Town Sports International Holdings, Inc.
Annual Report 2016

Plain-text annual report

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, 2016¨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 — 4TH 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 the preceding12 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 be submittedand posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submitand post such files). Yes þ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part IV of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company þ (Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þThe aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2016 (the last business day of the registrant’s most recentlycompleted second fiscal quarter) was approximately $33.9 million (computed by reference to the last reported sale price on The Nasdaq National Market on that date). The registrantdoes not have any non-voting common stock outstanding.As of February 17, 2017, there were 26,609,737 shares of Common Stock of the Registrant outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders, to be filed not later than April 30, 2017 are incorporated by 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.Business3Item 1A.Risk Factors13Item 1B.Unresolved Staff Comments24Item 2.Properties24Item 3.Legal Proceedings29Item 4.Mine Safety Disclosures29 PART II Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities30Item 6.Selected Financial Data32Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations35Item 7A.Quantitative and Qualitative Disclosures About Market Risk54Item 8.Financial Statements and Supplementary Data55Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure55Item 9A.Controls and Procedures55Item 9B.Other Information55 PART III Item 10.Directors, Executive Officers and Corporate Governance56Item 11.Executive Compensation56Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters56Item 13.Certain Relationships and Related Transactions, and Director Independence56Item 14.Principal Accountant Fees and Services56 PART IV Item 15.Exhibits And Financial Statements57SIGNATURES58INDEX TO FINANCIAL STATEMENTSF-1Exhibit Index Item 16.Form 10-K Summary Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC.PART IFORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (this “Annual Report”) contains disclosures which are “forward-looking” statements within the meaning of PrivateSecurities Litigation Reform Act of 1995, including, without limitation, statements regarding future financial results and performance, potential salesrevenue, potential club closures, results of cost savings initiatives, legal contingencies and tax benefits and contingencies, future declarations and paymentsof dividends, and the existence of adverse litigation and other risks, uncertainties and factors set forth under Item 1A., entitled “Risk Factors,” of this AnnualReport and in our other reports and documents filed with the Securities and Exchange Commission (“SEC”). You can identify these forward-lookingstatements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,”“predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “could” or the negative version of these words or other comparable words. Thesestatements are subject to various risks and uncertainties, many of which are outside our control, including, among others, the level of market demand for ourservices, economic conditions affecting our business, the success of our pricing model, the geographic concentration of our clubs, competitive pressure, theability to achieve reductions in operating costs and to continue to integrate acquisitions, outsourcing of certain aspects of our business, environmentalmatters, the application of federal and state tax laws and regulations, any security and privacy breaches involving customer data, the levels and terms of theCompany’s indebtedness, and other specific factors discussed herein and in other SEC filings made by us. We believe that all forward-looking statements arebased on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks,uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made, and we undertake no obligation to update these statements in light of subsequent events ordevelopments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.Item 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 InternationalHoldings, 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 UnitedStates (“U.S.”) and one of the largest fitness club owners and operators in the U.S. As of December 31, 2016, the Company, through its subsidiaries, operated150 fitness clubs (“clubs”). Our clubs collectively served approximately 544,000 members as of December 31, 2016. We owned and operated a total of 102clubs under the “New York Sports Clubs” (“NYSC”) brand name within a 120-mile radius of New York City as of December 31, 2016, including 35 locationsin Manhattan where we are the largest fitness club owner and operator. We owned and operated 28 clubs in the Boston region under our “Boston SportsClubs” (“BSC”) brand name, 12 clubs (one of which is partly-owned) in the Washington, D.C. region under our “Washington Sports Clubs” (“WSC”) brandname and five clubs in the Philadelphia region under our “Philadelphia Sports Clubs” (“PSC”) brand name as of December 31, 2016. In addition, as ofDecember 31, 2016, we owned and operated three clubs in Switzerland and partly-owned one club that operated under a different brand name in Washington,D.C., We employ localized brand names for our clubs to create an image and atmosphere consistent with the local community and to foster recognition as alocal 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 thehighest concentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members inurban or suburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market tothe active mature market. In each of our markets, we have developed clusters by initially opening or acquiring clubs located in the more central urbanmarkets of the region and then branching out from these urban centers to suburbs and neighboring communities.Over our 43-year history, since incorporating in 1973, we have developed and refined our club formats, which allows us to cost-effectively constructand efficiently operate our fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately 20,000square feet, while our multi-recreational clubs average3Table of Contentsapproximately 38,000 square feet. The aggregate average size of our clubs is approximately 27,000 square feet. Our clubs typically have an open fitness areato accommodate cardiovascular and strength-training equipment, as well as special purpose rooms for group fitness classes and other exercise programs. Weseek to provide a broad array of high-quality exercise programs and equipment that are popular and effective, promoting a quality exercise experience for ourmembers. When developing clubs, we carefully examine the potential membership base and the likely demand for supplemental offerings such as swimming,basketball, children’s programs, tennis or squash and, provided suitable real estate is available, we will add one or more of these offerings to our fitness-onlyformat. For example, a multi-recreational club in a family market may include Sports Clubs for Kids programs, which can include swim lessons and sportscamps for children.Reportable SegmentsDuring the first quarter of 2016, we began managing and reporting operating results through one reportable segment. Previously, we managed andreported results through two reportable segments: clubs and BFX Studio. Beginning in early 2016, our chief operating decision maker discontinued thereview of BFX Studio financial information separately for purposes of making operating decisions and assessing financial performance. Also, in the secondhalf of 2016, all BFX Studio locations were converted to clubs, discontinuing the BFX Studio brand. Accordingly, we now manage and report results throughone reportable segment.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 4.8% from $21.4 billion in 2011 to $25.8 billion in 2015, with a 6.6% increase from 2014to 2015. According to IHRSA, participation in health clubs has been growing steadily with total U.S. fitness club memberships increasing at a compoundannual growth rate of 1.8% from 51.4 million in 2011 to an all-time high of 55.3 million in 2015, with a 2.2% increase from 2014 to 2015. According to theIHRSA, the health club industry is witnessing a shift in the preferences of health club members. The club landscape extends beyond traditional, full-servicefitness centers that serve local communities and all age groups as well as affordable fitness centers with basic amenities. Studio concepts, including boxing,yoga, Pilates, group cycling, barre, boot camps, and sports-specific training, also shape the club market.According to the IHRSA, demographic trends have helped drive the growth experienced by the fitness industry over the past decade. The average age ofa health club member in 2015 was 39 years old and more than one-fourth of health club members were between the ages of 18 and 34 years old. The greatestmembership growth in the past few years has been in the under-18 age group, which has grown 43.9% from 2011 to 2015 and in the over-55 age group, wheremembership grew 27.5% from 2011 to 2015. These two age groups made up approximately 40% of total U.S. health club members in 2015. The industry hasbenefited from the “millennials,” and aging “baby boomer” and “Eisenhower” generations as they place greater emphasis on their health, including a focuson fitness.According to the Centers for Disease Control and Prevention, state prevalence of obesity continued to remain high across the country in 2015, with nostate with a prevalence of obesity less than 20%. In 2015, 44 states had a prevalence of obesity of 25% or more and 25 of these states had a prevalence ofobesity 30% or more. As healthcare costs continue to rise in the U.S., some of the focus on combating obesity and other diseases is being directed atprevention. Both government and medical research has shown that exercise and other physical activity plays a critical role in preventing obesity and otherhealth conditions, thereby reducing healthcare costs for treating obesity related sicknesses.As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, we believe that we are well positioned to benefitfrom these 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 Northeastand Mid-Atlantic regions of the U.S. and one of the largest fitness club owners and operators in the United States. Our strong real estate presence in the NewYork, Boston, Washington, D.C., and Philadelphia metropolitan regions enhances convenience to our members. We attribute our positions in these markets inpart to the strength of our localized owner and operator brand names, which foster recognition as a local network of quality fitness clubs.Regional clustering strategy provides significant benefits to members and corporations. By operating a network of clubs in a concentrated geographicarea, the value of our memberships is enhanced by our ability to offer members access to any of4Table of Contentsour clubs, which provides the convenience of having fitness clubs near a member’s workplace and home. This is also a benefit to our corporate members, asmany corporations have employees that will take advantage of multiple gym locations. Approximately 243,000, or 45%, of our members currently have apassport membership, which includes Regional Passport, Passport, and Elite Membership, as well as our corporate and group Passport Memberships, andbecause these memberships offer enhanced privileges and greater convenience, they typically generate higher monthly dues than our single clubmemberships in each respective region. Regional clustering also allows us to provide special facilities to all of our members within a local area, such asswimming pools and squash, tennis and basketball courts, without offering them at every location. In the year ended December 31, 2016, 28% of all clubusage was by members visiting clubs other than their home clubs.Regional clustering strategy designed to enhance revenues and achieve economies of scale. We believe our regional clustering strategy allows us toenhance revenue and earnings growth by providing high-quality, conveniently located fitness facilities on a cost-effective basis. We believe that potentialnew entrants would need to establish or acquire a large number of clubs in a market to compete effectively with us. Our clustering strategy also enables us toachieve economies of scale with regard to sales, marketing, purchasing, general operations and corporate administrative expenses and reduces our capitalspending needs. Regional clustering also provides the opportunity for members who relocate within a region to remain members of our clubs, thus aiding inmember 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 oflease and acquisition terms to ensure that a potential location meets our criteria for a model club. We believe our flexible club formats are well suited to thechallenging real 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 in existing clubs through driving membership growth and optimizing duesthrough price and member retention. We believe our offerings are compelling because we include group exercise classes, top of the line equipment, pools andcourts in the price of certain memberships, when available. Our member count increased by 3,000 members for a total member count of 544,000 in 2016 andwe will continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth.Grow ancillary and other non-membership revenues. We intend to grow our ancillary and other non-membership revenues through a continued focuson increasing the additional value-added services that we provide to our members. We offer a multi-session personal training membership product and fee-based Small Group Training classes to generate additional revenue. In 2016, under our Small Group Training classes, we introduced FlexPass and FlexSystemprograms at certain clubs. FlexPass allows members to book a wide variety of small group classes in any of our available clubs. These small group classesinclude offerings such as Ultimate Fitness Experience (“UXF”), Kettle Bells and Circuit Training, etc. FlexSystem programs are designed to help membersdevelop lean muscle mass, increase endurance and build strength. FlexSystem also offers unlimited monthly class membership, which allows members to crafta training program that fits their schedule. In addition, we offer Sports Clubs for Kids programs at select clubs.Non-membership revenues have decreased from $101.3 million, or 21.2% of revenues for the year ended December 31, 2012, to $92.5 million,or 23.3% of revenues for the year ended December 31, 2016. Although we experienced a decrease in non-membership revenues, we plan to remain focused onincreasing our ancillary programs in 2017 with continued improvements in training and hiring and building on ancillary programs such as our fee-based classofferings. In January 2017, we teamed up with the Gronkowski family to launch the Gronk Fitness Program. This program, available exclusively at BostonSports Clubs, introduces "Practical Sports Interval Training", which