwelve months.Recent Changes in or Recently Issued Accounting StandardsFor details of applicable new accounting standards, please, see Note 4 — Recent Accounting Pronouncements to our consolidated financial statements inthis Annual Report.Use of Estimates and Critical Accounting PoliciesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of thefinancial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.52Table of ContentsThe most significant assumptions and estimates relate to the useful lives of long-term assets, recoverability and impairment of fixed and intangible assets,deferred income tax valuation, valuation of and expense incurred in connection with stock options, valuation of interest-rate swap arrangements, insurancereserves, legal contingencies and the estimated average membership life.Estimated average membership life. Initiation and processing fees, as well as related direct and incremental expenses of membership acquisition, whichinclude sales commissions, bonuses and related taxes and benefits, are deferred and recognized, on a straight-line basis, in operations over the estimated averagemembership life or 12 months to the extent these costs are related to the first annual fee paid at the time of enrollment. Annual fees are amortized over 12 months.As of December 31, 2015 , the average membership life was 22 months. The Company monitors factors that might affect the estimated average membership lifeincluding retention trends, attrition trends, membership sales volumes, membership composition, competition, and general economic conditions, and adjusts theestimate as necessary on a quarterly basis.Fixed and intangible assets. Fixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which are30 years for building and improvements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computer software.Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Payroll costs directly related tothe construction or expansion of the Company’s locations are capitalized with leasehold improvements. Expenditures for maintenance and repairs are charged tooperations as incurred. The cost and related accumulated depreciation of assets retired or sold is removed from the respective accounts and any gain or loss isrecognized in operations. The costs related to developing web applications, developing web pages and installing or enhancing developed applications on the webservers are capitalized and classified as computer software. Web site hosting fees and maintenance costs are expensed as incurred.Long-lived assets, such as fixed assets and intangible assets are reviewed for impairment when events or circumstances indicate that their carrying value maynot be recoverable. Estimated undiscounted expected future cash flows are used to determine if an asset group is impaired, in which case, the asset’s carrying valuewould be reduced to its fair value, calculated considering a combination of market approach and a cost approach. In determining the recoverability of fixed assetsLevel 3 inputs were used in determining undiscounted cash flows, which are based on internal budgets and forecasts through the end of the life of the primary assetin the asset group which is normally the life of leasehold improvements. The most significant assumptions in those budgets and forecasts relate to estimatedmembership and ancillary revenue, attrition rates, discount rates, income tax rates, estimated results related to new program launches and maintenance capitalexpenditures, which are generally estimated at approximately 1% of total revenues depending upon the conditions and needs of a given club. If we continue toexperience competitive pressure, certain assumptions may fluctuate materially. See Note 5 - Fixed Assets to our consolidated financial statements.In the year ended December 31, 2015 , 2014 and 2013 , we recorded fixed asset impairment charges of $14.6 million , $4.6 million and $714,000 ,respectively. The fixed asset impairment charge is included as a component of operating expenses in a separate line on our consolidated statements of operations.Goodwill has been allocated to reporting units that closely reflect the regions served by the Company’s four trade names: New York Sports Clubs (“NYSC”),Boston Sports Clubs (“BSC”), Washington Sports Clubs (“WSC”) and Philadelphia Sports Clubs (“PSC”), with certain more remote clubs that do not benefit froma regional cluster being considered single reporting units (“Outlier Clubs”), the Company’s three clubs located in Switzerland being considered a single reportingunit (“SSC”), and our BFX Studio (“studio”). As of December 31, 2015 , only the SSC region has a remaining goodwill balance.As of February 28, 2015 and February 28, 2014, we performed our annual impairment test of goodwill. The February 28, 2015 annual impairment testsupported the recorded goodwill balance and as such no impairment of goodwill was required. The February 28, 2014 annual impairment test resulted in a goodwillimpairment charge of $137,000 associated with the Outlier Clubs in the nine months ended September 30, 2014.As a result of the significant decrease in market capitalization and a decline in our current performance primarily due to existing members downgrading theirmemberships to those with lower monthly dues and new members enrolling at lower rates that occurred between February 28, 2015 and May 31, 2015, weperformed an interim impairment test as of May 31, 2015. The determination as to whether a triggering event exists that would warrant an interim review ofgoodwill and whether a write-down of goodwill is necessary involves significant judgment based on our short-term and long-term projections. As a result of theMay 31, 2015 interim impairment test, we concluded that there would be no remaining implied fair value of goodwill attributable to the NYSC and BSC regions.Accordingly, as of May 31, 2015, we wrote off $31.6 million of goodwill associated with these reporting units. We did not have a goodwill impairment charge inthe SSC region as a result of the interim test given the profitability of this unit.53Table of ContentsFor the May 31, 2015 and February 28, 2015 impairment tests, fair value was determined by using a weighted combination of two market-based approaches(weighted 50% collectively) and an income approach (weighted 50%), as this combination was deemed to be the most indicative of the our fair value in an orderlytransaction between market participants. Under the market-based approaches, we utilized information regarding the Company, the Company's industry as well aspublicly available industry information to determine earnings multiples and sales multiples that are used to value our reporting units. Under the income approach,we determined fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflectsthe overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn, which are unobservable Level 3 inputs. Thediscounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average cost ofcapital, and future economic and market conditions. The estimated weighted-average cost of capital of NYSC and SSC were 9.2% and 11.2% as of May 31, 2015,respectively, compared to 13.3% and 13.9% as of February 28, 2015. Determining the fair value of a reporting unit is judgmental in nature and requires the use ofsignificant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. Theseassumptions were determined separately for each reporting unit. We believe our assumptions are reasonable, however, there can be no assurance that our estimatesand assumptions made for purposes of our goodwill impairment testing as of May 31, 2015 and February 28, 2015 will prove to be accurate predictions of thefuture. If our assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved, we may be required to record goodwillimpairment charges in future periods, whether in connection with our next annual impairment testing or prior to that, if any such change constitutes a triggeringevent outside the quarter when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment chargewould result. The estimated fair value of SSC was greater than book value by 65% as of May 31, 2015 and and 84% as of February 28, 2015.Solely for purposes of establishing inputs for the fair value calculation described above related to goodwill impairment testing, we made the followingassumptions. We developed long-range financial forecasts (three years) for all reporting units and assumed known changes in the existing club base. Terminalgrowth rates were calculated for years beyond the three year forecast. As of May 31, 2015, we used discount rates ranging from 8.2% to 11.2% and terminalgrowth rates ranging from 1.0% to 3.0%. As of February 28, 2015, we used discount rates ranging from 13.2% to 13.9% and terminal growth rates rangingfrom 0.5% to 3.0%. These assumptions are developed separately for each reporting unit.The valuation of intangible assets requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flowsand discount rates. We will continue to complete interim evaluations of the goodwill by reporting unit if a triggering event exists.Legal contingencies. In accordance with FASB guidance, we determine whether to disclose and accrue for loss contingencies based on an assessment ofwhether the risk of loss is remote, reasonably possible or probable. Our assessment is developed in consultation with our outside counsel and other advisors and isbased on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and can involvematters that are in litigation, which, by its nature are unpredictable. We believe that our assessment of the probability of loss contingencies is reasonable, butbecause of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which couldmaterially impact the consolidated financial statements.Self-insurance reserves. We limit our exposure to casualty losses on insurance claims by maintaining liability coverage subject to specific and aggregateliability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon a number of factors including salesestimates for each insurance year, claim amounts, claim settlements and number of claims, our historical loss experience and valuations provided by independentthird-party consultants. To the extent that estimated self-insurance losses differ from actual losses realized, our insurance reserves could differ significantly andmay result in either higher or lower insurance expense in future periods.Deferred income taxes. Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and thetax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has beenrecorded in the income statement. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making suchdetermination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,tax planning strategies and recent financial operations. Significant weight is given to positive and negative evidence that is objectively verifiable.Our deferred tax asset realization assessment considers future income which considers the execution of our business plans and other expectations aboutfuture outcomes and is based on certain assumptions. These assumptions require significant judgment about the forecast of future income and are consistent withthe plans and estimates we are using to manage our54Table of Contentsbusiness. When actual results do not meet our forecasted results or there are changes to future business results, such changes can lead to a change in judgmentrelated to the realization of the deferred tax asset.Based on the weight of the evidence at December 31, 2104, we were projected to be in a cumulative loss position during the three year period ending inDecember 31, 2015, which was considered to be a significant piece of negative evidence. We determined that it was appropriate to conclude that there would belosses that are projected in the near term due to our conversion to the lower pricing model in a substantial majority of our clubs, which includes lower membershiprevenue. We continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth. However, because theaccounting guidance for income taxes considers a projection of future earnings inherently subjective, it does not carry significant weight to overcome theobjectively verifiable evidence of cumulative losses in recent years. Based on these factors, most notably the projected three year cumulative loss, in the fourthquarter of 2014, we recorded a $60.4 million non-cash charge to income tax expense to establish a full valuation allowance against our U.S. net deferred tax assets.As of December 31, 2015, we continue to maintain a full valuation allowance of $43.7 million against outstanding net deferred tax assets.Tax benefits are recognized for a tax position when, in management’s judgment, it is more likely than not that the position will be sustained uponexamination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amountthat is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognizedtax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation.Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability forunrecognized tax benefits and subsequent adjustments as considered appropriate by management. The number of years with open tax audits varies by jurisdiction.While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefitsis adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in our tax provision and effective tax rate in the period ofresolution. Unfavorable settlement of an unrecognized tax benefit or a recognized tax position under examination could increase the tax provision and effective taxrate and may require the use of cash in the period of resolution. Interest and penalties recognized on the liability for unrecognized tax benefits is recorded asincome tax expense.InflationAlthough we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had a material impact on our results ofoperations or financial condition. Should there be periods of high inflation in the future, our results of operations or financial condition would be exposed to theeffects of inflation, such as higher rents for our leases under escalation terms based on the consumer price index and higher interest expense on the variable rateportion of our debt.Item 7A. Quantitative and Qualitative Disclosures About Market RiskOur debt effectively bears interest at fixed and variable rates so that we are exposed to market risks resulting from interest rate fluctuations. We regularlyevaluate our exposure to these risks and take measures to mitigate these risks on our consolidated financial results. We do not participate in speculative derivativetrading.Interest rates on borrowings for the 2013 Term Loan Facility are for one-month periods in the case of Eurodollar borrowings. Our exposure to market risk forchanges in interest rates relates to interest expense on variable rate debt. As of December 31, 2015 , we had $275.4 million of outstanding borrowings under our2013 Term Loan Facility of which $160.0 million of this variable rate debt is hedged to a fixed rate under an interest rate swap agreement. Changes in the fairvalue of the interest rate swap derivative instrument is recorded each period in accumulated other comprehensive income (loss). Based on the amount of ourvariable rate debt and our interest rate swap agreement as of December 31, 2015 , a hypothetical 100 basis point interest increase would have increased our annualinterest cost by approximately $940,000.For additional information concerning the terms of our 2013 Term Loan Facility, see Note 9 — Long-Term Debt to our consolidated financial statements inthis Annual Report.Item 8. Financial Statements and Supplementary DataOur Financial Statements appear following the signature page hereto, are incorporated herein by reference and are listed in the index appearing underItem 15.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone55Table of ContentsItem 9A. Controls and ProceduresEvaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that the information required to be disclosed by us in the reports filed or submitted by us under theExchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulatedand communicated to management, including the Executive Chairman and the Chief Financial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desiredcontrols.As of December 31, 2015 , we carried out an evaluation, under the supervision and with the participation of our management, including the ExecutiveChairman and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures defined above. Based uponthat evaluation, our Executive Chairman and Chief Financial Officer have concluded that, as of December 31, 2015 , our disclosure controls and procedures wereeffective at the reasonable assurance level.Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequateinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with theparticipation of our management, including our Executive Chairman and Chief Financial Officer, we assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2015 . In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our management’s assessment using those criteria, ourmanagement concluded that, as of December 31, 2015 , we maintained effective internal control over financial reporting.Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation ofconsolidated financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to therisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financialreporting as of December 31, 2015 , as stated in their attestation report included following the signature page hereto, included in Item 15.Changes in Internal Control over Financial Reporting: There have been no changes in our internal control over financial reporting during the quarterended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.56Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information with respect to directors, executive officers and corporate governance of the Company is incorporated herein by reference to the followingsections of the Company’s definitive Proxy Statement relating to the Company’s 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days ofthe Company’s fiscal year ended December 31, 2015 (the “Proxy Statement”): “Matters to be Considered at Annual Meeting — Proposal One — Election ofDirectors,” “Corporate Governance and Board Matters — Corporate Governance Documents,” “Corporate Governance and Board Matters — CommitteeMembership — Audit Committee,” “Section 16(A) Beneficial Ownership Reporting Compliance,” “Executive Officers,” and “Deadline for Receipt of StockholderProposals.”The following are the members of our Board of Directors and our Executive Officers: Board of Directors: Patrick Walsh Executive Chairman, Town Sports International Holdings, Inc. and Chief ExecutiveOfficer, PW Partners Atlas Funds, LLCMartin Annese Principal, MJA Consulting, LLCJason M. Fish Chief Investment Officer and member, Alliance Partners, LLCRobert Giardina Former Executive Chairman and Chief Executive Officer, Town Sports InternationalHoldings, Inc.Thomas J. Galligan III Former Executive Chairman, Papa Gino’s Holdings Corp.Spencer Wells Partner, Drivetrain Advisors, LLC Executive Officers: Patrick Walsh Executive ChairmanGregory Bartoli Chief Operating OfficerCarolyn Spatafora Chief Financial OfficerMichelle Ryan Chief Marketing OfficerNitin Ajmera Senior Vice President — Shared Services and ControllerItem 11. Executive CompensationThe information with respect to executive compensation is incorporated herein by reference to the following sections of the Proxy Statement: “ExecutiveCompensation.”The information with respect to compensation of directors is incorporated herein by reference to the following section of the Proxy Statement: “CorporateGovernance and Board Matters — Directors’ Compensation for the 2015 Fiscal Year.”Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information about securities authorized for issuance under equity compensation plans is incorporated herein by reference to the following section of theProxy Statement: "Executive Compensation - Equity Compensation Plan Information."The information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the following sectionof the Proxy Statement: “Ownership of Securities.”Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information with respect to certain relationships and related transactions and director independence is incorporated herein by reference to the followingsections of the Proxy Statement: “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters — Director Independence.”Item 14. Principal Accountant Fees and ServicesThe information with respect to principal accountant fees and services is incorporated herein by reference to the following section of the Proxy Statement:“Matters to be Considered at Annual Meeting — Proposal Two — Ratification of Independent Registered Public Accounting Firm.”57Table of ContentsPART IVItem 15. Exhibits And Financial Statements(a) Financial Statements(1) Financial statements filed as part of this report: Page NumberConsolidated Annual Financial Statements of Town Sports International Holdings, Inc: Report of Independent Registered Public Accounting Firm F-2 Consolidated balance sheets at December 31, 2015 and 2014 F-3 Consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013 F-4 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013 F-5 Consolidated statements of stockholders’ deficit for the years ended December 31, 2015, 2014 and 2013 F-6 Consolidated statements of cash flows for the years ended December 31, 2014, 2013 and 2012 F-7 Notes to consolidated financial statements F-8(2) Financial Statements Schedules:The schedules have been omitted because they are not applicable or the required information has been included in the financial statements or notes thereto.(3) Exhibits. See Item 15(b) below.(b) Exhibits required by Item 601 of Regulation S-KThe information required by this item is incorporated herein by reference from the Index to Exhibits immediately following page F-37 of this Annual Report.58Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 7, 2016 . T OWN S PORTS I NTERNATIONAL H OLDINGS , I NC . By: /s/ PATRICK WALSH Executive ChairmanPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Signature Title Date By: /s/ PATRICK WALSH Executive Chairman March 7, 2016 Patrick Walsh (principal executive officer) By: /s/ CAROLYN SPATAFORA Chief Financial Officer March 7, 2016 Carolyn Spatafora (principal financial and accounting officer) By: /s/ MARTIN ANNESE Director March 7, 2016 Martin Annese By: /s/ JASON M. FISH Director March 7, 2016 Jason M. Fish By: /s/ ROBERT GIARDINA Director March 7, 2016 Robert Giardina By: /s/ THOMAS J. GALLIGAN III Director March 7, 2016 Thomas J. Galligan III By: /s/ L. SPENCER WELLS Director March 7, 2016 L. Spencer Wells 59Table of ContentsINDEX TO FINANCIAL STATEMENTS PageConsolidated Annual Financial Statements of Town Sports International Holdings, Inc.: Report of Independent Registered Public Accounting FirmF-2 Consolidated balance sheets at December 31, 2015 and 2014F-3 Consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013F-4 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013F-5 Consolidated statements of stockholders’ deficit for the years ended December 31, 2015, 2014 and 2013F-6 Consolidated statements of cash flows for the years ended December 31, 2015, 2014 and 2013F-7 Notes to consolidated financial statementsF-8F-1Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofTown Sports International Holdings, Inc.:In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss),stockholders’ deficit and cash flows present fairly, in all material respects, the financial position of Town Sports International Holdings, Inc. and its subsidiaries atDecember 31, 2015 and 2014 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2015 , based on criteria established in Internal Control - Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements,for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included inManagement's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financialstatements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in allmaterial respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ P RICEWATERHOUSE C OOPERS LLPNew York, New YorkMarch 7, 2016F-2Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2015 and 2014(All figures in thousands except share and per share data) 2015 2014ASSETSCurrent assets:Cash and cash equivalents$76,217$93,452Accounts receivable, net1,9233,656Inventory337573Deferred tax assets1,549724Prepaid corporate income taxes6,89511,588Prepaid expenses and other current assets13,17012,893Total current assets100,091122,886Fixed assets, net195,341233,644Goodwill1,02532,593Intangible assets, net171394Deferred tax assets219—Deferred membership costs3,0297,396Other assets5,48412,920Total assets$305,360$409,833LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Current portion of long-term debt$2,810$3,114Accounts payable2,6152,873Accrued expenses26,03926,702Accrued interest129376Dividends payable90291Deferred revenue40,22536,950Deferred tax liabilities236 300Total current liabilities72,14470,606Long-term debt266,189296,757Building financing arrangement—83,400Dividends payable28211Deferred lease liabilities51,13653,847Deferred tax liabilities1,59311,999Deferred revenue3192,455Other liabilities10,1968,642Total liabilities401,605527,917Commitments and Contingencies (Note 16)Stockholders’ deficit:Preferred stock, $0.001 par value; no shares issued and outstanding at both December 31, 2015 andDecember 31, 2014Common stock, $0.001 par value; issued and outstanding 24,818,786 and 24,322,249 shares at December31, 2015 and 2014, respectively2424Additional paid-in capital(8,386)(10,055)Accumulated other comprehensive income(523)395Accumulated deficit(87,360)(108,448)Total stockholders’ deficit(96,245)(118,084)Total liabilities and stockholders’ deficit$305,360$409,833See notes to consolidated financial statements.F-3Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYears Ended December 31, 2015 , 2014 and 2013(All figures in thousands except share and per share data) 201520142013Revenues:Club operations$418,069$447,871$464,240Fees and other6,2545,9715,985 424,323453,842470,225Operating Expenses:Payroll and related175,898177,009174,894Club operating196,725192,716179,683General and administrative30,68331,35228,431Depreciation and amortization47,88747,30749,099Impairment of fixed assets14,571 4,569 714Impairment of goodwill31,558 137 —Gain on sale of building(77,146) — —Gain on lease termination(2,967) — —Insurance recovery related to damaged property— — (3,194) 417,209453,090429,627Operating income7,11475240,598(Gain) loss on extinguishment of debt(17,911)493750Interest expense20,57919,03922,617Interest income——(1)Equity in the earnings of investees and rental income(2,361)(2,402)(2,459)Income (loss) before (benefit) provision for corporate income taxes6,807(16,378)19,691(Benefit) provision for corporate income taxes(14,351)52,6117,367Net income (loss)$21,158$(68,989)$12,324Earnings (loss) per share:Basic$0.86$(2.84)$0.51Diluted$0.84$(2.84)$0.50Weighted average number of shares used in calculating earnings (loss) per share:Basic24,630,89824,266,40724,031,533Diluted25,114,05724,266,40724,736,961Dividends declared per common share$—$0.32$0.16See notes to consolidated financial statements.F-4Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)Years Ended December 31, 2015 , 2014 and 2013(All figures in thousands) 2015 2014 2013Net income (loss)$21,158 $(68,989) $12,324Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments, net of tax of $0 for the years ended in bothDecember 31, 2015 and 2014, and ($49) for the year ended December 31, 2013(165) (545) 68Interest rate swap, net of tax of $0 for the years ended in both December 31, 2015 and 2014,and ($583) for the year ended in December 31, 2013(753) (1,112) 758Total other comprehensive (loss) income, net of tax(918) (1,657) 826Total comprehensive income (loss)$20,240 $(70,646) $13,150See notes to consolidated financial statements.F-5Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITYears Ended December 31, 2015 , 2014 and 2013(All figures in thousands except share and per share data) Common Stock($.001 par) AdditionalPaid-inCapital AccumulatedOtherComprehensiveIncome RetainedEarnings(Deficit) TotalStockholders’(Deficit) Equity Shares Amount Balance at December 31, 201223,813,106 24 (16,326) 1,226 (40,420) (55,496)Stock option exercises135,786 — 600 — — 600Common stock grants29,562 — 305 — — 305Restricted stock grants178,500 — — — — —Cancellation of options— — (80) — — (80)Forfeiture of restricted stock(84,249) — — — — —Compensation related to stock options andrestricted stock grants— — 1,899 — — 1,899Tax shortfall from stock option exercises andrestricted stock vesting— — (244) — — (244)Dividends declared on common stock— — — — (3,850) (3,850)Dividend forfeitures— — — — 200 200Net income— — — — 12,324 12,324Derivative financial instruments— — — 758 — 758Foreign currency translation adjustment— — — 68 — 68Balance at December 31, 201324,072,705 24 (13,846) 2,052 (31,746) (43,516)Stock option exercises73,043 — 133 — — 133Common stock grants21,248 — 245 — — 245Restricted stock grants196,500 — — — — —Cancellation of options— — (71) — — (71)Forfeiture of restricted stock(41,247) — — — — —Compensation related to stock options andrestricted stock grants— — 1,666 — — 1,666Tax benefit from stock option exercises andrestricted stock vesting, net— — 1,613 — — 1,613Tax benefit on dividend payments— — 205 — — 205Dividends declared on common stock— — — — (7,736) (7,736)Dividend forfeitures— — — — 23 23Net loss— — — — (68,989) (68,989)Derivative financial instruments— — — (1,112) — (1,112)Foreign currency translation adjustment— — — (545) — (545)Balance at December 31, 201424,322,249 24 (10,055) 395 (108,448) (118,084)Stock option exercises171,718 — 283 — — 283Common stock grants67,609 — 445 — — 445Restricted stock grants507,000 — — — — —Forfeiture of restricted stock(249,790) — — — — —Compensation related to stock options andrestricted stock grants— — 941 — — 941Dividend forfeitures— — — — 176 176Net income— — — — 21,158 21,158Derivative financial instruments— — — (753) — (753)Foreign currency translation adjustment— — — (165) — (165)Dividend related to registration rights— — — — (246) (246)Balance at December 31, 201524,818,786 $24 $(8,386) $(523) $(87,360) $(96,245)See notes to consolidated financial statements.F-6Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31, 2015 , 2014 and 2013(All figures in thousands)201520142013Cash flows from operating activities:Net income (loss)$21,158 $(68,989) $12,324Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization47,887 47,307 49,099Insurance recovery related to damaged property— — (3,194)Impairment of fixed assets14,571 4,569 714Impairment of goodwill31,558 137 —Gain on sale of building(77,146) — —(Gain) loss on extinguishment of debt(17,911) 493 750Amortization of debt discount1,288 1,304 996Amortization of debt issuance costs778 627 1,153Amortization of building financing costs124 31 —Noncash rental income, net of non-cash rental expense(3,647) (5,399) (5,692)Share-based compensation expense1,386 1,911 2,204Net change in deferred taxes(11,519) 40,129 6,120Net change in certain operating assets and liabilities, net of acquisitions9,185 (20,994) 898Decrease in membership costs4,367 1,329 2,086Landlord contributions to tenant improvements1,288 1,684 1,472Increase (decrease) in insurance reserves1,087 482 (929)Other416 137 (613)Total adjustments3,712 73,747 55,064Net cash provided by operating activities24,870 4,758 67,388Cash flows from investing activities: Capital expenditures(30,471) (42,054) (30,861)Change in restricted cash(1,100) — —Acquisition of businesses— — (2,939)Insurance recovery related to damaged property— — 3,194Net cash used in investing activities(31,571) (42,054) (30,606)Cash flows from financing activities: Proceeds from building financing arrangement4,000 83,400 —Building financing arrangement costs— (3,160) —Principal payments on 2013 Term Loan Facility(3,038) (16,716) —Proceeds from 2013 Senior Credit Facility, net of original issue discount— — 323,375Repayment of 2011 Senior Credit Facility— — (315,743)Repurchase of 2013 Term Loan Facility(10,947) — —Term loan issuance and amendment related financing costs— — (4,356)Debt issuance and debt amendment costs(350) — (763)Cash dividends paid(213) (7,877) (4,088)Redemption paid pursuant to the Rights Plan(246) — —Proceeds from stock option exercises283 133 600Tax benefit from restricted stock vesting— 1,723 —Net cash (used in) provided by financing activities(10,511) 57,503 (975)Effect of exchange rate changes on cash(23) (353) 33Net (decrease) increase in cash and cash equivalents(17,235) 19,854 35,840Cash and cash equivalents beginning of period93,452 73,598 37,758Cash and cash equivalents end of period$76,217 $93,452 $73,598Summary of the change in certain operating assets and liabilities: Decrease in accounts receivable$1,446 $25 $2,859Decrease (increase) in inventory219 (101) (36)Decrease (increase) in prepaid expenses and other current assets596 (1,549) (1,278)Increase (decrease) in accounts payable, accrued expenses and accrued interest1,011 (9,856) 3,089Change in prepaid corporate income taxes and corporate income taxes payable4,774 (12,773) 1,604Increase (decrease) in deferred revenue1,139 3,260 (5,340)Net change in certain working capital components$9,185 $(20,994) $898See notes to consolidated financial statements.F-7Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2015 , 2014 and 2013(In thousands except share and per share data)1. Basis of PresentationAs of December 31, 2015 , Town Sports International Holdings, Inc. (the “Company” or “TSI Holdings”), through its wholly-owned subsidiary, Town SportsInternational, LLC (“TSI, LLC”), operated 152 fitness clubs (“Clubs”) and three BFX Studio (“studio”) locations. The clubs are composed of 105 clubs in the NewYork metropolitan market under the “New York Sports Clubs” brand name, 27 clubs in the Boston market under the “Boston Sports Clubs” brand name, 12 clubs (one of which is partly-owned) in the Washington, D.C. market under the “Washington Sports Clubs” brand name, five clubs in the Philadelphia market under the“Philadelphia Sports Clubs” brand name and three clubs in Switzerland. We also have one partly-owned club that operated under a different brand name inWashington, D.C. as of December 31, 2015 .The Company has been experiencing declining revenue from members for several years as the fitness industry continues to be highly competitive in thegeographic regions in which the Company competes. New members have been joining at lower monthly rates and cancellations of members paying higher rates,primarily from the conversion to the lower pricing model, will continue to negatively impact our liquidity if these trends are not reversed. In response to this, theCompany initiated cost savings initiatives in 2015 that have continued into fiscal 2016 to help mitigate the impact the decline in revenue has had on its profitabilityand cash flow from operations. The Company also purchased $29,829 principal amount of its debt at a significant discount in 2015.The Company’s ability to fund operations and capital expenditures in 2016 is dependent upon its ability to generate sufficient cash from operations coupledwith cash on hand. The Company believes it has sufficient liquidity from a combination of cash on hand and cash to be generated from operations during 2016 tofund anticipated capital expenditures and currently scheduled debt service for the year ending December 31, 2016. As further described in Note 9 - Long-TermDebt, the Company maintains a senior credit facility with its lenders which contains a term loan facility and a revolving loan facility. The terms of the senior creditfacility include a financial covenant under which the Company is currently not able to utilize more than 25% , or $11,250 , of the revolving loan facility. TheCompany will continue not to be able to utilize more than 25% of the revolving loan facility until it has a total leverage ratio, as defined, of no greater than 4.50:1.00. The revolving loan facility is scheduled to mature in November 2018. Based upon the Company’s current cash balance as of December 31, 2015 of $76,217and projected cash from operations, the Company does not anticipate the need to utilize the revolving loan facility during 2016.The Company may consider additional actions within its control, including the sale of certain assets, additional club closures and entering into arrangementswith revenue generating partnerships, some which may utilize a “shop-in-shop” concept. The Company may also consider additional strategic alternativesincluding opportunities to reduce TSI LLC’s existing debt and further cost savings initiatives, among other possibilities. The Company’s ability to continue to meetits obligations beyond 2016 is dependent on its ability to generate positive cash flow from a combination of initiatives, including those mentioned above. Failure tosuccessfully implement these initiatives could have a material adverse effect on our liquidity and our operations and we would need to implement alternative plansthat could include additional asset sales, additional reductions in operating costs, deferral of capital expenditures, further reductions in working capital and debtrestructurings. There can be no assurance that such alternatives would be available to the Company or that the Company would be successful in theirimplementation.2. Correction of Accounting ErrorsThe results for the year ended December 31, 2013 include the correction of deferred lease receivables and rental income resulting in an increase in rentalincome from subtenants and a related increase in deferred lease receivable in the Company’s consolidated statement of operations and consolidated balance sheet,respectively. This correction resulted in the recognition of Fees and other revenue in the year ended December 31, 2013 of $424 that relates to 2012. The Companydoes not believe that this error correction is material to 2013.The results for the year ended December 31, 2013 also include the correction of errors that resulted in an increase in tax benefits for corporate income taxesand a related increase in deferred tax assets in our consolidated statement of operations and consolidated balance sheet, respectively. In the fourth quarter of 2013,the Company identified corrections related to temporary differences in fixed assets for state depreciation resulting in the recognition of an income tax benefit of$225 . Also, in the fourth quarter of 2013, the Company identified corrections related to temporary differences in landlord allowances resulting in the recognitionof out of period expense of $209 for a net benefit to the Provision for corporate income taxes of $16 in the year ended December 31, 2013. The Company does notbelieve that either error correction is material to 2013.F-8Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)3. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements include the accounts of TSI Holdings and all wholly-owned subsidiaries. All intercompany accounts andtransactions have been eliminated in consolidation. Revenue RecognitionThe Company completed the introduction of a lower pricing model to a substantial majority of its clubs in the second quarter of 2015, offering reducedmonthly dues. As of December 31, 2015, approximately 80% of its clubs were operating under this pricing model, with the remaining clubs principally comprisingthe Company's passport-only model. The revenue recognition related to monthly dues revenue was not impacted by the change in membership pricing strategy.The Company generally receives one-time non-refundable joining fees and monthly dues from its members. The Company offers both month-to-month andone-year commit memberships. Members can cancel their membership at any time for a fee. Membership dues are recognized in the period in which access to theclub is provided.The Premier Membership allow members unlimited use of a single “home club”. Premier members can also elect to pay a per visit fee to use non-home clubs.These usage fees are recorded to membership revenue in the month the usage occurs. Usage fees recorded were $719 , $2,248 and $2,126 for the years endedDecember 31, 2015 , 2014 and 2013 , respectively.Initiation and processing fees, as well as related direct and incremental expenses of membership acquisition, which include sales commissions, bonuses andrelated taxes and benefits, are deferred and recognized, on a straight-line basis, in operations over the estimated average membership life or 12 months to the extentthese costs are related to the first annual fee paid at the time of enrollment. Annual fees are amortized over 12 months. Deferred membership costs were $3,029 and$7,396 at December 31, 2015 and 2014 , respectively.Prior to introducing the new pricing strategy, the Company tracked membership life of restricted members separately from unrestricted members. Restrictedmembers primarily include students and teachers (“Restricted Members”). This membership was discontinued as clubs transitioned to the lower pricing model andtherefore the Company now aggregates all members for purposes of tracking average membership life. The estimated average membership life was 22 months as ofboth December 31, 2015 and 2014 . The estimated average membership life for unrestricted members was 25 months during the quarter ended March 31, 2013, 24months during the quarter ended June 30, 2013, and 25 months for the second half of 2013. The estimated average membership life for Restricted Members was 27months during the quarter ended March 31, 2013 and 28 months for the last three quarters of 2013. The Company monitors factors that might affect the estimatedaverage membership life including retention trends, attrition trends, membership sales volumes, membership composition, competition, and general economicconditions, and adjusts the estimate as necessary on a quarterly basis.Revenues from ancillary services, such as personal training sessions, are recognized as services are performed. Unused personal training sessions expire aftera set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. The State of New York has informed the Company thatit is considering whether the Company is required to remit the amount collected for unused, expired personal training sessions to the State of New York asunclaimed property. As of December 31, 2015 and 2014 , the Company had approximately $14,968 and $15,207 , respectively, of unused and expired personaltraining sessions. We have not recognized any revenue from these sessions and have recorded the amounts as deferred revenue. The Company does not believe thatthese amounts are subject to the escheatment or abandoned property laws of any jurisdiction, including the State of New York. However, it is possible that one ormore of these jurisdictions may not agree with the Company’s position and may claim that the Company must remit all or a portion of these amounts to suchjurisdictions. In addition to the prepaid personal training sessions the Company also offers a personal training membership product which consists of single or multi-session packages ranging from one to 16 sessions per month. These sessions provided by the membership product are at a discount to our stand-alone sessionpricing and must be used in each respective month. Members who purchase this product commit to a three month period and revenue is recognized ratably overthis period.The Company generates management fees from certain club facilities that are not wholly-owned. Management fees earned for services rendered arerecognized at the time the related services are performed. These managed sites include three fitness clubs located in colleges and universities and nine managedsites. Revenue generated from managed sites were $1,802 , $1,502 and $796 for the years ended December 31, 2015 , 2014 and 2013 , respectively.F-9Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)When a revenue agreement involves multiple elements, such as sales of both memberships and services in one arrangement or potentially multiplearrangements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when the revenuerecognition criteria for each element is met.The Company recognizes revenue from merchandise sales upon delivery to the member.In connection with advance receipts of fees or dues, the Company was required to maintain bonds totaling $3,900 and $2,540 as of December 31, 2015 and2014 , respectively, pursuant to various state consumer protection laws.Advertising and Club Pre-opening CostsAdvertising costs and club pre-opening costs are charged to operations during the period in which they are incurred, except for production costs related totelevision and radio advertisements, which are expensed when the related commercials are first aired. Total advertising costs incurred by the Company for theyears ended December 31, 2015 , 2014 and 2013 totaled $11,057 , $7,903 and $5,943 , respectively and are included in Club operating expenses.Cash and Cash EquivalentsThe Company considers all highly liquid instruments which have original maturities of three months or less when acquired to be cash equivalents. Thecarrying amounts reported in the balance sheets for cash and cash equivalents approximate fair value. The Company owns and operates a captive insurancecompany in the State of New York. Under the insurance laws of the State of New York, this captive insurance company is required to maintain a cash balance of atleast $250 . Cash related to this wholly-owned subsidiary of $275 and $274 are included in cash and cash equivalents at December 31, 2015 and 2014 ,respectively.Deferred Lease Liabilities, Non-cash Rental Expense and Additional RentThe Company recognizes rental expense for leases with scheduled rent increases and inclusive of rental concessions, on the straight-line basis over the life ofthe lease beginning upon the commencement date of the lease. Rent concessions, primarily received in the form of free rental periods, are also deferred andamortized on a straight-line basis over the life of the lease.The Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In addition to base rent,the facility leases generally provide for additional rent to cover common area maintenance charges incurred and to pass along increases in real estate taxes. TheCompany accrues for any unpaid common area maintenance charges and real estate taxes on a club-by-club basis.Upon entering into certain leases, the Company receives construction allowances from the landlord. These construction allowances are recorded as deferredlease liability credits on the balance sheet when the requirements for these allowances are met as stated in the respective lease and are amortized as a reduction ofrent expense over the term of the lease. Amortization of deferred construction allowances were $2,920 , $2,771 and $3,310 as of December 31, 2015 , 2014 and2013 , respectively.Certain leases provide for contingent rent based upon defined formulas of revenue, cash flows or operating results for the respective facilities. Thesecontingent rent payments typically call for additional rent payments calculated as a percentage of the respective club’s revenue or a percentage of revenue in excessof defined break-points during a specified year. The Company records contingent rent expense over the related contingent rental period at the time the respectivecontingent targets are probable of being met.Lease termination gains and losses are recognized at fair value based at the expected settlement amount with the landlord when the Company terminates thecontract before the lease termination date. The Company recorded $1,550 and $1,482 of lease termination penalties in the years ended December 31, 2015 and2014 , respectively, which was included in Club operating expenses in the accompanying statements of operations. The Company did not incur any leasetermination penalties in the year ended December 31, 2013. In November 2015, the Company also received one-time gross proceeds of $3,090 from a landlordrelated to the termination of a future lease for a planned club opening that was not yet effective, which resulted in a net gain on lease termination of $2,967 in theyear ended December 31, 2015 . This net gain on lease termination was included in a separate line item on the accompanying statements of operations. In the yearended December 31, 2014, the Company recorded a $1,442 net occupancy gain related to the 2014 club closures which includes penalty payments to landlords andthe write-offs of deferred rent at clubs with early terminations. This net occupancy gain was included in Club operating expenses in the accompanying statementsof operations.F-10Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable consists of amounts due from the Company’s membership base and was $4,971 and $6,206 at December 31, 2015 and 2014 ,respectively, before the allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inabilityof the Company’s customers to make required payments. The Company considers factors such as: historical collection experience, the age of the receivable balanceand general economic conditions that may affect a customer’s ability to pay.Following are the changes in the allowance for doubtful accounts for the years December 31, 2015 , 2014 and 2013 : Balance Beginningof the Year Additions Write-offs Net ofRecoveries Balance atEnd of YearDecember 31, 2015$2,511 $11,237 $(10,615) $3,133December 31, 2014$2,309 $9,826 $(9,624) $2,511December 31, 2013$3,249 $8,335 $(9,275) $2,309InventoryInventory consists of supplies, headsets for the club entertainment system, clothing and other items for sale to members. Inventories are valued at the lowerof cost or market by the first-in, first-out method.Fixed AssetsFixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which are 30 years for building andimprovements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computer software. Leasehold improvementsare amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Payroll costs directly related to the construction orexpansion of the Company’s club and studio base are capitalized with leasehold improvements. Expenditures for maintenance and repairs are charged to operationsas incurred. The cost and related accumulated depreciation of assets retired or sold is removed from the respective accounts and any gain or loss is recognized inoperations. The costs related to developing web applications, developing web pages and installing or enhancing developed applications on the web servers arecapitalized and classified as computer software. Web site hosting fees and maintenance costs are expensed as incurred.Intangible Assets and Debt Issuance CostsIntangible assets are stated at cost and amortized by the straight-line method over their respective estimated lives. Intangible assets currently consist ofmembership lists, management contracts and trade names. Membership lists are amortized over the estimated average membership life, currently at 22 months,management contracts are amortized over their current contractual lives of between nine and 11 years and trade names are amortized over their estimated usefullives of between 10 and 20 years.Debt issuance costs are classified within other assets and are being amortized as additional interest expense over the life of the underlying debt, five to sevenyears, using the interest method. Amortization of debt issue costs was $778 , $627 and $1,153 , for the years ended December 31, 2015 , 2014 and 2013 ,respectively. Building financing costs were classified within other assets and were being amortized as additional interest expense over the life of the underlyingfinancing arrangement, 25 years , using the interest method. Amortization of building financing costs was $124 and $31 for the years ended December 31, 2015and 2014 . The balance of building financing costs of $3,005 was written off in December 2015 in connection with the termination of the future lease, which wasincluded in Gain on sale of building in the accompanying statements of operations.F-11Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Fair Value MeasurementsAccounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques areobservable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s marketassumptions. These two types of inputs create the following fair value hierarchy:•Level 1 — Quoted prices for identical instruments in active markets.•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; andmodel-derived valuations in which all significant inputs and significant value drivers are observable in active markets.•Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable .This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fairvalue.Accounting for the Impairment of Long-Lived Assets and GoodwillLong-lived assets, such as fixed assets and intangible assets are reviewed for impairment when events or circumstances indicate that their carrying value maynot be recoverable. Estimated undiscounted expected future cash flows are used to determine if an asset group is impaired, in which case the asset carrying valuewould be reduced to its fair value, calculated considering a combination of market approach and a cost approach. In determining the recoverability of fixed assetsLevel 3 inputs were used in determining undiscounted cash flows, which are based on internal budgets and forecasts through the end of the life of the primary assetin the asset group which is normally the life of leasehold improvements. The most significant assumptions in those budgets and forecasts relate to estimatedmembership and ancillary revenue, attrition rates, discount rates, income tax rates, estimated results related to new program launches and maintenance capitalexpenditures, which are generally estimated at approximately 1% of total revenues depending upon the conditions and needs of a given club. If the Companycontinues to experience competitive pressure, certain assumptions may not be accurate.Goodwill represents the excess of consideration paid over the fair value of the net identifiable business assets acquired in the acquisition of a club or group ofclubs. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-20, Intangibles – Goodwill and Other, requires goodwillto be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. The Company’s impairmentreview process compares the fair value of the reporting unit in which the goodwill resides to its carrying value.Goodwill impairment testing is a two-step process. Prior to performing this two-step process, companies also have the option to apply a qualitative approachto assess goodwill for impairment. Under the qualitative approach, an entity has the option to first assess qualitative factors to determine whether the existence ofevents or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, afterassessing the totality of events or circumstances, an entity determines it is not more likely than not that the estimated fair value of a reporting unit is less than itscarrying amount, then performing the two-step impairment test is unnecessary. Companies that do not elect to perform the qualitative approach may proceeddirectly to the two-step process. Step 1 involves comparing the estimated fair value of the Company’s reporting units to their carrying amounts. If the estimated fairvalue of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the estimated fairvalue, the second step must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting theestimated fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the estimated fair value of the reporting unit as determinedin Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less thanthe carrying value of goodwill, an impairment charge is recognized equal to the difference. The Company performs this analysis annually as of the last day ofFebruary and in the interim if a triggering event occurs. The Company’s goodwill impairment tests as of May 31, 2015 and February 28, 2015 were performedusing the two-step goodwill impairment analysis.For the May 31, 2015 and February 28, 2015 impairment tests, fair value was determined by using a weighted combination of two market-based approaches(weighted 50% collectively) and an income approach (weighted 50% ), as this combination was deemed to be the most indicative of the Company’s fair value in anorderly transaction between marketF-12Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)participants. Under the market-based approaches, the Company utilized information regarding the Company, the Company’s industry as well as publicly availableindustry information to determine earnings multiples and sales multiples that are used to value the Company’s reporting units. Under the income approach, theCompany determined fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, whichreflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn, which are unobservable Level 3 inputs.The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average costof capital, and future economic and market conditions. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significantestimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. These assumptionswere determined separately for each reporting unit.Solely for purposes of establishing inputs for the fair value calculation described above related to goodwill impairment testing, the Company developed long-range financial forecasts (three years) for all reporting units and assumed known changes in the existing club base. Terminal growth rates were calculated for yearsbeyond the three year forecast.InsuranceThe Company obtains insurance coverage for significant exposures as well as those risks required to be insured by law or contract. The Company retains aportion of risk internally related to general liability losses. Where the Company retains risk, provisions are recorded based upon the Company’s estimates of itsultimate exposure for claims, which are included in general and administrative expenses in the accompanying statements of operations. The provisions areestimated using actuarial analysis based on claims experience, an estimate of claims incurred but not yet reported and other relevant factors. In this connection,under the provision of the deductible agreement related to the payment and administration of the Company’s insurance claims, we are required to maintainirrevocable letters of credit, totaling $615 as of December 31, 2015 .Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.The most significant assumptions and estimates relate to the useful lives of long-term assets, recoverability and impairment of fixed and intangible assets,deferred income tax valuation, valuation of and expense incurred in connection with stock options, valuation of interest-rate swap arrangements, insurancereserves, legal contingencies and the estimated average membership life.Income TaxesDeferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or taxreturns. The Company also recognizes deferred tax in relation to the U.S. taxes on the total cumulative earnings of the Company's Swiss clubs. Deferred taxliabilities and assets are determined on the basis of the difference between the financial statement and tax basis of assets and liabilities (“temporary differences”) atenacted tax rates in effect for the years in which the temporary differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assetsto the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, includingfuture reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Based on theweight of the evidence at December 31, 2014, the Company was projected to be in a cumulative loss during the three year period ending in December 31, 2015,which was considered a significant piece of negative evidence, the Company recorded a $60,368 non-cash charge to income tax expense to establish a fullvaluation allowance against its U.S. net deferred tax assets in the fourth quarter of 2014. As of December 31, 2015, the Company continues to maintain a fullvaluation allowance of $43,681 against outstanding net deferred tax assets.The guidance related to accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for a tax position taken orexpected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosureand transition. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.F-13Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Statements of Cash FlowsSupplemental disclosure of cash flow information: Year Ended December 31, 2015 20142013Cash paid: Interest paid (net of amounts capitalized)$16,749 $17,103 $19,744Income taxes paid$105 $23,553 $390Cash received: Income taxes refund$7,768 $— $388Noncash investing and financing activities: Acquisition of fixed assets included in accounts payable and accrued expenses$2,031 $4,822 $5,789Note: Interest includes cash payments under Initial Lease resulting from the sale of the East 86th Street property. See Notes 9 and 10 for additional noncashfinancing activities.Accumulated Other Comprehensive (Loss) IncomeAccumulated other comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other eventsand circumstances from non-owner sources, including changes in the fair value of the Company’s derivative financial instrument and foreign currency translationadjustments. The Company presents accumulated other comprehensive (loss) income in its consolidated statements of comprehensive (loss) income.The Company uses a derivative financial instrument to limit exposure to changes in interest rates on the Company’s existing term loan facility. The derivativefinancial instrument is recorded at fair value on the balance sheet and changes in the fair value are either recognized in accumulated other comprehensive income(a component of shareholders’ equity) or net income depending on the nature of the underlying exposure, whether the hedge is formally designated as a hedge, andif designated, the extent to which the hedge is effective. The Company’s derivative financial instrument has been designated as a cash flow hedge. See Note 11 —Derivative Financial Instruments for more information on the Company’s risk management program and derivatives.At December 31, 2015 , the Company owned three Swiss clubs, which use the Swiss Franc, their local currency, as their functional currency. Assets andliabilities are translated into U.S. dollars at year-end exchange rates, while income and expense items are translated into U.S. dollars at the average exchange ratefor the period. For all periods presented, foreign exchange transaction gains and losses were not material. Adjustments resulting from the translation of foreignfunctional currency financial statements into U.S. dollars are included in the currency translation adjustment in the consolidated statements of stockholders’(deficit) equity and the consolidated statements of comprehensive (loss) income. The effect of foreign exchange translation adjustments was $(165) , net of tax of$0 ; $(545) , net of tax of $0 and $68 , net of tax of $49 , for the years ended December 31, 2015 , 2014 and 2013 , respectively.