is a system created by the Gronkowski family and inspired by the proven techniques ofNational Football League trainers. This Gronk Fitness Program is designed to help people stay strong, toned, healthy, fit, and focused while committed totheir long term goals. In 2017, we will also continue to remain focused on improving our personal training membership products. Personal training revenueincreased 1.3% over this five-year period and increased as a percentage of total revenue from 13.7% in 2012 to 16.8% in 2016. These sources of ancillaryand other non-membership revenues generate incremental profits with minimal capital investment and assist in attracting and retaining members.Enter into arrangements with revenue generating partnerships. We intend to utilize our valuable real estate to form partnerships with premiumboutique fitness providers, some of which will utilize a “shop-in-shop” concept. Our partnerships5Table of Contentsutilizing the “shop-in-shop” concept are Tone House Fitness, LLC and Cyc Fitness Partners, LLC. We believe this “shop-in-shop” model will lead to benefitsfor both parties, which includes, but is not limited to, leveraging co-location public relations and marketing, mutually beneficial foot traffic, memberconversion opportunities, merchandise sales, ride and personal training packages.Optimization of our clubs. We remain committed to optimizing our existing club base, including through club closures when appropriate. During2016, we opened one club, converted two BFX Studio locations to clubs and closed five clubs. We are also considering the sale of clubs or groups of clubs. Inthe event we build and acquire new clubs, the club expansion is expected to be funded with cash on hand or through internally generated cash flows.Retain members by focusing on the member experience. Our Company’s mission has evolved into “Bring the best out of every body.” We enact ourmission through our “Clubhouse Rules,” which provide a clear road map for how we want our clubs to look and how we want to serve our members. This isthe core of our member experience strategy and allows us to crystallize how we engage our staff to deliver a superior member experience. We tailor the hoursof each club to the needs of the specific member demographic utilizing each club and offer a variety of ancillary services, including personal training, groupclasses, Small Group Training, Sports Clubs for Kids programs. We offer a variety of different sports facilities in each regional cluster of clubs; modern, variedand well-maintained exercise and fitness equipment; and an assortment of additional amenities including access to babysitting. Through hiring, developingand training a qualified and diverse team that is passionate about fitness and health; maintaining and enhancing our programs and services; continuallyincreasing our attention to individual member needs; and investing in our digital ecosystem, we expect to demonstrate our commitment to increase thequality of the member experience, and thereby increase net membership. To better measure the member experience, we utilize member surveys, websitefeedback and social media to help analyze the areas we can improve upon as well as the areas in which the members are satisfied overall.Provide fitness experiences and services. We help educate our members to best practices in their pursuit of fitness, wellness and healthy lifestyles andeach of our clubs has an array of cardiovascular machines, resistance training equipment, free weights and functional training zones. We have technicianswho 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 bothentertainment and tracking features that record workout results and communicate with many mobile technologies. Most clubs have between one and threestudios used for exercise classes, including at least one large studio used for most group exercise classes, a cycling studio and a mind and body studio usedfor yoga and Pilates classes. We further offer a large variety of group fitness classes at each club and these classes are accessible to all members. The volumeand variety of activities at each club allow each member to enjoy the club, whether customizing their own workout or participating in group activities andclasses.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 thechanging demands of our customers. This flexibility allows us to compete against private studios with unique specialty offerings by adapting the space andformats in our own clubs to match the offerings provided by these private studios. We have a functional training zone within our clubs that features an arrayof innovative equipment designed to maximize the member’s workout. The functional training zone is approximately 800 to 1,200 square feet with AstroTurfflooring, a Total Body Resistance Exercise (“TRX”) suspension training frame and a variety of functional training equipment including Kettle Bells, BattlingRopes and Power Sleds. In 2017, we will focus on creating a second functional training zone in certain clubs. This new functional training zone will feature avariety of functional training equipment, which will include, but is not limited to, a rig, lifting platforms, performance treadmills, sand bags, dumbbells andkettle bells. Our functional training zones are open to members for free self-guided workouts, personal training sessions and fee-based programs.MarketingOur in-house marketing team 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 focuson being a premier network of fitness clubs. We are organized to enable close collaboration between our marketing, sales, fitness and operations staff, whichhelps to align efforts around operational objectives and new product development. We seek to inspire brand experiences and in doing so, drive sustainableand quality growth, while building a strong reputation and loyalty with members. In order to have credible and authentic connections to create suchdesirability with our members, we utilize a market segmentation strategy which includes targeted marketing in addition to mass marketing. We seek toidentify and understand consumers’ individual motivations and goals for exercising in an effort to create meaningful products, services and experiences thatbuild a lasting impression and brand loyalty.6Table of ContentsSalesWe sell our memberships primarily through three channels: direct sales at the club level; through corporate and group sales; and through our onlinewebsite. We employ approximately 400 “in-club” membership sales consultants who are responsible for new membership sales in and around theirdesignated club locations. Each club generally has two to three membership sales consultants. These consultants report directly to the club general manager,who, in turn, reports to a business director. Membership sales consultants complete a classroom based sales training followed by ongoing training within theclub 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 localand regional companies, organizations and other large groups. We also manage private fitness centers for both large and small corporations, colleges anduniversities, and private clubs. As of December 31, 2016, these managed sites include three managed university locations, and eight managed sites.We also sell individual memberships online at www.mysportsclubs.com for our standard membership types and the website also enables us to 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 a free one-day pass or purchase a 30 day guest pass. The online sales channel offers a high degree of conveniencefor customers who know and trust our brand and do not require up-front interaction with a membership sales consultant to make their decision. In addition,selling online significantly reduces our cost of sale. The web site also provides information about club locations, program offerings, exercise class schedulesand sales promotions. Job seekers can also begin the employment application process through the site and investors can access financial information andresources.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, 2016, we offered the following types of memberships at our clubs:•The Neighborhood Membership (previously named Premier Membership) allow members unlimited use of a single “home club.” Membership duesfor the Neighborhood Membership generally sold in the range of $19.99 to $59.99 per month.•The Neighborhood Plus Membership entitles members to use certain defined clubs within a region. Membership dues for the Neighborhood PlusMembership generally sold in the range of $29.99 to $44.99 per month.•The Regional Passport Membership entitles members to use any of our clubs within a region. Membership dues for the Regional PassportMembership generally sold in the range of $59.99 to $74.99 per month.•The Passport Membership entitles members to use any of our clubs in any region, except for Elite clubs, as described below. Membership dues forthe Passport Membership generally sold in the range of $69.99 to $79.99 per month.•The Elite Membership (previously named as Premium Membership), available at five of our clubs that have a greater array of member services andfacilities. Similar to the Passport Membership, the Elite Membership also entitles members to use any of our clubs in any region. Membership duesfor the Elite Memberships generally sold in the range of $84.99 and $189.99 per month.The membership prices above are dependent on club location and whether the member joins under a “month-to-month” or a “commit” contract. Amember may cancel a commit membership at any time for a fee. Under the commit model, new members commit to a one year membership, generally at alower monthly rate than a month-to-month membership. When the members’ commit period is over, they retain membership as a month-to-month memberuntil they choose to cancel. As of December 31, 2016, approximately 90% of our total members were on a month-to-month basis.In joining a club, a new member signs a membership agreement that typically obligates the member to pay fees (“Joining Fees”) including a one-timeinitiation fee and the first annual fee. Initiation fees generally range between $0 and $29 while the annual fee generally charged between $59.99 and $69.99for all memberships. These one-time Joining Fees averaged $61, $72 and $75 per sale for the years ended December 31, 2016, 2015 and 2014, respectively.The annual fee is also charged on each anniversary of the enrollment date, however is no longer considered a joining fee after the first payment.Monthly electronic fund transfers (“EFT”) of individual membership dues on a per-member basis, including the effect of promotions, averagedapproximately $45, $50 and $59 per month for the years ended December 31, 2016, 2015 and 2014, respectively. Currently, approximately 99% of ourmembers pay their membership dues the first of each month through EFT,7Table of Contentswith EFT membership revenue constituting approximately 72.9% of total consolidated revenue for the year ended December 31, 2016.UsageOur total club usage, based on the number of member visits, was 31.7 million and 30.8 million member visits for the years ended December 31, 2016and 2015, respectively. In the year ended December 31, 2016, approximately 28% of total usage or club visits was to members’ non-home clubs, indicatingthat our members take advantage of our network of clubs.Our membership plans allow for club members to elect to pay a per visit fee of $12.95 to use clubs that are not defined in their membership plan. In theaggregate, approximately $1.0 million and $719,000 of usage fees were generated in 2016 and 2015, respectively. The increase in usage fees was primarilydue to a decline in the number of Passport members. Consequently, more club members elected to pay for a per visit fee when using a club that is not definedin their membership plan. Usage fees are reported in membership dues in our consolidated statements of operations.Non-Membership RevenueThe table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2012 through 2016. For the Years Ended December 31, ($ in thousands) 2016 % 2015 % 2014 % 2013 % 2012 %Total revenue$396,921 100.0% $424,323 100.0% $453,842 100.0% $470,225 100.0% $478,981 100.0%Non-MembershipRevenue: Personal trainingrevenue66,487 16.8% 73,191 17.3% 70,338 15.5% 66,367 14.1% 65,641 13.7%Other ancillaryclub revenue(1)19,642 4.9% 22,138 5.2% 22,304 4.9% 24,720 5.3% 29,897 6.2%Fees and Otherrevenue(2)6,361 1.6% 6,254 1.5% 5,971 1.3% 5,985 1.3% 5,804 1.2%Total non-membershiprevenue$92,490 23.3% $101,583 24.0% $98,613 21.7% $97,072 20.7% $101,342 21.2% (1)Other ancillary club revenue primarily consists of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes.(2)Fees and other revenue primarily consist of rental income, management fees, marketing revenue and laundry revenue. The year ended December 31, 2013includes $424 for the correction 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 metropolitanareas that are capable of supporting the development of a cluster of clubs. Our clubs typically have high visibility and are easily accessible. In the New Yorkmetropolitan, Boston, Washington, D.C. and Philadelphia markets, we have created clusters of clubs in urban areas and their commuter suburban areasaligned with our operating strategy of offering our target members the convenience of multiple locations close to where they live and work, reciprocal useprivileges, and standardized facilities and services.Approximately 65% of our existing clubs are fitness-only clubs and the remaining clubs are multi-recreational. Our fitness-only clubs generally range insize from 15,000 to 25,000 square feet and average approximately 20,000 square feet. Our multi-recreational clubs generally range in size from 20,000 to65,000 square feet, with one club being approximately 200,000 square feet. The average multi-recreational club size is approximately 38,000 square feet.Our existing club base consists of clubs which we have developed and constructed as well as clubs we have acquired. Over the past five years fromJanuary 1, 2012 to December 31, 2016, we constructed ten new clubs, acquired six clubs and closed or relocated 24 clubs. Currently, 50 of our clubs, orapproximately 33% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31,2016, we constructed and opened one club, converted two BFX Studio locations to clubs, and closed five clubs, ending the year with 150 total clubs underoperation.8Table of ContentsThis compares to opening of one club and two BFX Studio locations, and closing of seven clubs during the year ended December 31, 2015. In both 2016 and2015, we also upgraded certain existing clubs and plan to continue to do so in 2017. Our facilities include a mix of cardiovascular and strength equipment from some of the best manufacturers including Life Fitness, Technogym, Nautilus,Cybex®, Precor®, Star Trac®, Hammer®, Woodway® and Octane®. At many locations, additional amenities are also offered, including swimming pools,racquet and basketball courts, functional training zones and babysitting services. Personal training services are offered at all locations for an additionalcharge. Our fee-based programs offered at many of our clubs, include personal training, Small Group Training, children’s programs, and summer camps forkids.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 teammembers are the key to delivering a valued member experience and our operations are organized to maximize their overall effectiveness. Our club operationsinclude the following: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 decisionmaking. Our learning and development system allows for all club positions to receive training on the key elements of their role as well as developmenttraining 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 inspecific areas of our clubs’ services, including sales and marketing, fitness and ancillary programming, learning and development, as well as facilitymanagement and member service.Driving excellence in fitness and ancillary programming is critical to our success. Members receive an introductory one-hour assessment session with afitness manager or a personal trainer who helps to develop a customized routine that supports the member’s fitness goals. This initial assessment sessionincludes a 30-minute workout evaluation, cardio, strength and endurance testing, and movement screening. Members who elect to receive personal trainingcan benefit from one-on-one coaching and guidance, with refreshed programs that evolve as the members achieve their fitness goals. All of our fitness clubsoffer our personal training membership products where members can select from a package of four to 12 personal training sessions per month. These sessionsmust be used in each respective month they are issued. Members who purchase this product commit to a three month period. Members can also purchaseprepaid single sessions or multi-session packages which are sold at a premium to the personal training membership product. The personal trainingmembership product provides members with a certified personal trainer who works with the member to create an individualized goal-based program. Ourfitness teams are trained to provide superior fitness solutions to address member needs. We believe the qualifications of the personal training staff help toensure that members receive a consistent level of quality service throughout our clubs and that our personal training programs provide valuable guidance toour members as well as a significant source of incremental revenue for us. We believe that members who participate in personal training programs typicallyhave a longer membership life.Our commitment to providing a quality exercise experience to our members also includes group exercise programming. Our instructors teach a varietyof classes, including dance, cycling, strength conditioning, boxing, yoga, Pilates and step classes. Instructors report through local club management and arefurther supported by regional managers responsible for ensuring consistency in class content, scheduling, training and instruction. We also provide SmallGroup Training offerings, which are fee-based programs that have smaller groups, and provide more focused, and typically more advanced classes.In addition to group exercise, we offer a variety of ancillary programming for children under our Sports Clubs for Kids brand. As of December 31, 2016,Sports Clubs for Kids was being offered in 33 locations throughout our NYSC, BSC, WSC and PSC regions. Our Sports Clubs for Kids programming positionsour multi-recreational clubs as family clubs, which we believe provides us with a competitive advantage. Depending upon the facilities available at alocation, Sports Clubs for Kids programming can include traditional youth offerings such as day camps, sports camps, swim lessons, hockey and soccerleagues, gymnastics, dance, and birthday parties. It also can include non-competitive “learn-to-play” sports programs.9Table of ContentsOur 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 teams. Senior management compensation, for example, is tied to overall companyperformance. Business directors and club level managers can achieve bonuses tied to meeting specific net member gain and profit targets. We offer ouremployees various benefits including health, dental, vision and disability insurance; pre-tax healthcare, commuting and dependent care accounts; free gymmembership; and a 401(k) plan. We believe we offer an industry competitive benefits plan that provides us with an advantage in attracting and retaining aquality leadership team, club managers and staff. This allows for the retention and development of staff who appreciate and delivers on key companyinitiatives and expectations.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 tooptimize their performance.In 2016, we created a more customizable and efficient experience for members through updated digital tools, which included an enhanced, clearer andeasier to use website and the Company's first-ever mobile application. The website features membership sign up, club location search, class schedules andbooking, training information, custom profiles for group fitness instructors and trainers. In addition, members are able to customize their group fitnessexperience based on fitness goals and preferences through a personalized search feature on the website. With the mobile application, members also haveaccess to gym check-in, class sign-up, class schedules and their own user profile including a workout log.We continuously implement infrastructure changes to accommodate growth, provide network redundancy, better manage telecommunications and datacosts, increase efficiencies in operations and improve management of all components of our technical architecture, including disaster recovery. Improvementsin the IT infrastructure 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, SPORTSCLUBS FOR KIDS, COMPANIESGETFIT.COM, BFX STUDIO, RIDE REPUBLIC, MASTER CLASS, and PRIVATE SESSIONS. We continue toregister other trademarks and service marks. We believe that our rights to these properties are adequately protected.CompetitionThe fitness club industry is highly competitive and continues to become more competitive. The number of health clubs in the U.S. has increased from29,960 in 2012 to 36,180 in 2016, based on the most recent information available according to the IHRSA. In each of the markets in which we operate, wecompete with other fitness clubs, physical fitness and recreational facilities.We consider the following groups to be our primary competitors in the health and fitness industry:•commercial, multi-recreational and fitness-only chains;•private studios, and other boutique fitness offerings;•the YMCA and similar non-profit organizations;•physical fitness and recreational facilities established by local governments, hospitals and businesses;•exercise and small fitness clubs; racquet, tennis and other athletic clubs;10Table of Contents•amenity gyms in apartments, condominiums and offices;•weight-reducing salons;•country clubs; •the home-use fitness equipment industry; and•online fitness coaching.The principal methods of competition include pricing and ease of payment, required level of members’ contractual commitment, level and quality ofservices, age of facility and equipment, training and quality of supervisory staff, size and layout of facility and convenience of location with respect to accessto transportation and pedestrian traffic.We consider our traditional service offerings to be in the mid-tier of the value/service proposition and designed to appeal to a large portion of thepopulation who utilize fitness facilities. The number of competitor clubs that offer lower pricing and a lower level of service have continued to grow in ourmarkets over the last few years. These clubs have attracted, and may continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs.We also face competition from club operators offering comparable or higher pricing with higher levels of service. Larger outer-suburban family fitnesscenters, in areas where suitable real estate is more likely to be available, also compete effectively against our suburban formats. Additionally, we facecompetition from the rising popularity and demand for private studios offering niche boutique experiences.We also compete with other entertainment and retail businesses for the discretionary income in our target demographics. There can be no assurance thatwe will be able to compete effectively in the future in the markets in which we operate. Competitors, who may include companies that are larger and havegreater resources than us, may enter these markets to our detriment. These competitive conditions may result in increased price competition and limit ourability to attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increasedcompetition among participants, particularly large multi-facility operators that are able to compete for attractive acquisition candidates and/or newlyconstructed club locations. This increased competition could increase our costs associated with expansion through both acquisitions and for real estateavailability for newly constructed club locations.We believe that our market leadership, experience and operating efficiencies enable us to provide the consumer with a superior product in terms 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 thesemarkets. However, such a competitor could enter these markets more easily through one, or a series of, acquisitions. These barriers of entry are significant inour four metropolitan regions; however, they are less challenging in our surrounding suburban locations.Seasonality 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 membershipsand camp revenue.Government RegulationOur operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which our clubs arelocated, including general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes thatprescribe certain forms and provisions of membership contracts and that govern the advertising, sale, financing and collection of such memberships as well asstate and local health regulations.Statutes and regulations affecting the fitness industry have been enacted in jurisdictions in which we conduct business and other states into which wemay expand in the future have adopted or may adopt similar legislation. Typically, these statutes and regulations prescribe certain forms and provisions ofmembership contracts, afford members the right to cancel the contract within a specified time period after signing or in certain circumstances, such as formedical reasons or relocation to a certain distance from the nearest club, require an escrow of funds received from pre-opening sales or the posting of a bondor proof of financial responsibility and may establish maximum prices for membership contracts and limitations on the term of contracts. The specificprocedures and reasons for cancellation vary due to differing laws in the respective jurisdictions, but in each instance, the canceling member is entitled to arefund of unused prepaid amounts. We are also subject to numerous other types11Table of Contentsof federal and state regulations governing the sale of memberships. These laws and regulations are subject to varying interpretations by a number of state andfederal enforcement agencies and courts. We maintain internal review procedures to comply with these requirements and believe that our activities are insubstantial compliance with all applicable statutes, rules and decisions.We primarily accept payments for our memberships through EFT from credit cards, and, therefore, we are subject to both federal and state legislationand certification requirements, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have considered legislationrequiring gyms and health clubs to offer non-automatic renewal membership option at all times and/or limit the duration for which gym memberships canauto-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,and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have suchhealth club statutes provide harsh penalties for violations, including membership contracts being void or voidable.Additionally, the collection, maintenance, use, disclosure and disposal of individually identifiable data by our businesses are regulated at the federal,state and provincial levels as well as by certain financial industry groups, such as the Payment Card Industry Organization and the National AutomatedClearing House Association. Federal, state and financial industry groups may also consider from time to time new privacy and security requirements that mayapply to our businesses and may impose further restrictions on our collection, disclosure and use of individually identifiable information that are housed inone or more of our databases.The tax treatment of membership dues varies by state. Some states in which we operate require sales tax to be collected on membership dues andpersonal training sessions. Several others states in which we operate have proposed similar tax legislation. These taxes have the effect of increasing thepayments by our members, which could impede our ability to attract new members or induce members to cancel their membership.Changes in any statutes, rules or regulations could have a material adverse effect on our financial condition and results of operations.EmployeesOn December 31, 2016, we had approximately 7,600 employees, of whom approximately 1,400 were employed full-time. We are not a party to anycollective bargaining agreement with our employees. We operate with an open door policy and encourage a culture of openness, innovation andinclusiveness that creates a high level of work accountability. We have good relations with our employees and are proud to offer them a great workenvironment with opportunities for growth and development.Available InformationWe make available through our web site at http://investor.mysportsclubs.com/ in the “Investor Relations — SEC Filings” section, free of charge, allreports and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Occasionally, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on andaccessible at http://investor.mysportsclubs.com/. In addition, you may automatically receive email alerts and other information about the Company byenrolling 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 incorporatedby reference into this report nor should it be deemed to have been filed with the SEC.12Table of ContentsItem 1A. Risk FactorsInvestors should carefully consider the risks described below and all other information in this Annual Report. The risks and uncertainties describedbelow are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impairour 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 BusinessWe are dependent on our Chief Executive Officer. In addition, the loss of key personnel and/or failure to attract and retain highly qualified personnelcould make it more difficult for us to develop our business and enhance our financial performance.We are dependent on the continued services of our senior management team, including our Chief Executive Officer, Patrick Walsh. Mr. Walsh makes allmajor strategic, operating, investment, and capital allocation decisions for the Company and its subsidiaries. We believe the loss of Mr. Walsh could have amaterial adverse effect on us and our financial performance. Currently, we do not have any long-term employment agreements with our executive officers,and we may not be able to attract and retain sufficient qualified personnel to meet our