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and the interest rate swap.Although the Company deposits its cash with more than one financial institution, as of December 31, 2015 , $64,824 of the cash balance of $76,217 was held attwo financial institutions. The Company has not experienced any losses on cash and cash equivalent accounts to date, and the Company believes that, based on thecredit ratings of these financial institutions, it is not exposed to any significant credit risk related to cash at this time.The counterparty to the Company’s interest rate swap is a major banking institution with a credit rating of investment grade or better and no collateral isrequired, and there are no significant risk concentrations. The Company believes the risk of incurring losses on derivative contracts related to credit risk is unlikely.F-14Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Earnings (Loss) Per ShareBasic earnings (loss) per share ("EPS") is computed by dividing net income (loss) applicable to common stockholders by the weighted average numbers ofshares of common stock outstanding during the period. Diluted EPS is computed similarly to basic EPS, except that the denominator is increased for the assumedexercise of dilutive stock options and unvested restricted stock calculated using the treasury stock method.The following table summarizes the weighted average common shares for basic and diluted EPS computations. For The Year Ended December 31, 2015 2014 2013Net income (loss)$21,158 $(68,989) $12,324Weighted average number of common share outstanding — basic24,630,898 24,266,407 24,031,533Effect of dilutive share-based awards483,159 — 705,428Weighted average number of common shares outstanding — diluted25,114,057 24,266,407 24,736,961Earnings (loss) per share: Basic$0.86 $(2.84) $0.51Diluted$0.84 $(2.84) $0.50For the years ended December 31, 2015 and December 31, 2013, we did not include options to purchase 276,846 and 269,992 shares of the Company’scommon stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than the average market price and theirinclusion would be anti-dilutive. For the year ended December 31, 2014, there was no effect of diluted stock options and unvested restricted common stock on thecalculation of diluted EPS as the Company had a net loss for this periods. There would have been 378,285 anti-dilutive shares had the Company not been in a netloss position for this period.Stock-Based CompensationThe Company accounts for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requiresthat the cost resulting from all share-based payment transactions be treated as compensation and recognized in the consolidated financial statements. We recordshare-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. The fair value ofstock options is determined using the Black-Scholes option-pricing model. The assumptions in the Black-Scholes model include risk-free interest rate, theCompany's expected stock price volatility over the term of the awards, expected term of the award, and dividend yield. The fair value of the restricted stock awardsis based on the closing price of the Company’s common stock on the date of the grant.4 . Recent Accounting PronouncementsIn November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. Thisamendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This standard is effective for annualperiods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating theeffect this standard will have on its financial statements.In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt IssuanceCosts”. This standard changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debtliability rather than as an asset. Amortization of debt issuance costs will be reported as interest expense. In August 2015, the FASB issued ASU No. 2015-15,“Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-CreditArrangements”. ASU 2015-15 clarifies that the U.S. Securities Exchange and Commission would not object to the deferral and presentation of debt issuance costsas an asset and subsequent amortization of debt issuance costs over the term of the line-of-credit arrangement, whether or there are any outstanding borrowings onthe line-of-credit arrangement. These standards are effective for annual reporting periods beginning after December 15, 2015. The adoption of this guidance is notexpected to have a material impact on the Company's financial statements.F-15Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 35-40): Customer's Accounting forFees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a softwarelicense. If an arrangement includes a software license, the accounting for the license will be consistent with licenses of other intangible assets. If the arrangementdoes not include a license, the arrangement will be accounted for as a service contract. ASU 2015-05 is effective for interim and annual periods beginning afterDecember 15, 2015. Early adoption is permitted. The Company is currently evaluating the effect this standard will have on its financial statements.In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying IncomeStatement Presentation by Eliminating the Concept of Extraordinary Items.” This guidance eliminates the concept of extraordinary items from GAAP. As a result,an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on itsincome statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item.However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or infrequent in occurrence. This guidance iseffective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginningof the fiscal year of adoption. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging” (Topic 815): “Determining Whether the Host Contract in a HybridFinancial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which provides guidance on identifying whether the nature of the hostcontract in a hybrid instrument is in the form of debt or equity”. This standard requires management to consider the stated and implied substantive terms andfeatures of the hybrid financial instrument, including the embedded derivative features, in order to determine whether the nature of the host contract is more akin todebt or to equity. The ASU is effective for annual periods and interim periods with those annual periods beginning after December 15, 2015, with early adoptionpermitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The standardrequires management to evaluate, at each annual and interim reporting period, the Company’s ability to continue as a going concern within one year of the date thefinancial statements are issued and provide related disclosures. This accounting guidance is effective for the Company on a prospective basis for the annual periodending December 31, 2016 and is not expected to have a material effect on its financial statements.In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. The standard provides a single, comprehensive revenuerecognition model for all contracts with customers and supersedes current revenue recognition guidance. The revenue standard contains principles that an entitywill apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depictthe transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The new standard alsoincludes enhanced disclosures which are significantly more comprehensive than those in existing revenue standards. In August 2015, the FASB issued ASU No.2015-14, “Revenue from Contracts with Customers” (Topic 606): “Deferral of the Effective Date”, which defers the effective date of ASU No. 2014-09 for allentities by one year, to annual reporting periods beginning after December 15, 2017. Early adoption will be permitted for annual reporting periods beginning afterDecember 15, 2016. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modifiedretrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is evaluating theimpact of this standard on its financial statements.F-16Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)5. Fixed AssetsFixed assets as of December 31, 2015 and 2014 are shown at cost, less accumulated depreciation and amortization and are summarized below: December 31, 2015 2014Leasehold improvements$498,394 $491,401Club equipment105,998 105,486Furniture, fixtures and computer equipment69,383 65,373Computer software24,047 22,071Building and improvements— 4,995Land— 986Construction in progress4,882 12,740 702,704 703,052Less: Accumulated depreciation and amortization(507,363) (469,408) $195,341 $233,644Depreciation and leasehold amortization expense for the years ended December 31, 2015 , 2014 and 2013 , was $47,664 , $46,794 and $48,785 ,respectively.Fixed assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that related carrying amounts may not berecoverable from undiscounted cash flows in accordance with FASB guidance. The Company’s long-lived assets and liabilities are grouped at the individual clublevel which is the lowest level for which there are identifiable cash flows. To the extent that estimated future undiscounted net cash flows attributable to the assetsare less than the carrying amount, an impairment charge equal to the difference between the carrying value of such asset and their fair values is recognized.In the year ended December 31, 2015 , the Company tested its underperforming clubs and recorded impairment charges of $14,571 on leaseholdimprovements and furniture and fixtures at eighteen clubs that experienced decreased profitability and sales levels below expectations during this period. Thesecharges were recorded within the Clubs segment. The remaining clubs tested that did not have impairment charges had an aggregate of $26,593 of net leaseholdimprovements and furniture and fixtures remaining as of December 31, 2015 .In the year ended December 31, 2014 , the Company recorded impairment charges totaling $4,569 related to nine underperforming clubs. In the year endedDecember 31, 2013 , the Company recorded impairment charges totaling $714 related to three underperforming clubs.The following table presents the long-lived assets measured at fair value on a nonrecurring basis for the period ended December 31, 2015 : Basis of Fair Value Measurements Fair Valueof Assets(Liabilities) Quoted Prices in ActiveMarkets for IdenticalItems (Level 1) Significant OtherObservableInputs (Level 2) Significant UnobservableInputs (Level 3)December 31, 2015$14,571 $— $— $14,571December 31, 2014$4,569 $— $— $4,5696. AcquisitionsThe following acquisitions were completed in the year ended December 31, 2013 and were accounted for using the acquisition method of accounting inaccordance with FASB guidance. Under the acquisition method, the purchase price was allocated to the assets acquired and the liabilities assumed based on theirrespective estimated fair values as of the acquisition date. Any excess of the purchase price over the fair values of the assets acquired and liabilities assumed wasallocated to goodwill. None of the acquisitions individually or in the aggregate were material to the financial position, results of operations or cash flows of theCompany; therefore pro forma financial information has not been presented. The results of operations ofF-17Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the clubs acquired have been included in the Company’s consolidated financial statements from the respective dates of acquisition.Acquisition on March 15, 2013On March 15, 2013, the Company acquired an existing fitness club in Manhattan, New York for a purchase price of $560 . The purchase price allocationresulted in fixed assets related to leasehold improvements of $458 , definite lived intangible assets related to member lists of $102 and a deferred revenue liabilityof $56 , for a net cash purchase price of $504 . Acquisition costs incurred in connection with this acquisition in the year ended December 31, 2013 wereapproximately $95 and are included in general and administrative expenses in the accompanying consolidated statements of operations.Acquisition on May 17, 2013On May 17, 2013, the Company acquired all of the Fitcorp clubs in Boston, which includes five clubs and four managed sites for a purchase price of $3,175and a net cash purchase price of $2,435 . Acquisition costs incurred in connection with the Fitcorp acquisition in the year ended December 31, 2013 wereapproximately $231 and are included in general and administrative expenses in the accompanying consolidated statements of operations.7. Goodwill and Intangible AssetsGoodwill has been allocated to reporting units that closely reflect the regions served by the Company’s four trade names: New York Sports Clubs (“NYSC”),Boston Sports Clubs (“BSC”), Washington Sports Clubs (“WSC”) and Philadelphia Sports Clubs (“PSC”), with certain more remote clubs that do not benefit froma regional cluster being considered single reporting units (“Outlier Clubs”), the Company’s three clubs located in Switzerland being considered a single reportingunit (“SSC”), and our BFX Studio (“studio”). As of December 31, 2015 , only the SSC region has a remaining goodwill balance.The Company’s annual goodwill impairment test is performed on the last day of February, or more frequently, should circumstances change which wouldindicate the fair value of goodwill is below its carrying amount. The determination as to whether a triggering event exists that would warrant an interim review ofgoodwill and whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. As aresult of the significant decrease in market capitalization and a decline in the Company’s performance primarily due to existing members downgrading theirmemberships to those with lower monthly dues and new members enrolling at lower rates that occurred between February 28, 2015 and May 31, 2015, theCompany performed an interim impairment test as of May 31, 2015.The Company’s current year annual goodwill impairment test as of February 28, 2015 and the interim test performed as of May 31, 2015 were performedusing the two-step goodwill impairment analysis. Step 1 involves comparing the fair value of the Company’s reporting units to their carrying amounts. If theestimated fair value of the reporting unit is greater than its carrying amount, there is no requirement to perform step two of the impairment test, and there is noimpairment. If the reporting unit’s carrying amount is greater than the estimated fair value, the second step must be completed to measure the amount ofimpairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the estimated fair value of all tangible and intangible assets, excludinggoodwill, of the reporting unit from the estimated fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this stepis compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment charge is recognizedequal to the difference. The Company concluded that there would be no remaining implied value attributable to the Outlier Clubs.As a result of the May 31, 2015 interim impairment test, the Company concluded that there would be no remaining implied fair value of goodwill attributableto the NYSC and BSC regions. Accordingly, as of May 31, 2015, the Company wrote off $31,558 of goodwill associated with these reporting units. TheCompany did not have a goodwill impairment charge in the SSC region as a result of the interim test given the profitability of this unit. The February 28, 2015annual impairment test supported the recorded goodwill balance and as such no impairment of goodwill was required.For the May 31, 2015 and February 28, 2015 impairment tests, fair value was determined by using a weighted combination of two market-based approaches(weighted 50% collectively) and an income approach (weighted 50% ), as this combination was deemed to be the most indicative of the Company’s fair value in anorderly transaction between market participants. Under the market-based approaches, the Company utilized information regarding the Company, the Company’sindustry as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value the Company’s reporting units.Under the income approach, the Company determined fair value based on estimated futureF-18Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unitand the rate of return an outside investor would expect to earn, which are unobservable Level 3 inputs. The discounted estimates of future cash flows includesignificant management assumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and marketconditions. The estimated weighted-average cost of capital of NYSC and SSC were 9.2% and 11.2% as of May 31, 2015, respectively, compared to 13.3% and13.9% as of February 28, 2015. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions,including revenue growth rates and operating margins, discount rates and future market conditions, among others. These assumptions were determined separatelyfor each reporting unit. The Company believes its assumptions are reasonable. The estimated fair value of SSC were greater than book value by 65% as of May 31,2015 and 84% as of February 28, 2015.Solely for purposes of establishing inputs for the fair value calculation described above related to goodwill impairment testing, the Company made thefollowing assumptions. The Company developed long-range financial forecasts (three years) for all reporting units and assumed known changes in the existing clubbase. Terminal growth rates were calculated for years beyond the three year forecast. As of May 31, 2015, the Company used discount rates ranging from 8.2% to11.2% and terminal growth rates ranging from 1.0% to 3.0% . As of February 28, 2015, the Company used discount rates ranging from 13.2% to 13.9% andterminal growth rates ranging from 0.5% to 3.0% . These assumptions are developed separately for each reporting unit.The changes in the carrying amount of goodwill from December 31, 2014 through December 31, 2015 are detailed in the charts below. NYSC BSC SSC Outlier Clubs TotalGoodwill$31,549 $15,775 $1,175 $3,982 $52,481Changes due to foreign currency exchange rate fluctuations— — (140) — (140)Less: accumulated impairment of goodwill— (15,766) — (3,982) (19,748)Balance as of December 31, 201431,549 9 1,035 — 32,593Changes due to foreign currency exchange rate fluctuations— — (10) — (10)Less: impairment of goodwill(31,549) (9) — — (31,558)Balance as of December 31, 2015$— $— $1,025 $— $1,025Intangible assets as of December 31, 2015 and 2014 are as follows: As of December 31, 2015 Gross CarryingAmount AccumulatedAmortization NetIntangiblesMembership lists$11,344 $(11,344) $—Management contracts250 (112) 138Trade names40 (7) 33 $11,634 $(11,463) $171 As of December 31, 2014 Gross CarryingAmount AccumulatedAmortization NetIntangiblesMembership lists$11,344 $(11,163) $181Management contracts250 (73) 177Trade names40 (4) 36 $11,634 $(11,240) $394Intangible assets were acquired in connection with the Company’s acquisitions during 2013. Amortization expense of intangible assets for the years endedDecember 31, 2015 , 2014 and 2013 was $223 , $513 and $314 respectively.F-19Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The aggregate amortization expense for the next five years and thereafter of the acquired intangible assets is as follows: Year Ending December 31, 2016$362017302018242019192020162021 and thereafter46 $1718. Accrued ExpensesAccrued expenses as of December 31, 2015 and 2014 consisted of the following: December 31, 2015 2014Accrued payroll$5,237 $3,966Accrued construction in progress and equipment1,235 4,822Accrued occupancy costs8,091 7,493Accrued insurance claims2,346 2,065Accrued other9,130 8,356 $26,039 $26,7029 . Long-Term DebtLong-term debt as of December 31, 2015 and 2014 consisted of the following: December 31, 2015 20142013 Term Loan Facility$275,417 $308,284Less: Unamortized discount(6,418) (8,413)Less: Current portion due within one year(2,810) (3,114)Long-term portion$266,189 $296,757The aggregate long-term debt obligations maturing during the next five years and thereafter are as follows: Amount DueYear Ending December 31, 2016$2,81020172,81020182,81020192,81020202,8102021 and thereafter261,367 $275,4172013 Senior Credit FacilityOn November 15, 2013, TSI, LLC, an indirect, wholly-owned subsidiary, entered into a $370,000 senior secured credit facility (“2013 Senior CreditFacility”), among TSI, LLC, TSI Holdings II, LLC, a newly-formed, wholly-owned subsidiary of the Company (“Holdings II”), as a Guarantor, the lenders partythereto, Deutsche Bank AG, as administrative agent, andF-20Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Keybank National Association, as syndication agent. The 2013 Senior Credit Facility consists of a $325,000 term loan facility maturing on November 15, 2020(“2013 Term Loan Facility”) and a $45,000 revolving loan facility maturing on November 15, 2018 (“2013 Revolving Loan Facility”). Proceeds from the 2013Term Loan Facility of $323,375 were issued, net of an original issue discount (“OID”) of 0.5% , or $1,625 . Debt issuance costs recorded in connection with the2013 Senior Credit Facility were $5,119 and are being amortized as interest expense and are included in other assets in the accompanying consolidated balancesheets. The Company also recorded additional debt discount of $4,356 related to creditor fees. The proceeds from the 2013 Term Loan Facility were used to payoff amounts outstanding under the Company’s previously outstanding long-term debt facility originally entered into on May 11, 2011 (as amended from time totime), and to pay related fees and expenses. None of the revolving loan facility was drawn upon as of the closing date on November 15, 2013, but loans under the2013 Revolving Loan Facility may be drawn from time to time pursuant to the terms of the 2013 Senior Credit Facility. The borrowings under the 2013 SeniorCredit Facility are guaranteed and secured by assets and pledges of capital stock by Holdings II, TSI, LLC, and, subject to certain customary exceptions, thewholly-owned domestic subsidiaries of TSI, LLC.Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI, LLC’s option, bear interest at either the administrative agent’sbase rate plus 2.5% or a LIBOR rate adjusted for certain additional costs (the “Eurodollar Rate”) plus 3.5% , each as defined in the 2013 Senior Credit Facility.With respect to the outstanding initial term loans, the Eurodollar Rate has a floor of 1.00% and the base rate has a floor of 2.00% . Commencing with the lastbusiness day of the quarter ended March 31, 2014, TSI, LLC is required to pay 0.25% of the principal amount of the term loans each quarter, which may bereduced by voluntary prepayments. As of December 31, 2015 , TSI LLC has made a total of $19,754 in principal payments on the 2013 Term Loan Facility.On January 30, 2015, the 2013 Senior Credit Facility was amended (the "Amendment") to permit TSI Holdings to purchase term loans under the CreditAgreement. Any term loans so purchased by TSI Holdings will be cancelled in accordance with the terms of the Credit Agreement, as amended by theAmendment. The Company may from time to time purchase term loans in market transactions, privately negotiated transactions or otherwise; however theCompany is under no obligation to make any such purchases. Any such transactions, and the amounts involved, will depend on prevailing market conditions,liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In December 2015, TSI Holdings purchased $29,829principal 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 andcancelled, which resulted in a gain on extinguishment of debt of $17,911 , including the write-off of related deferred financing costs and debt discount of $249 and$707 , respectively.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 $5,500 at any time outstanding) exceeds 25% of the aggregate amount of those commitments. In such event, TSI, LLC is requiredto maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.50 :1.00. While not subject to the total leverage ratio covenantas of December 31, 2015 as the Company’s only utilization of the 2013 Revolving Loan Facility as of December 31, 2015 was $2,851 of issued and outstandingletters of credit thereunder, because the Company’s total leverage ratio as of December 31, 2015 was in excess of 4.50 :1.00, the Company is currently not able toutilize more than 25% of the 2013 Revolving Loan Facility. The Company will continue not to be able to utilize more than 25% of the 2013 Revolving LoanFacility until it has a total leverage ratio of no greater than 4.50 :1.00. The 2013 Senior Credit Facility also contains certain affirmative and negative covenants,including covenants that may limit or restrict TSI, LLC and Holdings II’s ability to, among other things, incur indebtedness and other liabilities; create liens; mergeor consolidate; dispose of assets; make investments; pay dividends and make payments to shareholders; make payments on certain indebtedness; and enter into saleleaseback transactions, in each case, subject to certain qualifications and exceptions. In addition, at any time when the total leverage ratio is greater than 4:50 :1.00,there are additional limitations on the ability of TSI, LLC and Holdings II to, among other things, make certain distributions of cash to TSI Holdings. The 2013Senior Credit Facility also includes customary events of default (including non-compliance with the covenants or other terms of the 2013 Senior Credit Facility)which may allow the lenders to terminate the commitments under the 2013 Revolving Loan Facility and declare all outstanding term loans and revolving loansimmediately due and payable and enforce its rights as a secured creditor.TSI, LLC may prepay the 2013 Term Loan Facility and 2013 Revolving Loan Facility without premium or penalty in accordance with the 2013 SeniorCredit Facility. Mandatory prepayments are required relating to certain asset sales, insurance recovery and incurrence of certain other debt and commencing in2015 in certain circumstances relating to excess cash flow (as defined) for the prior fiscal year, as described below, in excess of certain expenditures. Pursuant tothe terms of the 2013 Senior Credit Facility, the Company is required to apply net proceeds in excess of $30,000 from sales of assets in any fiscal year towardsmandatory prepayments of outstanding borrowings. In connection with the sale of the East 86th Street property, accounted for as a building financing arrangement,described in Note 10 - Building Financing Arrangement, the CompanyF-21Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)received approximately $43,500 in net sales proceeds (after taxes, before giving effect to utilization of net operating losses and carryforward). Accordingly, theCompany made a mandatory prepayment of $13,500 on the 2013 Term Loan Facility in November 2014. In connection with this mandatory prepayment, duringthe year ended December 31, 2014, the Company recorded loss on extinguishment of debt of $493 , consisting of the write-off of unamortized debt issuance costsand debt discount of $119 and $374 , respectively, and was included in loss on extinguishment of debt in the accompanying consolidated statements of operationsfor the year ended December 31, 2014. To the extent the proceeds of the sale of the East 86th Street property are not reinvested, the Company may be required touse such amounts, other than amounts used in 2014 to repay debt, to pay down its outstanding debt, as provided under the terms of its 2013 Senior Credit Facility.Based on increased capital expenditures related to the building of new clubs and new studios, the Company does not expect to be required to make a payment atany time.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined, to be applied against outstanding 2013Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days after the fiscal year end. Theapplicable excess cash flow repayment percentage is applied to the excess cash flow when determining the excess cash flow payment. Earnings, changes inworking capital and capital expenditure levels all impact the determination of any excess cash flow. The applicable excess cash flow repayment percentage is 50%when the total leverage ratio, as defined in the 2013 Senior Credit Facility, exceeds or is equal to 2.50 :1.00; 25% when the total leverage ratio is greater than orequal to 2.00 :1.00 but less than 2.50 :1.00 and 0% when the total leverage ratio is less than 2.00:1.00. The first excess cash flow payment would have been due inApril 2015. The excess cash flow calculation performed as of December 31, 2015 did not result in any required payments.As of December 31, 2015 , the 2013 Term Loan Facility has a gross principal balance of $275,417 and a balance of $268,999 net of unamortized debtdiscount of $6,418 which is comprised of the unamortized portions of the OID recorded in connection with the May 11, 2011 debt issuance and the unamortizedbalance of the additional debt discounts recorded in connection with the first amendment and second amendment to the 2011 Senior Credit Facility. Theunamortized debt discount balance is recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheet and is being amortized asinterest expense using the effective interest method. As of December 31, 2015 , the unamortized balance of debt issuance costs of $2,991 is being amortized asinterest expense, and is included in other assets in the accompanying consolidated balance sheets.As of December 31, 2015 , there were no outstanding 2013 Revolving Loan Facility borrowings and outstanding letters of credit issued totaled $2,851 . Theunutilized portion of the 2013 Revolving Loan Facility as of December 31, 2015 was $42,149 and the available unutilized portion, based on the Company’s totalleverage ratio exceeding 4.50 :1.00, was $11,250 .Repayment of 2011 Senior Credit FacilityTSI, LLC’s previously outstanding senior secured credit facility was originally entered into on May 11, 2011 and consisted of a $350,000 senior securedcredit facility (“2011 Senior Credit Facility”) comprised of a $300,000 term loan facility (“2011 Term Loan Facility”) scheduled to mature on May 11, 2018 and a$50,000 revolving loan facility scheduled to mature on May 11, 2016 (“2011 Revolving Loan Facility”).Contemporaneously with entry into the 2013 Senior Credit Facility, TSI, LLC repaid the outstanding principal amount of the 2011 Term Loan Facility of$315,743 . The 2011 Term Loan Facility was set to expire on May 11, 2018. There were no outstanding amounts under the 2011 Revolving Loan Facility as ofNovember 15, 2013, the date of the initial borrowing under the 2013 Senior Credit Facility. The 2011 Term Loan Facility was repaid at face value of $315,743 plusaccrued and unpaid interest of $807 and letter of credit fees and commitment fees of $67 . The total cash paid in connection with this repayment was $316,617 asof November 15, 2013 with no early repayment penalty. The Company determined that the 2013 Senior Credit Facility was not substantially different than the2011 Senior Credit Facility for certain lenders based on the less than 10% difference in cash flows of the respective debt instruments. A portion of the transactionwas therefore accounted for as a modification of the 2011 Senior Credit Facility and a portion was accounted for as an extinguishment. As of November 15, 2013,the Company recorded loss on extinguishment of debt of approximately $750 , representing the write-off of the remaining unamortized debt costs and debtdiscount related to the portion of the 2011 Senior Credit Facility that was accounted for as an extinguishment, and was included in loss on extinguishment of debtin the accompanying consolidated statements of operations for the year ended December 31, 2013.F-22Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Fair Market ValueBased on quoted market prices, the 2013 Term Loan Facility had a fair value of approximately $104,658 and $221,964 , respectively, at December 31, 2015and December 31, 2014 , respectively, and is classified within level 2 of the fair value hierarchy. Level 2 is based on quoted prices for similar instruments in activemarkets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets. The fair value for the Company’s 2013 Term Loan Facility is determined using observable currentmarket information such as the prevailing Eurodollar interest rate and Eurodollar yield curve rates and includes consideration of counterparty credit risk.For the fair market value of the Company’s interest rate swap instrument refer to Note 11 — Derivative Financial Instruments.Interest ExpenseThe Company’s interest expense and capitalized interest related to funds borrowed to finance club facilities under construction for the years endedDecember 31, 2015 , 2014 and 2013 were as follows: Year Ended December 31, 2015 2014 2013Interest costs expensed$17,914 $18,228 $22,617Interest costs capitalized72 300 32Total interest expense and amounts capitalized$17,986 $18,528 $22,649Note: The table above does not include $2,666 and $810 of interest expense related to the building financing arrangement in fiscal 2015 and 2014, respectively.10 . Sale of BuildingOn September 12, 2014, the Company completed the legal sale of its property (building and land) on East 86th Street, New York City, to an unaffiliatedthird-party for gross proceeds of $85,650 , which included $150 of additional payments to the Company. Concurrent with the closing of the transaction, theCompany leased back the portion of the property comprising its health club (“Initial Lease”) and had agreed to vacate the property in connection with thePurchaser's future development of a new luxury, high-rise multi-use building. In connection with vacating the property, the Company had agreed to enter into anew lease (“New Club Lease”) for approximately 24,000 square feet in the new building for the purpose of operating a health club upon completion of constructionby the purchaser/landlord. This sale-leaseback transaction was characterized as a financing arrangement for accounting purposes rather than a sale until anycontinuing involvement has ceased. As of December 31, 2014, the total financing arrangement was $83,400 , which was net of $1,750 held in escrow for theCompany's former tenant in the building. As part of the transaction, the Company incurred $3,160 of real property transfer taxes, broker fees and other costs whichwere deferred and were being amortized over the term of the Initial Lease of 25 years, which included option periods. The net fees were included in Other assets onthe accompanying consolidated balance sheets as December 31, 2014. In March 2015, the Company received the remaining proceeds held in escrow of $500 .On December 23, 2015, the Company terminated the Initial Lease and the agreement to enter into the New Club Lease and received gross proceeds of $3,500in connection with the termination. The Company must vacate the currently leased area by March 12, 2016 or the Company will be required to return the grossproceeds of the lease termination to the purchaser/landlord. Because the lease was terminated with no continuing involvement, this sale-leaseback transaction wasaccounted for as a completed sale as of December 23, 2015. Under this treatment, the Company has recorded a $77,146 gain, previously accounted for as afinancing, on the sale of the property, recorded in Gain on sale of building in the consolidated statements of operations for the year ended December 31, 2015. Asof December 23, 2015, the net book value of the building and building improvements was $2,755 and the book value of the land was $986 and the net book valueof the deferred building financing costs was $3,005 . The gain on the sale of the building is also net of $3,483 of deferred lease receivable related to the Company’sformer tenant.11 . Derivative Financial InstrumentsIn its normal operations, the Company is exposed to market risks relating to fluctuations in interest rates. In order to minimize the possible negative impactof such fluctuations on the Company's cash flows the Company may enter into derivative financial instruments (“derivatives”), such as interest-rate swaps.Derivatives are not entered into for tradingF-23Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)purposes and the Company only uses commonly traded instruments. Currently, the Company has used derivatives solely relating to the variability of cash flowsfrom interest rate fluctuations.The Company originally entered into an interest rate swap arrangement on July 13, 2011 in connection with the 2011 Senior Credit Facility. In connectionwith entering into the 2013 Senior Credit Facility, the Company amended and restated the interest rate swap agreement initially entered into (and amended inAugust 2012 and November 2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rate swap arrangement had anotional amount of $160,000 and will mature on May 15, 2018. The swap effectively converts $160,000 of the $325,000 total variable-rate debt under the 2013Senior Credit Facility to a fixed rate of 5.384% , when including the applicable 3.50% margin. As permitted by ASC 815, Derivatives and Hedging, the Companyhas designated this swap as a cash flow hedge, the effects of which have been reflected in the Company's consolidated financial statements as of and for the yearsended December 31, 2015 , 2014 and 2013 . The objective of this hedge is to manage the variability of cash flows in the interest payments related to the portion ofthe variable-rate debt designated as being hedged.When the Company’s derivative instrument was executed, hedge accounting was deemed appropriate and it was designated as a cash flow hedge at inceptionwith re-designation being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps are designated as cash flow hedges for accounting purposessince they are being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt). On an ongoing basis, theCompany performs a quarterly assessment of the hedge effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in theconsolidated statements of operations. For the years ended December 31, 2015 , 2014 and 2013 , hedge ineffectiveness was evaluated using the hypotheticalderivative method. There was no hedge ineffectiveness in the years ended December 31, 2015 , 2014 and 2013 .The fair value for the Company’s interest rate swap is determined using observable current market information such as the prevailing Eurodollar interest rateand Eurodollar yield curve rates and include consideration of counterparty credit risk. The following table presents the aggregate fair value of the Company’sderivative financial instrument: Fair Value Measurements Using: TotalFair Value Quoted Pricesin Active Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Interest rate swap liability as of December 31, 2015$2,042 $— $2,042 $—Interest rate swap liability as of December 31, 2014$1,294 $— $1,294 $—The swap contract liability of $2,042 and $1,294 was recorded as a component of other liabilities as of December 31, 2015 and 2014 , respectively, with theoffset to accumulated other comprehensive income ( $1,154 and $1,215 , net of taxes, as of December 31, 2015 and 2014 , respectively) on the accompanyingconsolidated balance sheets.There were no significant reclassifications out of accumulated other comprehensive income in 2015 , 2014 and 2013 and the Company does not expect thatsignificant derivative losses included in accumulated other comprehensive income at December 31, 2015 will be reclassified into earnings within the next 12months .12. LeasesThe Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In addition to baserent, the facility leases generally provide for additional rent based on operating results, increases in real estate taxes and other costs. Certain leases provide foradditional rent based upon defined formulas of revenue, cash flow or operating results of the respective facilities. Under the provisions of certain of these leases,the Company is required to maintain irrevocable letters of credit, which amounted to $1,136 as of December 31, 2015 .The leases expire at various times through October 31, 2031 and certain leases may be extended at the Company’s option. Escalation terms on these leasesgenerally include fixed rent escalations, escalations based on an inflation index such as CPI, and fair market value