business needs.Our future profitability is not assured.Our operating results for future periods are subject to numerous uncertainties and there can be no assurances that we will be profitable in the 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 arefixed, 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 thatperiod and subsequent periods.We may be unable to attract and retain members, which could have a negative effect on our business.The performance of our clubs is highly dependent on our ability to attract and retain members, and we may not be successful in these efforts. Most ofour members hold month-to-month memberships and accordingly, most members can cancel their club membership at any time without penalty. In addition,we experience attrition and must continually engage existing members and attract new members in order to maintain our membership levels and ancillarysales. There are numerous factors that have in the past and could in the future lead to a decline in membership levels or that could prevent us from increasingour membership, including a decline in our ability to deliver quality service at a competitive cost, the age and condition of our clubs and equipment, thepresence of direct and indirect competition in the areas in which the clubs are located, the public’s interest in fitness clubs and general economic conditions.In order to increase membership levels, we may from time to time offer lower membership rates and initiation fees. Any decrease in our average membershiprates 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 inthe future 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 assetvalues, which could have a material negative effect on the demand for our services and products and such decline in demand may continue as the economycontinues to struggle and disposable income declines. Other factors that could influence demand include increases in fuel and other energy costs, conditionsin the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factorsaffecting consumer spending behavior. We believe the challenges to the global economy during the past several years have adversely affected our businessand our revenues and profits and continuing challenges may result in additional adverse effects. As a result of these factors, membership levels might not beadequate to maintain our operations at current levels or permit the expansion of our operations.In addition, to the extent our corporate clients are adversely affected by negative economic conditions, they may decide, as part of expense reductionstrategies, to curtail or cancel club membership benefits provided to their respective employees. Any reductions in corporate memberships may lead tomembership cancellations as we cannot assure that employees of corporate customers will choose to continue their memberships without employer subsidies.A decline in membership levels may have a material adverse effect on our business, financial condition, results of operations and cash flows.The level of competition in the fitness club industry could negatively impact our revenue growth and profitability.The fitness club industry is highly competitive and continues to become more competitive. In each of the markets in which we operate, we competewith other fitness clubs, private studios, physical fitness and recreational facilities established13Table of Contentsby local governments, hospitals and businesses for their employees, amenity and condominium clubs, the YMCA and similar organizations and, to a certainextent, with racquet and tennis and other athletic clubs, country clubs, weight reducing salons and the home-use fitness equipment industry. We also competewith other entertainment and retail businesses for the discretionary income in our target demographics. We might not be able to compete effectively in thefuture in the markets in which we operate. Competitors include companies that are larger and have greater resources than us and also may enter these marketsto our detriment. These competitive conditions may limit our ability to increase dues without a material loss in membership, attract new members and attractand retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition among participants, particularlylarge multi-facility operators that are able to compete for attractive acquisition candidates or newly constructed club locations, thereby increasing costsassociated with expansion through both acquisitions and lease negotiation and real estate availability for newly constructed club locations.The number of competitor clubs that offer lower pricing and a lower level of service continue to grow in our markets. These clubs have attracted, andmay continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs, particularly in the current consumer environment.Furthermore, smaller and less expensive weight loss facilities present a competitive alternative for consumers.We also face competition from competitors offering comparable or higher pricing with higher levels of service or offerings. Larger outer-suburban,multi-recreational family fitness centers, in areas where suitable real estate is more likely to be available, also compete against our suburban, fitness-onlymodels.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 fulfilltheir fitness needs.In addition, large competitors could enter the urban markets in which we operate to open a chain of clubs in these markets through one, or a series of,acquisitions.The lower average membership dues have and may in the future negatively impact our comparable club revenue growth and our operating margins.In recent years, we lowered monthly dues and/or initiation and processing fees at certain clubs in order to attract more members and, as a result, initiallyexperienced lower revenues and margin pressure. More recently, the Company has been raising monthly dues and/or initiation fees to more accurately reflectthe membership value; however, if we are unable to attract a sufficient number of new members or if we experience higher attrition as a result of these priceincreases, the pressure on the Company's revenue and result of operations could continue to be adversely impacted.Declines in revenue have adversely affected our results or operations and cash flow from operations and we may be compelled to take additional actionswhich may not be successful in mitigating such effects.We have been experiencing declining revenue from members for several years as the fitness industry continues to be highly competitive in thegeographic regions in which we compete. New members have been joining at lower monthly rates and cancellations of members paying higher rates willcontinue to negatively impact our results and liquidity if these trends are not reversed. In response to this, we initiated cost savings initiatives in 2015 thatcontinued into fiscal 2016 to help mitigate the impact the decline in revenue has had on its profitability and cash flow from operations.We continue to focus on increasing membership in existing clubs to increase revenue. We may consider additional actions within our control, includingthe sale of certain assets, club acquisitions, additional club closures and entering into arrangements with revenue generating partnerships, some of which willutilize a “shop-in-shop” concept. We may also consider additional strategic alternatives including opportunities to reduce TSI LLC's existing debt andfurther cost savings initiatives, among other possibilities, if any. Our ability to continue to meet our obligations is dependent on our ability to generatepositive cash flow from a combination of initiatives, including those mentioned above. Failure to successfully implement these initiatives could have amaterial adverse effect on our liquidity and our operations and we would need to implement alternative plans that could include additional asset sales,additional reductions in operating costs, deferral of capital expenditures, further reductions in working capital and debt restructurings. There can be noassurance that such alternatives would be available to us or that we would be successful in their implementation.Low consumer confidence levels, increased competition and decreased spending could negatively impact our financial position and result in club closuresand fixed asset and goodwill impairments.In the year ended December 31, 2016, we closed five clubs, while in 2015 we closed six clubs. We recognized $742,000 of fixed asset impairments in theyear ended December 31, 2016 and $14.6 million of fixed asset impairments in the year ended14Table of ContentsDecember 31, 2015. In addition, we recorded goodwill impairment charges of $31.6 million in the year ended December 31, 2015. The fixed asset impairmentand goodwill impairment charges in 2015 were primarily due to existing members downgrading their memberships to those with lower monthly dues and newmembers enrolling at lower rates. Some of our club closures and impairments were due, in large part, to the economic and consumer environment, andincreased competition in areas in which our clubs operate. If the economic and consumer environment were to deteriorate or not improve or if we are unableto 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 replaceany of the revenue lost from these closed clubs from our other club operations. We will continue to monitor the results and changes in expectations of theseclubs closely to determine if additional fixed asset or goodwill impairment charges will be necessary.Our geographic concentration heightens our exposure to adverse regional developments.As of December 31, 2016, we operated 102 fitness clubs in the New York metropolitan market, 28 fitness clubs in the Boston market, 12 fitness clubs inthe Washington, D.C. market, five fitness clubs in the Philadelphia market and three fitness clubs in Switzerland. Our geographic concentration in theNortheast and Mid-Atlantic regions and, in particular, the New York metropolitan area, heightens our exposure to adverse developments in these areas,including those related to economic and demographic changes in these regions, competition, severe weather, potential terrorist threats or other unforeseenevents.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 onOctober 29, 2012, with one club that closed permanently, 16 clubs that remained closed for over a week and one club that was closed for over a year andreopened in December 2013. We cannot predict the impact that any future severe weather events will have on our ability to avoid wide-spread or prolongedclub closures. Any such events affecting the areas in which we operate might result in a material adverse effect on our business, financial condition, cashflows and results of operations in the future.Any condition that causes people to refrain, or prevents people, from visiting our clubs, such as severe weather, outbreaks of pandemic or contagiousdiseases, 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 ofterrorist attacks or other conditions that cause people to refrain, or prevent people, from visiting our clubs. Our business could be severely impacted by awidespread regional, national or global health epidemic. A widespread health epidemic or perception of a health epidemic (such as Ebola), whether or nottraced to one of our clubs, may cause members and prospective members to avoid public gathering places or otherwise change their behaviors and impact ourability to staff our clubs. Outbreaks of disease, such as influenza, could reduce traffic in our clubs. Any of these events would negatively impact our business.In addition, any negative publicity relating to these and other health-related matters may affect members’ perceptions of our clubs, reduce member andprospective member visits to our clubs and negatively impact demand for our club offerings.Further, terrorist attacks, such as the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of violence orwar may affect the markets in which we operate, our operating results or the market on which our common stock trades. Our geographic concentration in themajor cities in the Northeast and Mid-Atlantic regions and, in particular, the New York City and Washington, D.C. areas, heightens our exposure to any suchfuture terrorist attacks, which may adversely affect our clubs and result in a decrease in our revenues. The potential near-term and long-term effect theseattacks may have for our members, the markets for our services and the market for our common stock are uncertain; however, their occurrence can be expectedto further negatively affect the U.S. economy generally and specifically the regional markets in which we operate. The consequences of any terrorist attacksor any armed conflicts are unpredictable; and we may not be able to foresee events that could have an adverse effect on our business.Our dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and couldadversely affect our revenues and gross profit.Equipment and certain products and services used in our clubs, including our exercise equipment and point-of-sale software and hardware, are sourcedfrom third-party suppliers. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate ourbusiness efficiently and consistently meet our business requirements. The ability of these third-party suppliers to successfully provide reliable and high-quality services is subject to technical and operational uncertainties that are beyond our control, including, for our overseas suppliers, vessel availability andport delays or congestion. Any disruption to our suppliers’ operations could impact our supply chain and our ability to service our existing stores and opennew stores on time or at all and thereby generate revenue. If we lose such suppliers or our suppliers encounter financial hardships unrelated to the demand forour equipment or other products or services, we may not be15Table of Contentsable to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to new suppliers would betime consuming and expensive and may result in interruptions in our operations. If we should encounter delays or difficulties in securing the quantity ofequipment we require to open new and refurbish existing stores, our suppliers encounter difficulties meeting our demands for products or services, ourwebsites 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 onour business and operating results.Our trademarks and trade names may be infringed, misappropriated or challenged by others.We believe our brand names and related intellectual property are important to our business. We seek to protect our trademarks, trade names and otherintellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectualproperty rights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputationcould cause membership levels to decline and make it more difficult to attract new members.Use of social media may adversely impact our reputation or subject us to fines or other penalties.There has been a substantial increase in the use of social media platforms, including blogs, social media websites and other forms of internet-basedcommunication, which allow individuals' access to a broad audience of consumers and other interested persons. Negative commentary about us may beposted on social media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available informationabout health clubs and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate withoutaffording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collectiveaction against our stores, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well asphysical 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 rapidlyevolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable lawsand regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us tofines 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 findingsites with the right geographical, demographic and other measures we employ in our selection process, we also need to evaluate the penetration of ourcompetitors in the market. We face competition from other health and fitness center operators for sites that meet our criteria and as a result, we may lose thosesites or we could be forced to pay higher prices for those sites. If we are unable to identify and acquire sites for new clubs on attractive terms, our revenue,growth rate and profits may be negatively impacted. Additionally, if our analysis of the suitability of a site is incorrect, we may not be able to recover ourcapital investment in developing and building a new club.We have, and will continue to have, significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, includingfuture increases in occupancy costs and the need to generate significant cash flow to meet our lease obligations.We have, and will continue to have, significant lease obligations. We currently lease substantially all of our fitness club locations pursuant to long-term leases (generally 15 to 20 years, including option periods). During the next five years, or the period from January 1, 2017 through December 31, 2021,we have leases for 23 club locations that are due to expire without any renewal options, three of which expire in 2017, and 48 club locations that are due toexpire with renewal options. For leases with renewal options, several of them provide for our unilateral option to renew for additional rental periods atspecific rental rates (for example, based on the consumer price index or stated renewal terms already set in the leases) or based on the fair market rate at thelocation. Our ability to negotiate favorable terms on an expiring lease or to negotiate favorable terms on leases with renewal options, or conversely for asuitable alternate location, could depend on conditions in the real estate market, competition for desirable properties and our relationships with current andprospective landlords or may depend on other factors that are not within our control. Any or all of these factors and conditions could negatively impact ourrevenue, growth and profitability.In addition to future minimum lease payments, some of our club leases provide for additional rental payments based on a percentage of net sales, or“percentage rent,” if sales at the respective stores exceed specified levels, as well as the payment of16Table of Contentscommon area maintenance charges, real property insurance, and real estate taxes. Many of our lease agreements have defined escalating rent provisions overthe initial term and any extensions.We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities tofund these expenses, we may not be able to service our lease expenses, which could materially harm our business. Furthermore, the significant cash flowrequired to satisfy our obligations under the leases increases our vulnerability to adverse changes in general economic, industry, and competitive conditions,and could limit our ability to fund working capital, incur indebtedness, and make capital expenditures or other investments in our business.If an existing or future club is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under theapplicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellationclause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leaseson terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.We may experience prolonged periods of losses in our recently opened clubs and when we open new clubs in existing markets our comparable clubrevenue growth and our operating margins may be negatively impacted.Upon opening a club, we typically experience an initial period of club operating losses. The sale of memberships typically generates insufficientrevenue for the club to initially generate positive cash flow. As a result, a new club typically generates an operating loss in its first full year of operations andsubstantially lower margins in its second full year of operations than a club opened for more than 24 months. These operating losses and lower margins willnegatively impact our future results of operations. This negative impact will be increased by the initial expensing of pre-opening costs, which include legaland other costs associated with lease negotiations and permitting and zoning requirements, as well as depreciation and amortization expenses, which willfurther negatively impact our results of operations. We may, at our discretion, accelerate or expand our plans to open new clubs, which may adversely affectresults 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 hasbeen that opening new clubs may attract some memberships away from other clubs already operated by us in those markets and diminish their revenues. Inaddition, as a result of new club openings in existing markets and because older clubs will represent an increasing proportion of our club base over time, ourmature club revenue increases may be lower in future periods than in the past.Another result of opening new clubs is that our club operating margins may be lower than they have been historically while the clubs build amembership base. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly opened clubs to affect ourclub operating margins at these new clubs.We are subject to government regulation, and changes in these regulations could have a negative effect on our financial condition and results ofoperations.Our operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which our clubs arelocated, 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,including exercise equipment. Claims might be asserted against us for injury suffered by, or death of members or guests while exercising at a club. We mightnot be able to successfully defend such claims. As a result, we might17Table of Contentsnot be able to maintain our general liability insurance on acceptable terms in the future or maintain a level of insurance that would provide adequatecoverage 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, includingthe matters disclosed under “Legal Proceedings” in this Annual Report. If one or more of these pending lawsuits, or any lawsuits in the future are adjudicatedin a manner adverse to our interests, or if a settlement of any lawsuit requires us to pay a significant amount, the result could have an adverse impact on ourconsolidated financial position, results of operations and cash flows. In addition, any litigation, regardless of the outcome, may distract our management fromthe operation of our business.Security and privacy breaches may expose us to liability and cause us to lose customers.Federal and state law requires us to safeguard our customers’ financial information, including credit card information. Although we have establishedsecurity procedures and protocol, including credit card industry compliance procedures, to protect against identity theft and the theft of our customers’financial information, our security and testing measures may not prevent security breaches and breaches of our customers’ privacy may occur, which couldharm our business. For example, a significant number of our users provide us with credit card and other confidential information and authorize us to bill theircredit card accounts directly for our products and services. Typically, we rely on encryption and authentication technology licensed from third parties toenhance transmission security of confidential information. Techniques used to obtain unauthorized access or to sabotage systems change frequently and areconstantly evolving. These techniques and other advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility securityor other developments may result in a compromise or breach of the technology used by us or one of our vendors to protect customer data. We may be unableto anticipate these techniques or to implement adequate preventive or reactive measures. Several recent, highly publicized data security breaches at othercompanies have heightened consumer awareness of this issue. Further, a significant number of states require the customers be notified if a security breachresults in the disclosure of their personal financial account or other information. Additional states and governmental entities are considering such “notice”laws. In addition, other public disclosure laws may require that material security breaches be reported.Any compromise of our security or that of our third party vendors or noncompliance with privacy or other laws or requirements could harm ourreputation, cause our members to lose confidence in us, or harm our financial condition and, therefore, our business. In addition, a party who is able tocircumvent our security measures or exploit inadequacies in our security measures or that of our third party vendors, could, among other effects,misappropriate proprietary information, cause interruptions in our operations or expose members to computer viruses or other disruptions. We may berequired to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Actual or perceivedvulnerabilities may lead to claims against us. To the extent the measures taken by us or our third party vendors prove to be insufficient or inadequate, we maybecome subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our reputation.Changes in legislation or requirements related to electronic fund transfer, or our failure to comply with existing or future regulations, may adverselyimpact our business.We primarily accept payments for our memberships through EFT from members’ bank accounts and, therefore, we are subject to federal, state andprovincial legislation and certification requirements governing EFT, including the Electronic Funds Transfer Act. Some states, such as New York, havepassed or have considered legislation requiring gyms and health clubs to offer a prepaid membership option at all times and/or limit the duration for whichgym memberships can auto-renew through EFT payments, if at all. Our business relies heavily on the fact that our memberships continue on a month-to-month basis after the completion of any initial term requirements, and compliance with these laws and regulations and similar requirements may be onerousand 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 tocomply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages and civil liability and may result in the lossof our ability to accept EFT payments, which would have a material adverse effect on our business, results of operations and financial condition. In addition,any such costs, which may arise in the future as a result of changes to the legislation and regulations or18Table of Contentsin their interpretation, could individually or in the aggregate cause us to change or limit our business practice, which may make our business model lessattractive to our members.We are subject to a number of risks related to ACH, credit card and debit card payments we accept.We accept payments through automated clearing house (“ACH”), credit card and debit card transactions. For ACH, credit card and debit card payments,we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for 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 onour member satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition,if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards, debit cards or bank accounts on atimely basis or at all, we could lose membership revenue, which would harm our operating results.If we fail to adequately control fraudulent ACH, credit card and debit card transactions, we may face civil liability, diminished public perception of oursecurity measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financialcondition and results of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card wouldsignificantly impair our ability to operate our business.Regulatory changes in the terms of credit and debit card usage, including any existing or future regulatory requirements, could have an adverse effect onour business.Our business relies heavily on the use of credit and debit cards in sales transactions. Regulatory changes to existing rules or future regulatoryrequirements affecting the use of credit and debit cards or the fees charged could impact the consumer and financial institutions that provide card services.This may lead to an adverse impact on our business if the regulatory changes result in unfavorable terms to either the consumer or the banking institutions.Disruptions and failures involving our information systems could cause customer dissatisfaction and adversely affect our billing and other administrativefunctions.The continuing and uninterrupted performance of our information systems is critical to our success. We use a fully-integrated information system toprocess new memberships, bill members, check-in members and track and analyze sales and membership statistics, the frequency and timing of memberworkouts, cross-club utilization, member life, value-added services and demographic profiles by member. This system also assists us in evaluating staffingneeds and program offerings. We believe that, without investing in enhancements, this system was approaching the end of its life cycle. Correcting anydisruptions or failures that affect our proprietary system could be difficult, time-consuming and expensive because we would need to use contractedconsultants 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 maybecome dissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or failures that affect ourbilling and other administrative functions could have an adverse effect on our operating results.Infrastructure changes are being undertaken to accommodate our growth, provide network redundancy, better manage telecommunications and datacosts, 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 orother similar disruptive problems could also adversely affect our sites. Any system disruption or failure, security breach or other damage that interrupts ordelays our operations could cause us to lose members, damage our reputation, and adversely affect our business and results of operations.Our growth could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.Future expansion will place increased demands on our administrative, operational, financial and other resources. Any failure to manage growtheffectively could seriously harm our business. To be successful, we will need to continue to improve management information systems and our operating,administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among ourexecutive, accounting, finance, marketing, sales19Table of Contentsand operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management attention.Outsourcing certain aspects of our business could result in disruption and increased costs.We have outsourced certain aspects of our business to third party vendors that subject us to risks, including disruptions in our business and increasedcosts. For example, we have engaged third parties to host and manage certain aspects of our data center, information and technology infrastructure andelectronic pay solutions. Accordingly, we are subject to the risks associated with the vendor's ability to provide these services to meet our needs. If the cost ofthese services is more than expected, if the vendor is not able to handle the volume of activity or perform the quality of service that we expect, if we or thevendor are unable to adequately protect our data and information is lost, if our ability to deliver our services is interrupted, or if our third party vendors facefinancial or other difficulties, then our business and results of operations may be negatively impacted.Our cash and cash equivalents are concentrated in a small number of banks.Our cash and cash equivalents are held, primarily, in a small number of commercial banks. These deposits are not collateralized. In the event thesebanks become insolvent, we would be unable to recover most of our cash and cash equivalents deposited at the banks. Cash and cash equivalents held in onecommercial bank as of December 31, 2016 totaled $21.0 million. During 2016, in any one month, the amount held in one commercial bank has been as highas approximately $44.2 million.Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not ableto obtain additional capital, our ability to operate or expand our business may be impaired and our results of operations could be adversely affected.Our business requires significant levels of capital to finance the development of additional sites for new clubs and the construction of our clubs. If cashfrom available sources is insufficient or unavailable due to restrictive credit markets, or if cash is used for unanticipated needs, we may require additionalcapital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all.Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities.If we issue new equity securities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences orprivileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to execute our currentgrowth plans, take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could havean adverse effect on our business plans and operating results.We may incur rising costs related to construction of new clubs and maintaining our existing clubs. If we are not able to pass these cost increases through 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, 2016, we had approximately $15.1 million of unused and expired personal training sessions that had not beenrecognized as revenue and was recorded as deferred revenue. We do not believe that these amounts are subject to the escheatment or abandoned property lawsof any jurisdiction, including the State of New York. However, it is possible that one or more of these jurisdictions may not agree with our position and mayclaim that we must remit all or a portion of these amounts to such jurisdiction. This could have a material adverse effect on our cash flows.We may have exposure to additional tax liabilities.From time to time, we are under audit by federal and local tax authorities and we may be liable for additional tax obligations and may incur additionalcosts in defending any claims that may arise. For example, as of December 31, 2016, certain of our state and local tax returns from years 2006 through 2014were currently being examined by certain state and local jurisdictions and it is difficult to predict the final outcome or timing of resolution of any particularmatter regarding these examinations. In particular, in a revised letter dated December 12, 2016, we received from the State of New York a revised20Table of Contentsassessment related to tax years 2006-2009 for $4.7 million, inclusive of $2.0 million of interest. We disagree with the proposed assessment and havescheduled a conciliation conference with the State of New York to appeal the assessment. We have not recorded a tax reserve related to the proposedassessment. It is difficult to predict the ultimate outcome of this or any other tax examination and the result of any such tax examination could have amaterial adverse effect on our results of operations and financial condition.Risks 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 LoanFacility”). 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 arefunds generated from operating activities, available cash and cash equivalents and borrowings under our 2013 Revolving Loan Facility. If our currentresources do not satisfy our liquidity requirements, we may have to seek additional financing.Economic conditions, both domestic and foreign, may affect our financial performance. Prevailing economic conditions, including unemploymentlevels, inflation, availability of credit, energy costs and other macro-economic factors, as well as uncertainty about future economic conditions, adverselyaffect consumer spending and, consequently, our business and results of operations.Our leverage may impair our financial condition, and we may incur significant additional debt.We currently have a substantial amount of debt. As of December 31, 2016, our total outstanding consolidated debt was $202.0 million under our 2013Term Loan Facility. The 2013 Term Loan Facility expires on November 15, 2020. In addition, as of December 31, 2016, under the 2013 Revolving LoanFacility there were no outstanding borrowings and outstanding letters of credit issued totaled $2.9 million, which if still outstanding, will likely need to befunded by our cash upon the expiration of the 2013 Revolving Loan Facility on November 15, 2018. The unutilized portion of the 2013 Revolving LoanFacility as of December 31, 2016 was $42.1 million, with borrowings under such facility subject to the conditions applicable to borrowings under our 2013Senior Credit Facility, which conditions we may or may not be able to satisfy at the time of borrowing. Our substantial debt could have importantconsequences, 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 RevolvingLoan Facility and partially variable on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing ourability to use our cash flow to fund working capital, capital expenditures and acquisitions of new clubs and general corporate requirements;•increasing our vulnerability to interest rate fluctuations in connection with borrowings under our 2013 Senior Credit Facility, some of which are atvariable interest rates;•limiting our ability to refinance our existing indebtedness on favorable terms before the expiration of the current 2013 Term Loan Facility, or at all;and•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they currently face could intensify.21Table of ContentsThe current debt under the 2013 Senior Credit Facility has a floating interest rate and an increase in interest rates may negatively impact our financialresults.Interest rates applicable to our debt are expected to fluctuate based on economic and market factors that are beyond our control. In particular, theunhedged portion of $42.0 million of our outstanding debt under our 2013 Senior Credit Facility as of December 31, 2016, has a floating interest rate. Anysignificant increase in market interest rates, and in particular the short-term Eurodollar rates, would result in a significant increase in interest expense on ourdebt, which could negatively impact our net income and cash flows.The Company may be unsuccessful in its efforts to effectively hedge against interest rate changes on our variable rate debt.In its normal operations, the Company is exposed to market risk relating to fluctuations in interest rates. In order to minimize the negative impact ofsuch fluctuations on the Company’s cash flows, the Company may enter into derivative financial instruments, such as interest rate swaps. The Company’scurrent interest rate swap arrangement is with one financial institution and covers $160.0 million of our current $202.0 million outstanding term loanprincipal balance with the swap expiring on May 15, 2018. We are exposed to credit risk if the counterparty to the agreement is not able to perform on itsobligations. Additionally, a failure on our part to effectively hedge against interest rate changes may adversely affect our financial condition and results ofoperations. We are required to record the interest rate swap at its fair value. Changes in interest rates can significantly impact the valuation of the instrumentresulting in non-cash changes to our financial position.Covenant restrictions under our indebtedness may limit our ability to operate our business and, in such an event, we may not have sufficient assets to settleour indebtedness.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 terms of the 2013 Senior Credit Facility provide for a financial covenant in the situation where the total utilization of the revolving loancommitments (other than letters of credit up to $5.5 million at any time outstanding) exceeds 25% of the aggregate amount of those commitments. In suchevent, TSI, LLC is required to maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.50:1.00. As of December 31,2016, the total leverage ratio was slightly below 4.50:1.00. Other than $2.9 million of letters of credit, we did not have any amounts utilized on the 2013Revolving Loan Facility and therefore we were not subject to this financial covenant as of December 31, 2016. The terms of the 2013 Senior Credit Facilityinclude a financial covenant under which the Company is not able to utilize more than 25%, or $11.3 million, in accordance with terms of the creditagreement, of the 2013 Revolving Loan Facility if the total leverage ratio exceeds 4.50:1:00 (calculated on a proforma basis to give effect to any borrowing).Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet certain financial ratios underthe 2013 Senior Credit Facility. We may be unable to meet those tests and the lenders may decide not to waive any failure to meet those tests. A failure tosatisfy these tests could limit our ability to obtain funds to pay dividends or cause a default under the 2013 Senior Credit Facility. If an event of default underthe 2013 Senior Credit Facility occurs, the lenders could elect to terminate any and all outstanding undrawn commitments to lend and declare all amountsoutstanding thereunder, together with accrued interest, to be immediately due and payable. If any such event should occur, we might not have sufficientassets to pay our indebtedness and meet our other obligations, which would have a material adverse effect on our business, financial condition and results ofoperations.22Table of ContentsRisks Related to Our Common StockThe stock ownership of certain large shareholders will likely limit your ability to influence corporate matters.As of February 17, 2017, the Company had three stockholders (including Patrick Walsh, the Chief Executive Officer and Chairman of our board ofdirectors) which, together with each such stockholder's affiliates, beneficially owned 16.7%, 17.5% and 15.3% of our outstanding common stock,respectively, based on public filings made by such shareholders. Each of these stockholders may vote their stock with respect to certain matters, includingany determinations with respect to mergers or other business combinations, the acquisition of assets for stock consideration or disposition of all orsubstantially all of our assets, and the issuance of any additional common stock or other equity securities, in a manner which may not be viewed as beneficialby 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 tobe similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, includingdecreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject towide fluctuations in response to a number of factors, including those described elsewhere in this report and others such as:•actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;•changes in the market’s expectations about our operating results;•success of competitors;•our operating results failing to meet the expectation of securities analysts or investors in a particular period;•changes in financial estimates and recommendations by securities analysts concerning us or our industry in general;•operating and stock price performance of other companies that investors deem comparable to the Company;•our ability to market new and enhanced services on a timely basis;•changes in laws and regulations affecting our business;•our ability to meet compliance requirements;•commencement of, or involvement in, litigation involving us;•changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; any major change in our board ofdirectors or management;•sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such salescould occur; and•general economic and political conditions such as recessions, interest rates, fuel prices, and acts of war or terrorism.In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type oflitigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments tosatisfy judgments or to settle litigation.Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on whichstockholders vote.Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares ofcommon stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock orvoting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likelyresult in your interest in us being subject to the prior rights of holders of that preferred stock.23Table of ContentsBecause we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investmentunless you sell your common stock for a price greater than that which you paid for it.We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for theforeseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, amongother things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deemrelevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiariesincur, including our credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for aprice 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 1,2017 through December 31, 2021, we have leases for 23 club locations that are due to expire without any renewal options, three of which are due to expire in2017, and 48 club locations that are due to expire with renewal options. Renewal options include terms for rental increases based on the consumer priceindex, fair market rates or stated renewal terms already set in the lease agreements.We lease approximately 20,000 square feet of office space in New York City, which expires in April 2017. We also have smaller regional offices inFairfax, VA, and Boston, MA, for administrative and general corporate purposes.We lease approximately 82,000 square feet in Elmsford, NY, for the operation of a centralized laundry facility for NYSC offering towel service, and forconstruction and equipment storage. This space also serves as corporate office space. Total square footage related to the laundry facility is 42,000 and totalsquare footage related to the corporate office and warehouse space is 40,000.24Table of ContentsThe following table provides information regarding our club locations:Location Address Date Opened or Management AssumedNew York Sports Clubs: Manhattan, NY 61 West 62nd Street July 1983Manhattan, NY 1601 Broadway September 1991Manhattan, NY 349 East 76th Street April 1994Manhattan, NY 248 West 80th Street May 1994Manhattan, NY 502 Park Avenue February 1995Manhattan, NY 117 Seventh Avenue South March 1995Manhattan, NY 303 Park Avenue South December 1995Manhattan, NY 1635 Third Avenue October 1996Manhattan, NY 575 Lexington Avenue November 1996Manhattan, NY 278 Eighth Avenue December 1996Manhattan, NY 200 Madison Avenue February 1997Manhattan, NY 2162 Broadway November 1997Manhattan, NY 633 Third Avenue April 1998Manhattan, NY 217 Broadway March 1999Manhattan, NY 23 West 73rd Street April 1999Manhattan, NY 34 West 14th Street July 1999Manhattan, NY 1372 Broadway October 1999Manhattan, NY 300 West 125th Street May 2000Manhattan, NY 19 West 44th Street August 2000Manhattan, NY 128 Eighth Avenue December 2000Manhattan, NY 2527 Broadway August 2001Manhattan, NY 3 Park Avenue August 2001Manhattan, NY 10 Irving Place November 2001Manhattan, NY 230 West 41st Street November 2001Manhattan, NY 1221 Avenue of the Americas January 2002Manhattan, NY 200 Park Avenue December 2002Manhattan, NY 232 Mercer Street September 2004Manhattan, NY 225 Varick Street August 2006Manhattan, NY 885 Second Avenue February 2007Manhattan, NY 301 West 145th Street October 2007Manhattan, NY 1400 5th Avenue December 2007Manhattan, NY 75 West End Avenue April 2013Manhattan, NY 555 Sixth Avenue September 2014Manhattan, NY 28-30 Avenue A March 2015Manhattan, NY 30 Broad Street March 2015Manhattan, NY 1231 Third Avenue Future openingManhattan, NY 4 Astor Place Future openingBronx, 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 200825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 1999West 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 199926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 2014Boston, MA 699 Boylston Street June 2015Allston, 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 199827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 200128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 the Appellate Division, Second Department of the Supreme Court of the State of New York against it and two of its health clubsubsidiaries alleging, among other things, breach of lease in connection with the decision to close the club located in a building owned by the plaintiff andleased to a subsidiary of TSI, LLC, the tenant, and take additional space in a nearby facility leased by another subsidiary of TSI, LLC. Following adetermination of an initial award, which TSI, LLC and the tenant have paid in full, the landlord appealed the trial court’s award of damages, and on August29, 2011, an additional award (amounting to approximately $900,000) (the “Additional Award”), was entered against the tenant, which has recorded aliability. Separately, TSI, LLC is party to an agreement with a third-party developer, which by its terms provides indemnification for the full amount of anyliability of any nature arising out of the lease described above, including attorneys’ fees incurred to enforce the indemnity. As a result, the developerreimbursed 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 arecurrently litigating the payment of the Additional Award and judgment was entered against the developer on June 5, 2013, in the amount of approximately$1.0 million, plus interest, which judgment was upheld by the appellate court on April 29, 2015. TSI, LLC does not believe it is probable that TSI, LLC willbe required to pay for any amount of the Additional Award.On or about October 4, 2012, in an action styled James Labbe, et al. v. Town Sports International, LLC, plaintiff, commenced a purported class action inNew York State court on behalf of personal trainers employed in New York State. Labbe was seeking unpaid wages and damages from TSI, LLC and allegesviolations of various provisions of the New York State labor law with respect to payment of wages and TSI, LLC’s notification and record-keepingobligations. The Company completed settlement negotiations, pursuant to which TSI, LLC will pay its trainers the aggregate sum of $165,000 in exchangefor full releases. The settlement agreement has been executed by the parties, has been approved by the court and the class, and the Company paid thesettlement amount in the fourth quarter of 2016.On January 21, 2016, in an action styled Triangle 17 Center, LLC v. Town Sports International Holdings (NJ), LLC, et al. (“TSI Holdings NJ”), filed inthe New Jersey Superior Court, a Landlord of one of TSI Holdings NJ’s competitors filed an action against TSI Holdings NJ, its affiliate and subsidiary,claiming that TSI Holdings NJ engaged in sham litigation to prevent the opening of a competitor’s facility in close proximity to TSI Holdings NJ’s locationin Ramsey, New Jersey. This matter settled for nominal consideration without any admission of liability on the Company’s part.On or about October 6, 2016, Moelis & Company LLC commenced an action against TSI, LLC in the Supreme Court of the State of New York claimingentitlement to certain fees due pursuant to a Letter Agreement between the parties dated December 28, 2015. In consideration for Moelis & Company LLC’sservices, it is claimed that TSI, LLC agreed to pay a debt discount transaction fee plus costs and expenses incurred. While the Company disagreed andobjected to Moelis' claim, solely for business purposes, TSI, LLC settled the matter in 2016.In addition to the litigation discussed above, the Company is involved in various other lawsuits, claims and proceedings incidental to the ordinarycourse of business, including personal injury, construction matters, employee relations claims and landlord tenant disputes. The results of litigation areinherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, requiresignificant amounts of management time and result in diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot bepredicted with certainty. The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss,or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. We currentlybelieve that the ultimate outcome of such lawsuits, claims and proceedings will not, individually or in the aggregate, have a material adverse effect on ourconsolidated financial position, results of operations or liquidity. However, depending on the amount and timing, an unfavorable resolution of some or all ofthese matters could materially affect our future results of operations in a particular period.Item 4. Mine Safety DisclosuresNot applicable.29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 periodin the last two fiscal years, the high and low sales prices (in dollars per share) of our common stock as quoted or reported on The NASDAQ Global Market: High LowYear ended December 31, 2016: First Quarter$3.02 $0.92Second Quarter$3.97 $2.39Third Quarter$3.45 $2.43Fourth Quarter$3.16 $2.10Year ended December 31, 2015: First Quarter$7.69 $6.00Second Quarter$7.01 $2.54Third Quarter$3.13 $1.92Fourth Quarter$3.08 $1.12HoldersAs of February 17, 2017, there were approximately 98 holders of record of our common stock. There are additional holders who are not “holders ofrecord” but who 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 Companydid not declare any dividends in 2016 and 2015. The cash dividends were funded by available cash on hand.The board of directors does not currently intend to declare dividends. The declaration and payment of dividends to holders of our common stock by us,if any, are subject to the discretion of our board of directors. Our board of directors will take into account such matters as general economic and businessconditions, our strategic plans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us and oursubsidiaries and such other factors as our board of directors may consider to be relevant. If we decide to pay a dividend, we may rely on cash on hand at TSIHoldings, which was approximately $506,000 at December 31, 2016, and distributions received from our subsidiaries to provide the funds necessary to paydividends on our common stock. The existing credit agreement of TSI, LLC restricts the ability of our subsidiaries to pay cash distributions to TSI Holdingsin order for TSI Holdings to pay cash dividends except (a) in an amount, when combined with certain prepayments of indebtedness, of up to $35.0 million,subject to pro forma compliance with a total leverage ratio of no greater than 4.50:1.00 and no default or event of default existing or continuing under thecredit agreement, and (b) an additional amount based on excess cash flow, such additional amounts subject to pro forma compliance with a total leverageratio of less than 4.00:1.00 and no default or event of default existing or continuing under the credit agreement.Issuer Purchases of Equity SecuritiesWe did not purchase any equity securities during the fourth quarter ended December 31, 2016.Recent Sales of Unregistered SecuritiesWe did not sell any securities during the year ended December 31, 2016 that were not registered under the Securities Act of 1933, as amended (the“Securities Act”), other than as previously reported in a Current Report on Form 8-K.30Table of ContentsStock Performance GraphThe graph depicted below compares the changes in our cumulative total stockholder return with the cumulative total return of the Russell 2000 and theNASDAQ 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 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ended December 31. December 31, 2011 2012 2013 2014 2015 2016Town Sports International Holdings, Inc$100.00 $189.19 $264.97 $111.64 $22.36 $46.98NASDAQ Composite$100.00 $116.41 $165.47 $188.69 $200.32 $216.54Russell 2000$100.00 $116.35 $161.52 $169.43 $161.95 $196.45Notes :(1)The graph covers the period from December 31, 2011 to December 31, 2016.(2)The graph assumes that $100 was invested at the market close on December 31, 2011, in our common stock, in the Russell 2000 and in the 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$0.16 per share to common stock holders.(4)Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.(5)We include a comparison against the Russell 2000 because there is no published industry or line-of-business index for our industry and we do not have areadily definable peer group that is publicly traded.Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act, or the Exchange Act that mightincorporate by reference this Annual Report or future filings made by the Company under those statutes, the Stock Performance Graph is not deemed filedwith the SEC, is not deemed soliciting material and shall not be31Table of Contentsdeemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes, except to the extentthat the Company specifically incorporates such information by reference into a previous or future filing, or specifically requests that such information betreated as soliciting 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, 2016 and 2015 and the selected consolidated statement of operations and cash flowdata for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere herein.The selected consolidated balance sheet data as of December 31, 2014, 2013 and 2012 and the selected consolidated statement of operations and cash flowdata for the years ended December 31, 2013 and 2012 have been derived from our audited consolidated financial statements not included herein. Other dataand club and membership data for all periods presented have been derived from our unaudited books and records. Our historical results are not necessarilyindicative of results for any future period. You should read these selected consolidated financial and other data, together with the accompanying notes, inconjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report and ourconsolidated financial statements and the related notes appearing at the end of this Annual Report. Year Ended December 31, 20162015201420132012Statement of Operations Data: Revenues $396,921 $424,323 $453,842 $470,225 $478,981Operating expenses: Payroll and related 149,029 175,898 177,009 174,894 181,632Club operating 185,104 196,725 192,716 179,683 178,950General and administrative 24,702 30,683 31,352 28,431 24,139Depreciation and amortization 43,727 47,887 47,307 49,099 49,391Impairment of fixed assets 742 14,571 4,569 714 3,436Impairment of goodwill — 31,558 137 — —Gain on sale of building(1) — (77,146) — — —Gain on lease termination(2)— (2,967) — — —Insurance recovery related to damaged property(3) — — — (3,194) —Operating (loss) income (6,383) 7,114 752 40,598 41,433(Gain) loss on extinguishment of debt(4) (37,893) (17,911) 493 750 1,010Interest expense, net of interest income 13,938 20,579 19,039 22,616 24,597Equity in the earnings of investees and rental income (242) (2,361) (2,402) (2,459) (2,461)Income (loss) before provision (benefit) for corporate incometaxes 17,814 6,807 (16,378) 19,691 18,287Provision (benefit) for corporate income taxes(5) 9,771 (14,351) 52,611 7,367 6,321Net income (loss) $8,043 $21,158 $(68,989) $12,324 $11,966Earnings (loss) per share: Basic $0.31 $0.86 $(2.84) $0.51 $0.51Diluted $0.31 $0.84 $(2.84) $0.50 $0.50Dividends declared per common share(6) $— $— $0.32 $0.16 $3.0032Table of Contents As of December 31, 20162015201420132012Balance Sheet Data: Cash and cash equivalents $45,596 $76,217 $93,452 $73,598 $37,758Working capital (deficit) surplus (6,323) 27,947 52,280 27,830 (11,825)Total assets(7) 235,878 303,101 407,150 410,588 400,498Long-term debt, including current installments(7) 196,825 266,740 297,188 311,705 306,067Total stockholders’ (deficit) equity (85,670) (96,245) (118,084) (43,516) (55,496)Net debt(8) 156,404 199,200 214,832 251,402 277,985 Year Ended December 31, 20162015201420132012Cash Flow Data: Cash provided by (used in): Operating activities $21,190 $24,870 $4,758 $67,388 $60,053Investing activities (20,003) (31,571) (42,054) (30,606) (22,490)Financing activities (31,763) (10,511) 57,503 (975) (47,722)Other Data: Non-cash rental income, net of non-cash rentalexpense (3,617) (3,647) (5,399) (5,692) (4,037)Non-cash share-based compensation expense 1,807 1,386 1,911 2,204 1,306 Year Ended December 31, 201620152014 2013 2012Club and Membership Data: New clubs opened 1 1 4 — —Clubs acquired — — — 6 —BFX Studio locations converted to clubs 2 — — — —Clubs closed (5) (6) (8) (4) —Wholly-owned clubs operated at end of period 149 151 156 160 158Total clubs operated at end of period(9) 150 152 158 162 160BFX Studio locations at end of period — 3 1 — —Total members at end of period(10) 544,000 541,000 484,000 497,000 510,000Restricted members at end of period(11) — — 20,000 41,000 38,000Comparable club revenue (decrease)increase(12) (4.1)% (5.6)% (4.2)% (1.8)% 1.6%Revenue per weighted average club(in thousands)(13) $2,634 $2,777 $2,842 $2,971 $3,032Average revenue per member(14) $728 $823 $941 $934 $922Average Joining Fees collected permember(15) $61 $72 $75 $59 $57Annual attrition(16) 44.3 % 46.9 % 44.3 % 41.9 % 41.0%(1)The $77,146 gain on sale of building in the year ended December 31, 2015 was related to the sale of our East 86th Street property. Refer to Note 8 – Saleof Building to the Company’s consolidated financial statements for further details.