adjustments. In the next five years, or the periodfrom January 1, 2016 through December 31, 2020, the Company has leases for 20 club locations that are due to expire without any renewal options, three of whichare due to expire in 2016, and 53 club locations that are due to expire with renewal options.F-24Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Future minimum rental payments under non-cancelable operating leases are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2016$89,359201784,159201877,854201970,191202064,186Aggregate thereafter216,133Rent expense for the years ended December 31, 2015 , 2014 and 2013 was $124,920 , $124,816 and $118,811 , respectively. Such amounts include non-baserent items of $24,767 , $24,340 and $23,539 , respectively. Including the effect of deferred lease liabilities, rent expense was $123,872 , $124,449 and $117,191 forthe years ended December 31, 2015 , 2014 and 2013 .The Company, as landlord, leases space to third party tenants under non-cancelable operating leases and licenses. In addition to base rent, certain leasesprovide for additional rent based on increases in real estate taxes, indexation, utilities and defined amounts based on the operating results of the lessee. The sub-leases expire at various times through December 31, 2022. Future minimum rentals receivable under noncancelable leases are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2016$2,21420171,63520181,14020198652020709Aggregate thereafter514Rental income, including non-cash rental income, for the years ended December 31, 2015 , 2014 and 2013 was $4,669 , $4,791 and $5,161 , respectively.Such amounts include additional rental charges above the base rent of $0 , $229 and $242 for the years ended December 31, 2015 , 2014 and 2013 , respectively.The Company previously owned the building at the 86th Street club location which housed a rental tenant that generated rental income of approximately $1,926 forthe year ended December 31, 2105 and $2,000 for each of the years ended December 31, 2014 and 2013 . Refer to Note 10 - Gain on Sale of Building for furtherdetails.For the year ended December 31, 2013, rental income includes non-cash revenue of $424 related to an out of period adjustment for subtenants at certainlocations.13. Stockholders’ (Deficit) EquityThe Company’s certificate of incorporation adopted in connection with the IPO provides for 105,000,000 shares of capital stock, consisting of 5,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”) and 100,000,000 shares of Common Stock, par value $0.001 per share (the“Common Stock”).The Company’s 2006 Stock Incentive Plan, as amended and restated (the “2006 Plan”), authorizes the Company to issue up to 3,500,000 shares of CommonStock to employees, non-employee directors and consultants pursuant to awards of stock options, stock appreciation rights, restricted stock, in payment ofperformance shares or other stock-based awards. An amendment to the 2006 Plan to increase the aggregate number of shares issuable under the plan by 500,000shares from 2,500,000 shares to 3,000,000 shares was unanimously adopted by the Board of Directors on March 1, 2011, and approved by stockholders at theAnnual Meeting of Stockholders on May 12, 2011. In April 2015, the Company further amended the 2006 Plan to increase the aggregate number of shares ofCommon Stock issuable under the 2006 Plan by 500,000 shares to a total of 3,500,000 . As of December 31, 2015 , there were 668,460 shares available to beissued under the 2006 Plan.F-25Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Effective December 31, 2014, the Company’s Board of Directors adopted a stockholder rights plan (the "Rights Plan"). Pursuant to the Rights Plan, theBoard of Directors declared a dividend distribution of one preferred share right (a "Right") for each share of Common Stock held as of January 12, 2015. EachRight entitles the holder to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock (the "Preferred Shares") at an initial exerciseprice of $15 , subject to certain adjustments. On March 24, 2015, the Company entered into a nomination and standstill agreement (the “Nomination and StandstillAgreement”). Pursuant to the Nomination and Standstill Agreement, the Company agreed to redeem, effective immediately, the rights issued pursuant to the RightsPlan. Pursuant to the terms of the Rights Plan, the Company paid a redemption price to the holders of the rights equal to $0.01 per right in cash, or $246 , onApril 20, 2015.a. Common Stock OptionsThe outstanding Common Stock options as of December 31, 2015 vest in full at various dates between January 1, 2018 and December 31, 2019. The vestingof certain grants will be accelerated in the event that certain defined events occur including the sale of the Company. The term of each grant generally ranges fromfive to ten years.As of December 31, 2015 , 2014 and 2013 , a total of 544,869 , 1,023,606 and 1,029,416 Common Stock options were exercisable, respectively.At December 31, 2015 , the Company had no stock option outstanding under the 2004 Plan while the 2006 Plan had 1,394,869 stock options outstanding.The Company recognizes stock option expense equal to the grant date fair value of a stock option on a straight-line basis over the requisite service period,which is generally the vesting period, net of estimated forfeitures. The total compensation expense related to options, classified within payroll and related on theconsolidated statements of operations related to these plans was $99 , $299 , and $843 for the years ended December 31, 2015 , 2014 and 2013 , respectively, andthe related tax benefit was $38 , $142 and $362 for the years ended December 31, 2015 , 2014 and 2013 , respectively. The 2015 and 2014 benefit of $38 and $142, respectively, were prior to the recognition of the valuation allowance. The total compensation expense of $299 for the year ended December 31, 2014 includes $160 related to incremental compensation expense recognized in connection with the modification of stock options described below.The following table summarizes the stock option activity for the years ended December 31, 2015 , 2014 and 2013 : Common WeightedAverageExercisePriceBalance at January 1, 20131,310,818 $5.21Exercised(135,786) 4.42Cancelled(30,548) 6.33Forfeited(4,253) 1.00Balance at December 31, 20131,140,231 5.21Exercised(73,043) 1.82Cancelled(34,567) 12.56Forfeited(2,100) 3.54Balance at December 31, 20141,030,521 5.29Granted850,000 2.68Exercised(171,718) 1.68Cancelled(313,934) 8.61Balance at December 31, 20151,394,869 $3.40F-26Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table summarizes information about stock options outstanding and exercisable as of December 31, 2015 : Options Outstanding Options Exercisable Number of Options Weighted-AverageRemainingContractualLife Weighted-AverageExercisePrice Number of Options Weighted-AverageExercisePriceCommon 2006 grants53,500 7 months 12.05 53,500 12.052007 grants64,500 18 months 15.44 64,500 15.442008 grants42,770 34 months 2.92 42,770 2.922009 grants80,678 47 months 1.73 80,678 1.732010 grants295,921 55 months 1.84 295,921 1.842011 grants7,500 61 months 1.93 7,500 1.932015 grants850,000 67 months 2.68 — —Total Grants1,394,869 58 months $3.40 544,869 $4.52At December 31, 2015 stock options outstanding have a weighted average remaining contractual life of 4.8 years and the total intrinsic value for “in-the-money” options, based on the Company’s closing stock price of $1.19 , was $36 . At December 31, 2015 stock options exercisable have a weighted averageremaining contractual life of 3.6 years and the total intrinsic value for “in-the-money” exercisable options was $36 . The total intrinsic value of options exercisedwas $187 for the year ended December 31, 2015 .The aggregated intrinsic value represents the pre-tax intrinsic value (the difference between the fair value of the Company’s common stock at December 31,2015 of $1.19 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holdersexercised their options on December 31, 2015 . The intrinsic value is based on the fair market value of the Company’s stock and therefore changes as the fairmarket value of the stock price changes.Under the 2006 Plan, stock options must be granted at a price not less than the fair market value of the stock on the date the option is granted, generally arenot subject to re-pricing, and will not be exercisable more than ten years after the date of grant. Options granted under the 2006 Plan generally are qualify as "non-qualified stock options" under the U.S. Internal Revenue Code. Certain options granted under the 2004 Stock Option Plan generally qualify as “incentive stockoptions” under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the fair market value of the Company’s Common Stock on theoption grant date.Options granted during the year ended December 31, 2015 to employees of the Company were as follows:DateNumber ofShares ExercisePrice Grant DateFair ValueAugust 19, 2015700,000 $2.61 $1,827October 12, 201550,000 $2.95 148October 19, 2015100,000 $3.04 304 850,000 $2,279Included in the August 2015 grants above were 450,000 shares of non-qualified options issued to the Company's COO (“Non-Plan Options”) to purchase itscommon stock. These Non-Plan Options were granted outside of any shareholder-approved plan as an inducement to accept employment with the Company. Theoptions granted on August 19, 2015 shall vest in three equal installments on each of the first three anniversaries of the date of grant and have a term of five years. These options have an exercise price of $2.61 per share, equal to the closing price of the Company's common stock on the date of grant.The weighted average fair value of stock options as of the grant date was $1.10 in 2015. The Company did not grant any stock options during the yearsended December 31, 2014 and 2013. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions:Common Risk-Free Interest Rate Expected Dividend Yield Expected Term (Years) Expected Volatility2015 Grants 1.1% — 3.99 52.03%F-27Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company calculated the weighted average expected term of stock options to be 3.99 years, which represents the period of time that options areexpected to be outstanding. The risk free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield in effect at the time ofgrant. The volatility is determined based on management's estimate or historical volatilities of comparable companies.As of December 31, 2015 , $822 of unrecognized compensation cost related to stock options is expected to be recognized through October 2019.b. Common Stock GrantsRestricted Stock GrantsThe following restricted stock grants were issued to employees of the Company during the year ended December 31, 2015 .DateNumberof Shares SharePrice Grant DateFair ValueMarch 2, 2015207,000 $6.68 $1,383August 19, 2015300,000 $2.61 783Total507,000 $2,166Included in the grants above were 300,000 shares of restricted stock issued to the Company's COO (“Non-Plan RSA”). These Non-Plan RSA were grantedoutside of any shareholder-approved plan as an inducement to accept employment with the Company. The fair value of the Non-Plan RSA was $2.61 per share,representing the closing stock price on the date of grant. These shares will vest in three equal installments on each of the first three anniversaries of the date ofgrant.The following table summarizes the restricted stock activity for the year ended December 31, 2015 . Numberof Shares WeightedAverageGrant DateFair ValueBalance as of January 1, 2013367,612 $10.72Granted178,500 9.33Vested(98,692) 10.39Forfeited(84,249) 10.92Balance as of December 31, 2013363,171 10.08Granted196,500 8.47Vested(116,890) 9.82Forfeited(41,247) 9.92Balance as of December 31, 2014401,534 9.38Granted507,000 4.27Vested(133,874) 9.20Forfeited(249,790) 8.19Balance as of December 31, 2015524,870 $5.06The fair value of restricted stock is based on the closing stock price of an unrestricted share of the Company’s common stock on the grant date and isamortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period, net of estimated forfeitures. Thetotal compensation expense, classified within payroll and related on the consolidated statements of operations, related to restricted stock grants was $842 , $1,367and $1,056 for the years ended December 31, 2015 , 2014 and 2013 , respectively, and the related tax benefit was $321 , $648 , $459 for the years endedDecember 31, 2015 , 2014 and 2013 , respectively. The 2015 and 2014 benefit of $321 and $648 , respectively, were prior to the recognition of the valuationallowance. The restricted shares contain vesting restrictions and generally vest 25% per year over four years on the anniversary date of the grants. The Companygranted restricted stock awards totaling 507,000 shares with an aggregate grant date fair value of $2,166 in the year ended December 31, 2015 . In the years endedDecember 31, 2014 and 2013 , the Company granted 196,500 and 178,500 restricted shares, respectively, with an aggregate grant date fair value of $1,663 and$1,665 , respectively.F-28Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The total unrecognized compensation cost related to restricted stock of $1,614 is expected to be recognized through March 2019.Non-Restricted Stock GrantsThe below table indicates the non-restricted common stock grants issued to the Company’s Board of Directors during the year ended December 31, 2015 and2014 . The total fair value of the shares issued was expensed upon the grant dates.DateNumber ofShares SharePrice Grant DateFair ValueJanuary 16, 201421,248 11.53 245February 2, 201535,764 6.85 245March 24, 201531,845 6.28 200c. Common Stock DividendsOn April 15, 2014, the board of directors of the Company declared a quarterly cash dividend of $0.16 per share, payable on June 5, 2014 to commonstockholders of record at the close of business on May 22, 2014. On February 12, 2014, the board of directors of the Company declared a quarterly cash dividendof $0.16 per share, payable on March 5, 2014 to common stockholders of record at the close of business on February 24, 2014.On November 15, 2013, the board of directors of the Company declared a quarterly cash dividend of $0.16 per share, payable on December 5, 2013 tocommon stockholders of record at the close of business on November 26, 2013. The aggregate amount of the dividends payable was $3,792 , based upon shares ofcommon stock outstanding as of the record date of November 26, 2013 and additional amounts payable with each quarterly declaration as restricted shares vest.The remaining amount payable was $56 and $162 as of December 31, 2015 and 2014 , respectively. The quarterly dividend was discontinued in the second quarterof 2014.On November 16, 2012, the board of directors of the Company declared a special cash dividend of $3.00 per share, payable on December 11, 2012 tocommon stock holders of record at the close of business on November 30, 2012. The aggregate amount of the dividends payable was $70,296 , based upon sharesof common stock outstanding as of the record date of November 30, 2012 with another $1,104 payable as restricted shares vest. The remaining amount payablewas $62 and $340 as of December 31, 2015 and 2014, respectively.Pursuant to the 2006 Plan, holders of unvested restricted shares as of December 11, 2012 qualify to receive the $3.00 dividend on each future vesting date,subject to continued employment through the vesting date. Holders of unvested restricted shares as of December 5, 2013, March 5, 2014 and June 5, 2014 qualifyto receive the $0.16 dividend on each future vesting date, subject to continued employment through the vesting date. As of December 31, 2015 , the total dividendspayable on unvested restricted shares was $118 , of which $90 is classified as the current portion of the dividends payable expected to be paid in 2014 and $28classified as long-term which is expected to be paid in the vesting periods in 2016 through 2018.14. Revenue from Club OperationsRevenues from club operations for the years ended December 31, 2015 , 2014 and 2013 are summarized below: Years Ended December 31, 2015 2014 2013Membership dues$309,096 $343,185 $358,761Initiation and processing fees13,644 12,044 14,392Personal training revenue73,191 70,338 66,367Other ancillary club revenue(1)22,138 22,304 24,720Total club revenue418,069 447,871 464,240Fees and other revenue(2)6,254 5,971 5,985Total revenue$424,323 $453,842 $470,225(1)Other ancillary club revenue primarily consists of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes.(2)Fees and other revenue primarily consist of rental income, marketing revenue and management fees.F-29Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)15 . Corporate Income TaxesThe provision for income taxes for the years ended December 31, 2015 , 2014 and 2013 consisted of the following: Year Ended December 31, 2015 Federal Foreign State andLocal TotalCurrent$(3,100) $67 $197 $(2,836)Deferred(8,262) — (3,253) (11,515) $(11,362) $67 $(3,056) $(14,351) Year Ended December 31, 2014 Federal Foreign State andLocal TotalCurrent$12,454 $183 $266 $12,903Deferred14,684 — 25,024 39,708 $27,138 $183 $25,290 $52,611 Year Ended December 31, 2013 Federal Foreign State andLocal TotalCurrent$396 $232 $175 $803Deferred6,487 — 77 6,564 $6,883 $232 $252 $7,367The components of deferred tax liabilities, net consist of the following items: December 31, 2015 2014 Deferred tax assets Basis differences in depreciation and amortization$6,578 $—Deferred lease liabilities24,345 25,077Deferred revenue10,974 12,603Deferred compensation expense incurred in connection with stock options1,589 2,370Federal and state net operating loss carry-forwards10,430 7,197Accruals, reserves and other7,654 6,121Deferred Financing Arrangement— 39,295 $61,570 $92,663Deferred tax liabilities Basis differences in depreciation and amortization$— $16,674Deferred costs1,751 5,604Deferred rent receivable— 1,564Change in accounting method6,621 10,121Undistributed foreign earnings and other622 587 $8,994 $34,550Gross deferred tax assets52,576 58,113Valuation allowance(52,637) (69,689)Deferred tax liabilities, net$(61) $(11,576) As of December 31, 2015 , the Company has net deferred tax liability of $61 . The state net deferred tax liability balance as of December 31, 2015 is $17 .For the year ending December 31, 2014 the Company had a net deferred tax liability of $11,576 . The state net deferred tax liability balance as of December 31,2014 was $3,274 .F-30Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In assessing the realizability of deferred tax assets, the Company evaluates whether it is more likely than not (more than 50%) that some portion or all of thedeferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amount expected to be realized. The ultimate realizationof deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or netoperating loss carryforward can be utilized. The Company evaluates all positive and negative evidence when determining the amount of the net deferred tax assetsthat are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences,tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a jurisdictionalbasis 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 ofthe deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likelythan not realizable, we establish a valuation allowance. The Company has recorded valuation allowances in the amounts of $43,681 and $60,368 at December 31,2015 and 2014, respectively.In recording the valuation allowance, deferred tax liabilities associated with goodwill generally cannot be used as a source of taxable income to realizedeferred tax assets with a definitive loss carry forward period. The Company does not amortize goodwill for book purposes but does amortize goodwill with taxbasis for tax purposes. The deferred tax liability recorded at December 31, 2015 relates to the tax effect of differences between book and tax basis of intangibleassets not expected to reverse during the Company’s net operating loss carry forward period.As of December 31, 2015 , state tax net operating loss carry-forwards were $11,020 . Such amounts expire between December 31, 2016 and December 31,2034. The Company has not recorded a tax benefit for the windfall portion of the stock compensation that either created or increased the remaining state netoperating losses for tax purposes. As such, the amount of state net operating loss carry-forwards for which a tax benefit would be recorded to additional paid-incapital when the tax benefit is realized is approximately $590 as of December 31, 2015 .The Company’s foreign pre-tax earnings related to the Swiss entity were $277 , $762 and $968 for the years ended December 31, 2015 , 2014 and 2013 ,respectively, and the related current tax provisions were $67 , $183 and $232 , respectively. In 2011, the Company repatriated Swiss earnings through 2010. Inaccordance with ASC 740-30, the Company has recognized a deferred tax liability of $622 for the incremental U.S. tax cost on the total cumulative undistributedearnings of the Swiss clubs for the period through December 31, 2015 .The results for the years ended December 31, 2013 include error corrections that resulted in an increase in benefit for corporate income taxes and a relatedincrease in deferred tax assets in the Company’s consolidated statement of operations and consolidated balance sheet for each year, respectively. In the fourthquarter of 2013, the Company identified a correction relating to temporary differences in fixed assets for state depreciation that resulted in the recognition of anincome tax benefit of $225 . Also in the fourth quarter of 2013, the Company identified corrections related to temporary differences in landlord allowancesresulting in the recognition of out of period expense of $209 for a net benefit to provision for corporate income taxes of $16 recorded in the year endedDecember 31, 2013. The Company does not believe that these error corrections are material to the current or prior reporting periods.F-31Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The differences between the United States Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years endedDecember 31, 2015 , 2014 and 2013 : Years Ended December 31, 2015 2014 2013Federal statutory tax rate35 % 35 % 35 %State and local income taxes (net of federal tax benefit)11 8 8Change in state effective income tax rate3 (4) —State tax benefit related to insurance premiums(14) 7 (6)Tax reserves1 1 2Correction of an error— — (1)Permanent differences in fines and penalties2 1 —Other permanent differences— — (1) 38 48 37Valuation allowance(249) (422) —Elimination of federal effect of state deferred taxes— 53 — (211)% (321)% 37 %The 2015 , 2014 and 2013 effective tax rate of (211)% , (321)% , and 37% , respectively, on the Company’s pre-tax income or loss was primarily impactedby the change in the valuation allowance and the state tax benefits related to insurance premiums and interest paid to the captive insurance company.The amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate in any future periods were $1,155 as of bothDecember 31, 2015 and 2014 . For the years ended December 31, 2015 , 2014 and 2013 , interest (income) expense on unrecognized tax benefits was $81 , $(334)and $495 , respectively. The Company recognizes both interest accrued related to unrecognized tax benefits and penalties in income tax expenses. The Companyhad total accruals for interest as of December 31, 2015 and 2014 of $704 and $623 , respectively.A reconciliation of unrecognized tax benefits, excluding interest and penalties, is as follows: 2015 2014 2013 Balance on January 1$1,187 $13,830 $15,659Gross decreases for tax positions taken in prior years— (12,675) (1,829)Gross increases for tax positions taken in prior years— 32 —Balance on December 31$1,187 $1,187 $13,830As of December 31, 2015 , the Company had $1,187 of unrecognized tax benefits and it is reasonably possible that the entire amount could be realized by theCompany in 2016 since the income tax returns may no longer be subject to audit in 2016.The Company files federal, foreign and multiple state and local jurisdiction income tax returns. The Company is no longer subject to examinations of itsfederal income tax returns by the Internal Revenue Service for years 2010 and prior. U.S. net operating losses generated in closed years and utilized in open yearsare subject to adjustment by tax authorities.The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2012), andNew York City (2006 through 2012).On January 13, 2016, the Company received from the State of New York a revised assessment related to tax years 2006-2009 for $4,119 , inclusive of $1,617of interest. The Company continues to evaluate the merits of the proposed assessment as new information becomes available during continued discussions with theState of New York. The Company has not recorded a tax reserve related to the proposed assessment. It is difficult to predict the final outcome or timing ofresolution of any particular matter regarding these examinations. An estimate of the reasonably possible change to unrecognized tax benefits within the next 12months cannot be made.F-32Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)16 . Commitments and ContingenciesOn 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 fitnessclubs filed a lawsuit in state court against it and two of its health club subsidiaries alleging, among other things, breach of lease in connection with the decision toclose 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 leasedby 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 trialcourt’s award of damages, and on August 29, 2011, an additional award (amounting to approximately $900 ) (the “Additional Award”), was entered against thetenant, which has recorded a liability. Separately, TSI, LLC is party to an agreement with a third-party developer, which by its terms provides indemnification forthe 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, thedeveloper 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 theAdditional Award, and the tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord are currentlylitigating the payment of the Additional Award and judgment was entered against the developer on June 5, 2013, in the amount of approximately $1,045 , plusinterest, 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 forany amount of the Additional Award.On or about October 4, 2012, in an action styled James Labbe, et al. v. Town Sports International, LLC, plaintiff commenced a purported class action in NewYork State court on behalf of personal trainers employed in New York State. Labbe is seeking unpaid wages and damages from TSI, LLC and alleges violations ofvarious provisions of the New York State labor law with respect to payment of wages and TSI, LLC’s notification and record-keeping obligations. The Companycompleted settlement negotiations, pursuant to which TSI will pay its trainers the aggregate sum of $165 in exchange for full releases. The settlement agreement iscurrently in the process of being executed by the parties, which will become effective upon approval of the court and the class.On January 21, 2016, in an action styled Triangle 17 Center, LLC v. Town Sports International Holdings (NJ), LLC, ET AL., a Landlord of one of TSI’scompetitors filed an action, claiming that TSI engaged in sham litigation to prevent the opening of a competitor’s facility in close proximity to TSI’s location inRamsey, New Jersey. As this matter is in its infancy stage, it is difficult to determine what, if any, liability TSI may have in connection with this suit, howeverupon the initial advice of counsel TSI believes it has meritorious defenses to the claims asserted and as such TSI does not believe it is probable that TSI will berequired to pay any amounts in connection with this litigation.In addition to the litigation discussed above, the Company is involved in various other lawsuits, claims and proceedings incidental to the ordinary course ofbusiness, including personal injury, employee relations claims and landlord tenant disputes. The results of litigation are inherently unpredictable. Any claimsagainst the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and resultin diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot be predicted with certainty. The Company establishesaccruals 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 suchaccruals are adjusted thereafter as appropriate to reflect changes in circumstances. The Company concluded that an accrual for any such matters is not required asof December 31, 2015 .17. Employee Benefit PlanThe Company maintains a 401(k) defined contribution plan and is subject to the provisions of the Employee Retirement Income Security Act of 1974(“ERISA”). The Plan provides for the Company to make discretionary contributions. The Plan was amended, effective January 1, 2001, to provide for an employermatching contribution in an amount equal to 25% of the participant’s contribution with a limit of five hundred dollars per individual, per annum. Effective January1, 2016, the Plan was further amended to eliminate this employer matching contribution.Employer matching contributions totaling $198 and $200 were made in February 2015 and 2014, respectively, for the Plan years ended December 31, 2014and 2013, respectively. The Company expects to make an employer matching contribution of approximately $205 in March 2016 for the Plan year endedDecember 31, 2015 .18 . Reportable SegmentsThe Company’s operating segments are New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs, Washington Sports Clubs, Swiss SportsClubs and BFX Studio, which is the level at which the chief operating decision makers review discrete financial information and make decisions about segmentprofitability based on earnings before income taxF-33Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)depreciation and amortization. The Company has historically determined that these clubs have similar economic characteristics and meet the criteria which permitthem to be aggregated into one reportable segment. During the fourth quarter of 2014, BFX Studio started to be managed separately and reported as a separatereportable segment as it does not meet the aggregation criteria to be aggregated with the clubs. Geographically, the Company operates its fitness clubs mainly inthe United States. Segment information on geographic regions is not material for presentation. Segment information on assets is not presented as the chiefoperating decision makers do not regularly review segment assets.The following tables set forth the Company’s financial performance by reportable segment for the years ended December 31, 2015 , 2014 and 2013 . Sincethe first BFX Studio lease was not signed until November 2013, BFX Studio had immaterial impact on the Company’s consolidated financial statements for theyear ended December 31, 2013. Year ended December 31, 2015 2014 2013Revenues: Clubs$422,090 $453,516 $470,225Studio2,233 326 —Total Revenues$424,323 $453,842 $470,225The Company presents earnings (loss) before interest expense (net of interest income), provision (benefit) for corporate income taxes, and depreciation andamortization (“EBITDA”) as the primary measure of profit and loss for its operating segments in accordance with FASB guidance for segment reporting. ClubsEBITDA includes all corporate overhead expenses and the impact of equity in the earnings of investees and rental income. Studio reported EBITDA loss of 3,959and 3,556 in 2015 and 2014 , primarily reflecting the rent and occupancy costs, start-up costs and overhead payroll for the Company's three studios opened inSeptember 2014, March 2015 and June 2015. Year ended December 31, 2015 2014 2013EBITDA: Clubs$79,232 $53,524 $91,770Studio(3,959) (3,556) (364)Total reportable segments75,273 49,968 91,406Depreciation and amortization47,887 47,307 49,099Interest expense20,579 19,039 22,617Interest income— — (1)Income (loss) before provision for corporate income taxes$6,807 $(16,378) $19,691 Year ended December 31, 2015 2014 2013Capital Expenditures: Clubs$23,427 $37,101 $30,565Studio7,044 4,953 296Total Capital Expenditures$30,471 $42,054 $30,861F-34Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)19. Selected Quarterly Financial Data (Unaudited) 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (b) (c) (d)Net revenue$111,424 $108,296 $103,764 $100,839Operating (loss) income(7,941) (41,451) (19,711) 76,217Net (loss) income(12,764) (31,068) (22,006) 86,996(Loss) earnings per share (a) Basic$(0.52) $(1.26) $(0.89) $3.50Diluted$(0.52) $(1.26) $(0.89) $3.47 2014 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (e) (f)Net revenue$115,903 $115,697 $112,521 $109,721Operating (loss) income(2,104) 2,068 2,412 (1,624)Net loss(3,515) (919) (867) (63,688)Loss per share (a) Basic$(0.15) $(0.04) $(0.04) $(2.62)Diluted$(0.15) $(0.04) $(0.04) $(2.62)(a)Basic and diluted (loss) earnings per share are computed independently for each quarter presented. Accordingly, the sum of the quarterly earnings per sharemay not agree with the calculated full year earnings per share.(b)Net loss and loss per share for the second quarter of 2015 included $32,572 and $0.84 , respectively, comprised of non-cash goodwill impairment charge of$31,558 and non-cash fixed asset impairment charge of $1,014 .(c)Net loss and loss per share for the third quarter of 2015 included $12,420 and $0.50 , respectively, of non-cash fixed asset impairment charge.(d)Net income and diluted earnings per share for the fourth quarter of 2015 included $90,024 and $2.24 , respectively, comprised of the following: gain on sale ofbuilding of $77,146 , gain on extinguishment of debt of $17,911 and gain on lease termination of $2,967 .(e)Net loss and loss per share for the third quarter of 2014 included $833 and $0.03 , respectively, comprised of the following: $928 , net of tax, occupancy gainrelated to club closures, $60 , net of tax, related to rental income from the Company's former tenant in the East 86th Street building, $24 , net of tax, resultingfrom rent paid under the building financing arrangement (recorded in interest expense on the accompanying consolidated statement of operations), partiallyoffset by $123 , net of tax, related to legal damages resulting from a legal judgment and $56 , net of tax, related to legal and other expenses associated withclub closures.(f)Net loss and loss per share for the fourth quarter of 2014 included $60,368 and $2.48 , respectively, comprised of non-cash charge related to a tax valuationallowance recorded against deferred tax assets.20. Separation ObligationIn March 2015, Robert Giardina's employment with the Company as Executive Chairman was terminated. Mr. Giardina continues to serve as a member ofthe Board and will be treated as a non-employee director. Pursuant to a letter agreement entered with Mr. Giardina in February 2015, Mr. Giardina was entitled toreceive payment of $1,100 in accordance with the terms of the agreement, which has been placed by the Company in a Rabbi Trust, and the Company accrued anadditional $208 of payroll taxes and medical benefits related to this agreement. These amounts were classified within payroll and related as well as general andadministrative on the consolidated statements of operations for the year ended December 31, 2015. Of the $1,100 separation obligation, $679 was paid in April2015, $140 was paid in September 2015 and the remaining balance ofF-35Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)$281 is being paid over a 12 -month period beginning October 2015. As of December 31, 2015, the remaining separation obligation was $211 , which was includedin Prepaid expenses and other current assets on the accompanying consolidated balance sheets as of December 31, 2015. The $211 is classified as restricted cash asof December 31, 2015 and is restricted in its use as noted above.In June 2015, Daniel Gallagher's employment with the Company as Chief Executive Officer and President was terminated. Pursuant to a letter agreemententered with Mr. Gallagher in June 2015, Mr. Gallagher received payment of $150 in June 2015, and is entitled to receive severance payment of $550 , payableover a 12 -month period beginning July 2015. The Company also accrued an additional $76 of payroll taxes and medical benefits related to this agreement. Theseamounts were classified within payroll and related on the consolidated statements of operations for the year ended December 31, 2015. Of the $550 severancepayment, $286 was paid in 2015 and the remaining balance of $264 was included in Accrued expenses on the accompanying consolidated balance sheets as ofDecember 31, 2015.In connection with Mr. Gallagher's termination, the Company's Board of Directors named Patrick Walsh, then Chairman of the Board of the Company, toserve as Executive Chairman, on an interim basis, in which capacity Mr. Walsh is responsible for the general management and control of the affairs and business ofthe Company. In exchange for his service as Executive Chairman, Mr. Walsh is entitled to receive compensation of $30 per month, payable from June 19, 2015. Inthe year ended December 31, 2015, the Company incurred compensation expense of $191 to Mr. Walsh in connection with this arrangement.In September 2015, Paul Barron's employment with the Company as Chief Information Officer was terminated. Pursuant to a letter agreement entered withMr. Barron in February 2015, Mr. Barron received payment of $83 in December 2015, and is entitled to receive severance payment of $319 , payable over a a 12 -month period beginning December 2015. The Company also accrued an additional $44 of payroll taxes and benefits related to this agreement. These amounts wereclassified within payroll and related on the consolidated statements of operations for the year ended December 31, 2015. Of the $319 severance payment, $39 waspaid in the year ended December 31, 2015 and the remaining balance of $280 was included in Accrued expenses on the consolidated balance sheets as ofDecember 31, 2015.In December 2015, Scott Milford's employment with the Company as Senior Vice President of Human Resources was terminated. Pursuant to a letteragreement entered with Mr. Milford in February 2015, Mr. Milford received payment of $103 in December 2015, and is entitled to receive severance payment of$322 , payable over a 12 -month period beginning February 2016. The Company also accrued an additional $75 of payroll taxes and medical benefits related to thisagreement. These amounts were classified within payroll and related on the consolidated statements of operations for the year ended December 31, 2015. Theseverance payment of $322 was also included in Accrued expenses on the consolidated balance sheets as of December 31, 2015.F-36Table of ContentsExhibit IndexThe following is a list of all exhibits filed or incorporated by reference as part of this Report: ExhibitNo. Description of Exhibit 3.1 Amended and Restated Certificate of Incorporation of Town Sports International Holdings, Inc. (the “Registrant”) (incorporated by referenceto Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 3.3 Third Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report onForm 8-K, filed on September 17, 2014). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-1, FileNo. 333-126428 (the “S-1 Registration Statement”)). 10.1 Registration Rights Agreement, dated as of February 4, 2004, by and among Town Sports International Holdings, Inc., Town SportsInternational, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. the individuals and entities listed on the BRS Co-Investor Signature Pagesthereto, Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR Capital Partners, L.P., and Farallon CapitalInstitutional Partners II, L.P., Canterbury Detroit Partners, L.P., Canterbury Mezzanine Capital, L.P., Rosewood Capital, L.P., RosewoodCapital IV, L.P., Rosewood Capital IV Associates, L.P., CapitalSource Holdings LLC, Keith Alessi, Paul Arnold, and certain stockholders ofthe Company listed on the Executive Signature Pages thereto (incorporated by reference to Exhibit 10.5 of the Registrant’s RegistrationStatement on Form S-4, File No. 333-114210 (the “S-4 Registration Statement”). 10.2 Amendment No. 1 to the Registration Rights Agreement dated as of March 23, 2006 (incorporated by reference to Exhibit 10.21 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2005). 10.3 Amendment No. 2 to the Registration Rights Agreement dated as of May 30, 2006 (incorporated by reference to Exhibit 10.9.1 of the S-1Registration Statement). 10.4 Credit Agreement, dated as of November 15, 2013, among Town Sports International, LLC, TSI Holdings II, LLC, the lenders party thereto,Deutsche Bank Trust Company Americas, as Administrative Agent, and Keybank National Association, as Syndication Agent (incorporatedby reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated November 15, 2013). 10.5 First Amendment to Credit Agreement, dated as of January 30, 2015, among Town Sports International, LLC, TSI Holdings, II, LLC, thelenders party thereto, Deutsche Bank AG New York Branch, as administrative agent (incorporated by reference to Exhibit 10.5 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2014). 10.6 Subsidiaries Guaranty, dated as of November 15, 2013, among each of the Guarantors party thereto, and Deutsche Bank AG New YorkBranch, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, datedNovember 15, 2013). 10.7 Pledge Agreement dated as of November 15, 2013, among the Borrower, Holdings II, each of the Pledgors party thereto, and Deutsche BankAG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, datedNovember 15, 2013). 10.8 Security Agreement dated as of November 15, 2013, among the Borrower, Holdings II, each of the Assignors party thereto, and DeutscheBank AG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K,dated November 15, 2013).F-37Table of Contents ExhibitNo. Description of Exhibit 10.9 Amended and Restated Interest Rate Swap Confirmation, dated November 15, 2013, between Town Sports International, LLC and DeutscheBank AG New York (incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K, for the year endedDecember 31, 2013). 10.10 Agreement of Sale, dated December 23, 2013, by and between Town Sports International, LLC and Monty Two East 86th Street AssociatesLLC (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013). 10.11 First Amendment to Agreement of Sale, dated March 26, 2014, between Town Sports International, LLC and Monte Two East 86 th StreetAssociates, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March31, 2014). 10.12 Second Amendment to Agreement of Sale, dated April 11, 2014, between Town Sports International, LLC and Monte Two East 86 th StreetAssociates, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March31, 2014). 10.13 Third Amendment to Agreement of Sale, dated July 7, 2014, between Town Sports International, LLC and Monte Two East 86 th StreetAssociates, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,2014). *10.14 2004 Common Stock Option Plan (incorporated by reference to Exhibit 10.7 of the S-4 Registration Statement). *10.15 Amendment No. 1 to the Registrant’s 2004 Common Stock Option Plan (incorporated by reference to Exhibit 10.2 of the Registrant’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2007). *10.16 Town Sports International Holdings, Inc. 2006 Stock Incentive Plan, as amended and restated effective April 2, 2015 (incorporated herein byreference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed on April 27, 2015). *10.17 Form of Incentive Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K filed August 8, 2006). *10.18 Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K filed August 8, 2006). *10.19 Form of the Non-Qualified Stock Option Agreement for Non-Employee Directors pursuant to the 2006 Incentive Plan (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed April 2, 2007). *10.20 Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.3 of theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007). *10.21 Form of Restricted Stock Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2008). *10.22 Amended and Restated Town Sports International Holdings, Inc. 2006 Annual Performance Bonus Plan (incorporated by reference toAppendix B of the Registrant’s definitive Proxy Statement on Schedule 14A filed on April 27, 2015).F-38Table of Contents ExhibitNo. Description of Exhibit *10.23 Amended and Restated Non-Employee Director Compensation Plan Summary Effective January 1, 2015 (incorporated by reference toExhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014). *10.24 Offer Letter, dated March 18, 2010, between the Registrant and Robert Giardina (incorporated by reference to Exhibit 10.1 to theRegistrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2010). *10.25 Letter Agreement with Daniel Gallagher, dated January 10, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant’s CurrentReport on Form 8-K filed January 13, 2014). *10.26 Letter Agreement with Carolyn Spatafora, dated April 16, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant’s CurrentReport on Form 8-K filed April 25, 2014). *10.27 Form of Executive Severance Agreement between the Registrant and Daniel Gallagher (incorporated by reference to Exhibit 10.38 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2007). *10.28 Form of Amendment to Executive Severance Agreement between the Registrant and Daniel Gallagher (incorporated by reference toExhibit 10.39 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008). *10.29 Form of Executive Severance Agreement between the Registrant and each of Robert Giardina, Carolyn Spatafora and Nitin Ajmera(incorporated by reference to Exhibit 10.28 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009). *10.30 Amendment dated March 1, 2011 to Executive Severance Agreement between the Registrant and Robert Giardina (incorporated byreference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2011). *10.31 Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.25 of the S-1 Registration Statement). *10.32 Letter Agreement, dated February 25, 2015, between Town Sports International Holdings, Inc. and Robert Giardina (incorporated byreference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed February 25, 2015). *10.33 Letter Agreement, dated February 25, 2015, between Town Sports International Holdings, Inc. and Daniel Gallagher (incorporated byreference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed February 25, 2015). *10.34 Form of Amended and Restated Executive Severance Agreement, dated February 25, 2015, between Town Sports International Holdings,Inc. and each of Carolyn Spatafora, and Nitin Ajmera (incorporated by reference to Exhibit 10.3 of the Registrant's Current Report on Form8-K filed February 25, 2015).F-39Table of Contents ExhibitNo. Description of Exhibit *10.35 Nomination and Standstill Agreement, dated March 24, 2015, by and among Town Sports International Holdings, Inc. and PW PartnersAtlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners, LLC, PW Partners Capital ManagementLLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora Capital Management, LLC, and Parag Vora. Holdings,Inc. and PW Partners Atlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners, LLC, PW PartnersCapital Management LLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora Capital Management, LLC, andParag Vora (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed March 25, 2015). *10.36 Letter Agreement, dated March 24, 2015 between Town Sports International Holdings, Inc. and Farallon Capital Management, L.L.C.(incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed March 25, 2015). *10.37 Amended and Restated Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.3 of the Registrant’s CurrentReport on Form 8-K filed March 25, 2015). *10.38 Separation Letter between the Company and Daniel Gallagher (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Reporton Form 8-K filed June 18, 2015). *10.39 Letter Agreement with Gregory Bartoli, dated August 17, 2015 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Reporton Form 8-K filed August 18, 2015). *10.40 Form of Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form10-Q for the period ended September 30, 2015). *10.41 Form of Non-Qualified Stock Option Agreement for Gregory Bartoli pursuant to the 2006 Incentive Plan, as amended (incorporated byreference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2015). *10.42 Form of Restricted Stock Agreement for Gregory Bartoli (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report onForm 10-Q for the period ended September 30, 2015). *10.43 Form of Non-Qualified Stock Option Agreement for Gregory Bartoli (incorporated by reference to Exhibit 10.5 of the Registrant’sQuarterly Report on Form 10-Q for the period ended September 30, 2015). 10.44 Agreement Regarding Termination of Nomination and Standstill Agreement (Filed herewith). 21 Subsidiaries of the Registrant (Filed herewith). 23.1 Consent of PricewaterhouseCoopers LLP (Filed herewith). F-40Table of Contents ExhibitNo. Description of Exhibit 31.1 Certification of Executive Chairman pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Section 1350 Certification of Executive Chairman. 32.2 Section 1350 Certification of Chief Financial Officer. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema. 101.CAL XBRL Taxonomy Extension Calculation Linkbase. 101.DEF XBRL Taxonomy Extension Definition Linkbase. 101.LAB XBRL Taxonomy Extension Label Linkbase. 101.PRE XBRL Taxonomy Extension Presentation Linkbase.___________________________*Management contract or compensatory plan or arrangement.F-41Exhibit 10.44Agreement Regarding Termination of Nomination and Standstill AgreementThis Agreement Regarding Termination of Nomination and Standstill Agreement, dated as of February 17, 2016 (the “ Agreement ”), is entered into by and amongTown Sports International Holdings, Inc., a Delaware corporation (the “ Corporation ”), PW Partners Atlas Fund III LP (“ Atlas Fund III ”), PW Partners MasterFund LP (“ PW Master Fund ”), PW Partners Atlas Funds, LLC (“ Atlas Fund GP ”), PW Partners, LLC (“ PW Master Fund GP ”), PW Partners CapitalManagement LLC (“ PW Capital Management ”), Patrick Walsh (“ Mr. Walsh ” and collectively, with Atlas Fund III, Atlas Fund GP, PW Master Fund, PWMaster Fund GP and PW Capital Management, the “ PW Group Shareholders ”), HG Vora Special Opportunities Master Fund, Ltd. (“ HG Vora Master Fund ”),HG Vora Capital Management, LLC (“ HG Vora Capital Management ”), Parag Vora (“ Mr. Vora ” and collectively, with HG Vora Master Fund and HG VoraCapital Management, the “ HG Vora Group Shareholders ” (each of the Corporation, the PW Group Shareholders and the HG Vora Group Shareholders, a “ Party ”to this Agreement, and collectively, the “ Parties ”).RECITALSWHEREAS , the Corporation, the PW Group Shareholders and the HG Vora Group Shareholders are party to a Nomination and Standstill Agreement, dated as ofMarch 24, 2015 (the “ Nomination and Standstill Agreement ”); andWHEREAS , the Corporation, the PW Group Shareholders and the HG Vora Group Shareholders wish to set forth their agreement that the Nomination andStandstill Agreement has terminated as set forth below.AGREEMENTNOW, THEREFORE , in consideration of the foregoing it is hereby agreed as follows: 1. Termination . The Parties agree that (a) the Nomination and Standstill Agreement has terminated and (b) neither the Corporation, the PW GroupShareholders or the HG Vora Group Shareholders (individually or collectively) has any rights, claims (including under Section 2 thereof) or obligations under orpursuant to the Nomination and Standstill Agreement; and (c) the Nomination and Standstill Agreement has no further force and effect, in each case, except thatthe provisions of Section 9(a) (but excluding the last sentence thereof) through Section 18 of the Nomination and Standstill Agreement shall survive suchtermination.2. Miscellaneous .(a) Governing Law . THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OFTHE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.(b) Counterparts . This Agreement may be executed in two or more counterparts either manually or by electronic or digital signature (includingby facsimile or electronic mail transmission), each of which shall be deemed to be an original and all of which together shall constitute a single binding agreementon the Parties, notwithstanding that not all Parties are signatories to the same counterpart.IN WITNESS WHEREOF , each of the Parties has executed this Agreement, or caused the same to be executed by its duly authorized representative as of thedate first above written.TOWN SPORTS INTERNATIONAL HOLDINGS, INC./s/ Kieran Sikso Name: Kieran SiksoTitle: Vice President of Finance [Signature Page to Agreement]PW GROUP SHAREHOLDERSPW PARTNERS ATLAS FUND III LPBy: PW Partners Atlas Funds, LLCGeneral PartnerBy: /s/ Patrick Walsh Name: Patrick WalshTitle: Managing Member and Chief Executive OfficerPW PARTNERS MASTER FUND LPBy: PW Partners, LLCGeneral PartnerBy: /s/ Patrick Walsh Name: Patrick WalshTitle: Managing Member and Chief Executive OfficerPW PARTNERS ATLAS FUNDS, LLCBy: /s/ Patrick Walsh Name: Patrick WalshTitle: Managing Member and Chief Executive OfficerPW PARTNERS, LLCBy: /s/ Patrick Walsh Name: Patrick WalshTitle: Managing Member and Chief Executive OfficerPW PARTNERS CAPITAL MANAGEMENT LLCBy: /s/ Patrick Walsh Name: Patrick WalshTitle: Managing Member and Chief Executive OfficerPATRICK WALSH/s/ Patrick Walsh Name: Patrick Walsh[Signature Page to Agreement]HG VORA GROUP SHAREHOLDERSHG VORA SPECIAL OPPORTUNITIES MASTER FUND, LTDBy: /s/ Parag Vora Name: Parag VoraTitle: DirectorHG VORA CAPITAL MANAGEMENT, LLCBy: /s/ Parag Vora Name: Parag VoraTitle: DirectorPARAG VORA/s/ Parag Vora Name: Parag Vora[Signature Page to Agreement]Exhibit 21Company State ofIncorporation Doing Business AsParent TSI Holdings II, LLC DE n/aTown Sports International, LLC NY n/aSubsidiaries BFX 1231 Third Avenue, LLC DE BFX StudioBFX 30 Broad Street, LLC DE BFX StudioBFX Back Bay, LLC DE BFX StudioBFX West 15th Street, LLC DE BFX StudioBoutique Fitness, LLC DE BFX Boutique Fitness ExperienceTSI 20 Exchange Place, LLC DE NYSCTSI 217 Broadway, LLC DE NYSCTSI Alexandria, LLC DE WSCTSI Alexandria West, LLC DE n/aTSI Allston, LLC DE BSCTSI Andover, LLC DE BSCTSI Ardmore, LLC DE PSCTSI Arthro-Fitness Services, LLC DE NYSCTSI Astoria, LLC DE NYSCTSI Avenue A, LLC DE NYSCTSI Back Bay, LLC DE BSCTSI Battery Park, LLC DE NYSCTSI Bay Ridge 86th Street, LLC DE NYSCTSI Bayonne, LLC DE NYSCTSI Bayridge, LLC DE NYSCTSI Beacon Street, LLC DE BSCTSI Bensonhurst, LLC DE NYSCTSI Bethesda, LLC DE n/aTSI Boylston, LLC DE BSCTSI Broadway, LLC DE NYSCTSI Brooklyn Belt, LLC DE NYSCTSI Brunswick, LLC DE NYSCTSI Bulfinch, LLC DE BSCTSI Butler, LLC DE NYSCTSI Canton, LLC DE BSCTSI Carmel, LLC DE NYSCTSI Cash Management, LLC DE n/aTSI Central Square, LLC DE BSCTSI Cherry Hill, LLC DE n/aTSI Chevy Chase, LLC DE WSCTSI Clarendon, LLC DE WSCTSI Clarendon Street, LLC DE BSCTSI Clifton, LLC DE NYSCTSI Cobble Hill, LLC DE NYSCTSI Colonia, LLC DE NYSCTSI Columbia Heights, LLC DE WSCTSI Commack, LLC DE NYSCTSI Connecticut Avenue, LLC DE WSCCompany State ofIncorporation Doing Business AsTSI Court Street, LLC DE NYSCTSI Croton, LLC DE NYSCTSI Danbury, LLC DE NYSCTSI Davis Square, LLC DE BSCTSI Deer Park, LLC DE NYSCTSI Dobbs Ferry, LLC DE NYSCTSI Dorchester, LLC DE BSCTSI Downtown Crossing, LLC DE BSCTSI Dupont Circle, Inc. DE n/aTSI Dupont II, Inc. DE n/aTSI East 23, LLC DE NYSCTSI East 31, LLC DE NYSCTSI East 34, LLC DE NYSCTSI East 36, LLC DE NYSCTSI East 41, LLC DE NYSCTSI East 48, LLC DE NYSCTSI East 51, LLC DE NYSCTSI East 59, LLC DE NYSCTSI East 76, LLC DE NYSCTSI East 86, LLC DE NYSCTSI East 86th Street II, LLC DE NYSCTSI East 91, LLC DE NYSCTSI East Brunswick, LLC DE NYSCTSI East Meadow, LLC DE NYSCTSI Englewood, LLC DE NYSCTSI F Street, LLC DE WSCTSI Fairfax, LLC DE WSCTSI Fenway, LLC DE BSCTSI First Avenue, LLC DE NYSCTSI Fit Acquisition, LLC DE n/aTSI Forest Hills, LLC DE NYSCTSI Fort Lee, LLC DE NYSCTSI Framingham, LLC DE BSCTSI Franklin (MA), LLC DE BSCTSI Franklin Park, LLC DE NYSCTSI Freehold, LLC DE NYSCTSI Gallery Place, LLC DE WSCTSI Garden City, LLC DE NYSCTSI Garnerville, LLC DE NYSCTSI Georgetown, LLC DE WSCTSI Germantown, LLC DE WSCTSI Giftco, LLC PA n/aTSI Glendale, LLC DE NYSCTSI Glover, LLC DE WSCTSI Grand Central, LLC DE NYSCTSI Great Neck, LLC DE NYSCTSI Greenpoint, LLC DE NYSCCompany State ofIncorporation Doing Business AsTSI Greenwich, LLC DE NYSC and AMFIT Physical TherapyTSI Hartsdale, LLC DE NYSCTSI Hawthorne, LLC DE NYSCTSI Herald, LLC DE NYSCTSI Hicksville, LLC DE NYSCTSI Highpoint, LLC DE PSCTSI Hoboken, LLC DE NYSCTSI Hoboken North, LLC DE NYSCTSI Holdings (CIP), LLC DE n/aTSI Holdings (DC), LLC DE n/aTSI Holdings (IP), LLC DE n/aTSI Holdings (MA), LLC DE n/aTSI Holdings (MD), LLC DE n/aTSI Holdings (NJ), LLC DE n/aTSI Holdings (PA), LLC DE n/aTSI Holdings (VA), LLC DE n/aTSI Huntington, LLC DE NYSCTSI Insurance, Inc. NY n/aTSI International, Inc. DE n/aTSI Irving Place, LLC DE NYSCTSI Jamaica Estates, LLC DE NYSCTSI Jersey City, LLC DE NYSCTSI K Street, LLC DE WSCTSI Larchmont, LLC DE NYSCTSI Lexington (MA), LLC DE BSCTSI Lincoln, LLC DE NYSCTSI Livingston, LLC DE NYSCTSI Long Beach, LLC DE NYSCTSI Lynnfield, LLC DE BSCTSI M Street, LLC DE WSCTSI Mahwah, LLC DE NYSCTSI Mamaroneck, LLC DE NYSCTSI Market Street, LLC DE PSCTSI Marlboro, LLC DE NYSCTSI Matawan, LLC DE NYSCTSI Mercer Street, LLC DE NYSCTSI Midwood, LLC DE NYSCTSI Montclair, LLC DE NYSCTSI Morris Park, LLC DE NYSCTSI Murray Hill, LLC DE NYSCTSI Nanuet, LLC DE NYSCTSI Natick, LLC DE BSCTSI New Rochelle, LLC DE NYSCTSI Newark, LLC DE NYSCTSI Newbury Street, LLC DE BSCTSI Newton, LLC DE BSCCompany State ofIncorporation Doing Business AsTSI No Sweat, LLC DE n/aTSI North Bethesda, LLC DE WSCTSI Norwalk, LLC DE NYSCTSI Oceanside, LLC DE NYSCTSI Old Bridge, LLC DE NYSCTSI Parsippany, LLC DE NYSCTSI Plainsboro, LLC DE NYSCTSI Port Jefferson, LLC DE NYSCTSI Princeton, LLC DE NYSCTSI Princeton North, LLC DE NYSCTSI Providence Downtown, LLC DE BSC ITSI Providence Eastside, LLC DE BSC IITSI Radnor, LLC DE PSCTSI Ramsey, LLC DE NYSCTSI Reade Street, LLC DE NYSCTSI Rego Park, LLC DE NYSCTSI Ridgewood, LLC DE NYSCTSI Rodin Place, LLC DE PSCTSI Scarsdale, LLC DE NYSCTSI Seaport, LLC DE NYSCTSI Sheridan, LLC DE NYSCTSI Silver Spring, LLC DE WSCTSI Smithtown, LLC DE NYSCTSI Society Hill, LLC DE PSCTSI Soho, LLC DE NYSCTSI Somers, LLC DE NYSCTSI Somerset, LLC DE NYSCTSI South Bethesda, LLC DE WSCTSI South End, LLC DE BSCTSI South Park Slope, LLC DE NYSCTSI South Station, LLC DE BSCTSI Springfield, LLC DE NYSCTSI Stamford Downtown, LLC DE NYSCTSI Stamford Post, LLC DE NYSCTSI Stamford Rinks, LLC DE NYSCTSI Staten Island, LLC DE NYSCTSI Sterling, LLC DE WSCTSI Stoked, LLC DE n/aTSI Summer Street, LLC DE BSC and Boston Racquet ClubTSI Sunnyside, LLC DE NYSCTSI Syosset, LLC DE NYSCTSI University Management, LLC DE n/aTSI Varick Street, LLC DE NYSCTSI Wall Street, LLC DE NYSCTSI Waltham, LLC DE BSCTSI Washington, Inc. DE WSCTSI Water Street, LLC DE NYSCCompany State ofIncorporation Doing Business AsTSI Watertown, LLC DE BSCTSI Wayland, LLC DE BSCTSI Wellesley, LLC DE BSCTSI Wellington Circle, LLC DE BSCTSI West 14, LLC DE NYSCTSI West 16, LLC DE NYSCTSI West 23, LLC DE NYSCTSI West 38, LLC DE NYSCTSI West 41, LLC DE NYSCTSI West 44, LLC DE NYSCTSI West 48, LLC DE NYSCTSI West 52, LLC DE NYSCTSI West 73, LLC DE NYSCTSI West 76, LLC DE NYSCTSI West 80, LLC DE NYSCTSI West 94, LLC DE NYSCTSI West 115th Street, LLC DE NYSCTSI West 125, LLC DE NYSCTSI West 145th Street, LLC DE NYSCTSI West Caldwell, LLC DE NYSCTSI West End, LLC DE NYSCTSI West Hartford, LLC DE NYSCTSI West Newton, LLC DE BSCTSI West Nyack, LLC DE NYSCTSI West Springfield, LLC DE WSCTSI Westborough, LLC DE BSCTSI Westport, LLC DE NYSCTSI Westwood, LLC DE NYSCTSI Weymouth, LLC DE BSCTSI White Plains City Center, LLC DE NYSCTSI White Plains, LLC DE NYSCTSI Whitestone, LLC DE NYSCTSI Williamsburg, LLC DE n/aTSI Woburn, LLC DE BSCTSI Woodmere, LLC DE NYSCExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (No. 333-135048, 333-151965, 333-175884 and 333-205955) and Form S-3 (No. 333-167377) of Town Sports International Holdings, Inc. of our report dated March 7, 2016 relating to the financial statements and theeffectiveness of internal control over financial reporting, which appears in this Form 10-K./s/ P RICEWATERHOUSE C OOPERS LLPNew York, New YorkMarch 7, 2016Exhibit 31.1CERTIFICATIONSI, Patrick Walsh, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2015 of Town Sports International Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.By:/s/ Patrick Walsh Patrick Walsh Executive ChairmanMarch 7, 2016Exhibit 31.2CERTIFICATIONSI, Carolyn Spatafora, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2015 of Town Sports International Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. By:/s/ Carolyn Spatafora Carolyn Spatafora Chief Financial OfficerMarch 7, 2016Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Town Sports International Holdings, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2015filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick Walsh, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuantto 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ Patrick WalshPatrick WalshExecutive ChairmanMarch 7, 2016Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Town Sports International Holdings, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2015filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carolyn Spatafora, certify, pursuant to 18 U.S.C. 1350, as adoptedpursuant to 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ Carolyn SpataforaCarolyn SpataforaChief Financial OfficerMarch 7, 2016

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