(2)The $2,967 net gain on lease termination in the year ended December 31, 2015 was related to the termination of a lease for a planned club opening thatwas not yet effective.33Table of Contents(3)The $3,194 of insurance recovery related to damaged property in the year ended December 31, 2013 was related to property damaged by HurricaneSandy.(4)The $37,893 gain on extinguishment of debt recorded for the year ended December 31, 2016 was net of the write-off of deferred financing costs and debtdiscount of $545 and $1,561, respectively, and other costs related to the transaction. In April 2016, TSI Holdings settled a transaction to purchase $8,705principal amount of debt outstanding under the 2013 Senior Credit Facility for $3,787. In May 2016, TSI Holdings settled another transaction topurchase $62,447 principal amount of debt outstanding under the 2013 Senior Credit Facility for $25,978. The purchased debt was transferred to TSI,LLC and canceled.The $17,911 gain on extinguishment of debt recorded for the year ended December 31, 2015 included the write-off of related deferred financing costsand debt discount of $249 and $707, respectively, and other costs related to the transaction. In the year ended December 31, 2015, TSI Holdingspurchased $29,829 principal amount of debt outstanding under the 2013 Senior Credit Facility in the open market for $10,947, and such debt wastransferred 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 costsand debt discount in connection with the fourth quarter 2014 mandatory prepayment of $13,500 on the 2013 Term Loan Facility.The $750 loss on extinguishment of debt recorded for the year ended December 31, 2013 is comprised of the write-off of net deferred financing costs anddebt discount in connection with the November 15, 2013 debt refinancing. The proceeds from the 2013 Senior Credit Facility were used to repay theremaining outstanding principal amounts of a previous senior secured credit facility, entered into in May 2011, of $315,743 plus accrued and unpaidinterest.The $1,010 loss on extinguishment of debt recorded for the year ended December 31, 2012 is comprised of the $464 write-off of net deferred financingcosts and debt discount related to the August 22, 2012 debt repricing and a write-off of $546 of net deferred financing costs and debt discount inconnection with the August 28, 2012 voluntary prepayment of $15,000 on our term loan facility.(5)Corporate income taxes for the years ended December 31, 2016, 2015 and 2014 included non-cash charges of $54,193, $52,637 and $60,368,respectively, related to tax valuation allowances. Corporate income taxes for the years ended December 31, 2013 and 2012 included income tax benefitstotaling $16 and $483, respectively, related to the correction of accounting errors. For the years ended December 31, 2016, 2015 and 2014, see Note 13— Corporate Income Taxes to the Company’s consolidated financial statements in this Annual Report for further details.(6)In April 2014, February 2014 and November 2013, the board of directors of the Company declared quarterly cash dividends of $0.16 per share. Thequarterly dividend was discontinued in the second quarter of 2014.In the year ended December 31, 2012, the board of directors of the Company declared a special cash dividend of $3.00 per share.(7)Effective January 1, 2016, the Company elected to change its method of presentation relating to debt issuance costs in accordance with AccountingStandards Update (“ASU”) 2015-03. As a result, in 2015, 2014, 2013, and 2012, the Company reclassified $2,259, $2,683, $3,204 and $4,272,respectively, of deferred financing costs from other long-term assets to long-term debt.(8)Net debt represents the total principal balance of long-term debt outstanding, net of cash and cash equivalents.(9)Includes wholly-owned and one partly-owned club. Not included in the total club count is one partly-owned club in which we have an equity interestbut operates under a different brand and locations that are managed by us in which we do not have an equity interest. These managed sites include threefitness clubs located in colleges and universities and eight managed sites.(10)Represents members (including restricted members) at wholly-owned and partly-owned clubs. Restricted members primarily include students andteachers.(11)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 and the Company aggregated all members beginning in 2015.(12)Total revenue for a club is included in comparable club revenue increase (decrease) beginning on the first day of the thirteenth full calendar month of theclub’s operation.34Table of Contents(13)Revenue per weighted average club is calculated as total revenue divided by the product of the total number of clubs and their weighted average monthsin operation as a percentage of the period.(14)Average revenue per member is total revenue from wholly-owned clubs for the period divided by the average number of members from wholly-ownedclubs for the period, where average number of memberships for the period is derived by dividing the sum of the total memberships at the end of eachmonth during the period by the total number of months in the period.(15)Average joining fees collected per member is calculated as total initiation and annual fees divided by the number of new members during each respectiveyear.(16)Annual attrition is calculated as total member losses for the year divided by the average monthly member count over the year during each respectiveyear.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“Selected Consolidated Financial and Other Data” section of this Annual Report and our consolidated financial statements and the related notesappearing at the end of this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements thatinvolve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a resultof certain factors, including, but not limited to, those set forth under the headings “Risk Factors,” “Business” and “Forward-Looking Statements”contained in Item 1A, Item 1, and Part I, respectively, of this Annual Report.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 U.S. andone of the largest fitness club owners and operators in the U.S. As of December 31, 2016, the Company, through its subsidiaries, operated 150 clubs. Ourclubs collectively served approximately 544,000 members as of December 31, 2016. We owned and operated a total of 102 clubs under the NYSC brandname within a 120-mile radius of New York City as of December 31, 2016, including 35 locations in Manhattan where we are the largest fitness club ownerand operator. We owned and operated 28 clubs in the Boston region under our BSC brand name, 12 clubs (one of which is partly-owned) in theWashington, D.C. region under our WSC brand name and five clubs in the Philadelphia region under our PSC brand name as of December 31, 2016. Inaddition, as of December 31, 2016, we owned and operated three clubs in Switzerland and partly-owned one club that operated under a different brand namein Washington, D.C. We employ localized brand names for our clubs to create an image and atmosphere consistent with the local community and to fosterrecognition 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 thehighest concentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members inurban or suburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market tothe active mature market. In each of our markets, we have developed clusters by initially opening or acquiring clubs located in the more central urbanmarkets of the region and then branching out from these urban centers to suburbs and neighboring communities.Revenue and Operating ExpensesWe have two principal sources of revenue:•Membership revenue: Our largest source of revenue is 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. Thesedues and fees comprised 76.7% of our total revenue for the year ended December 31, 2016. We recognize revenue from membership dues in themonth when the services are rendered. We recognize revenue from initiation and processing fees over the estimated average membership life andannual fees over a twelve month period.•Ancillary club revenue: For the year ended December 31, 2016, we generated 16.8% of our revenue from personal training and 4.9% of ourrevenue from other ancillary programs and services consisting of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes, aswell as sales of miscellaneous sports products. We continue to grow ancillary club revenue by building on ancillary programs such as our personaltraining membership product and our fee-based Small Group Training programs.35Table of ContentsWe also receive revenue (approximately 1.6% of our total revenue for the year ended December 31, 2016) from the rental of space in our facilities 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.We refer to these revenues as Fees and other revenue.Our performance is dependent in part on our ability to continually attract and retain members at our clubs. In the years ended December 31, 2016 and2015, our attrition rate was 44.3% and 46.9%, respectively.Our operating and selling expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other salary andrelated expenses, occupancy costs, including most elements of rent, utilities, housekeeping and contracted maintenance expenses, as well as depreciation.Variable costs are primarily related to payroll associated with ancillary club revenue, membership sales compensation, advertising, certain facility repairs andclub 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 estate development expenses. Payroll and related expenses areincluded in a separate line item on the consolidated statement of operations and are not included in general and administrative expenses. Approximately45% 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 toimprove. 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 thefacility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for which we are currently budgetingapproximately 2% of projected annual revenue. Expansions of certain facilities are also performed from time to time, when incremental space becomesavailable on acceptable terms and utilization and demand for the facility dictate. In this regard, facility remodeling is also considered where appropriate.Operating income is impacted by certain charges and benefits which can fluctuate year to year. In 2016, operating income was impacted by fixed assetimpairment charges of $742,000 related to underperforming clubs. In 2015, operating income included a gain on sale of building of $77.1 million and gainon lease termination of $3.0 million, partially offset by goodwill impairment charges of $31.6 million associated with the NYSC and BSC regions, and fixedasset impairment charges of $14.6 million related to underperforming clubs. In 2014, operating income was impacted by fixed asset impairment charges of$4.6 million related to underperforming clubs, and goodwill impairment charges of $137,000 associated with one outlier club. Year Ended December 31, 2016 2015 2014 ($ amounts in thousands)Operating (loss) income $(6,383) $7,114 $752(Decrease) increase over prior period (189.7)% 846.0% (98.1)%Net income (loss) $8,043 $21,158 $(68,989)(Decrease) increase over prior period (62.0)% 130.7% (659.8)%Cash flows provided by operating activities $21,190 $24,870 $4,758(Decrease) increase over prior period (14.8)% 422.7% (92.9)%Historically, we have focused on building or acquiring clubs in areas where we believe the market is underserved or where new clubs are intended toreplace existing clubs at their lease expiration. Based on our experience, a new club tends to experience a significant increase in revenues during its first threeyears of operation as it reaches maturity. Because there is relatively little incremental cost associated with such increasing revenue, there is a greaterproportionate increase in profitability. We believe that the revenues and operating income of our immature clubs will increase as they mature. In contrast,operating income margins may be negatively impacted in the near term in our recent and planned club openings. In most cases, we are able to transfer manyof the members of closed clubs to other clubs thereby enhancing overall profitability. During 2016, we opened one new location. During 2017, we also planto open two additional locations in New York City. In addition, our operating income margins have been, and may continue to be negatively affected by ourlower average dues per membership.36Table of ContentsAs of December 31, 2016, 149 of our fitness clubs were wholly-owned by us and our consolidated financial statements include the operating results ofall such clubs. One location in Washington, D.C., was partly-owned by us, with our profit sharing percentage approximating 45%, and is treated as anunconsolidated affiliate for which we apply the equity method of accounting. We also partly-owned another location in Washington D.C., which does notoperate under the WSC brand, with a profit sharing percentage approximating 20% (after priority distributions) for which the equity accounting is alsoapplied. In addition, we provide management services at locations where we do not have an equity interest which include three fitness clubs located incolleges and universities and eight managed sites.Comparable 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-Year2014 First Quarter (4.7)% Second Quarter (4.5)% Third Quarter (4.5)% Fourth Quarter (3.9)% (4.2)%2015 First Quarter (3.5)% Second Quarter (5.4)% Third Quarter (7.1)% Fourth Quarter (6.7)% (5.6)%2016 First Quarter (7.6)% Second Quarter (4.5)% Third Quarter (3.0)% Fourth Quarter (2.2)% (4.1)%Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary revenueincreases (decreases).The comparable club revenue decline experienced in 2016 was primarily due to lower average dues per membership, partially offset by an increase inmembership sales volume and annual fees. The comparable club revenue decline experienced in 2015 and 2014 was primarily due to the decline inmembership dues. In 2015, the effect of new members enrolling at lower monthly dues combined with members cancelling who were paying higher monthlydues was only partially offset by an increase in membership sales volume.37Table of ContentsHistorical Club Count Year Ended December 31, 201620152014Wholly-owned clubs operated at beginning of period 151 156 160New clubs opened 1 1 4BFX Studio locations converted to clubs 2 — —Clubs closed (5) (6) (8)Wholly-owned clubs operated at end of period 149 151 156Partly-owned clubs operated at end of period(1) 1 1 2Total clubs operated at end of period(1)(2)(3) 150 152 158(1)Excludes one partly-owned club that operated under a different brand name in our Washington, D.C. region.(2)Includes wholly-owned clubs and one partly-owned club. Not included in the total club count are locations that are managed by us in which we do nothave an equity interest. These managed sites include three fitness clubs located in colleges and universities and eight managed sites.Consolidated Results of OperationsThe following table sets forth certain operating data as a percentage of revenue for the periods indicated: Year Ended December 31, 2016 2015 2014Revenues100.0 % 100.0 % 100.0 %Operating expenses: Payroll and related37.5 41.5 39.0Club operating46.7 46.4 42.5General and administrative6.2 7.2 6.9Depreciation and amortization11.0 11.3 10.4Impairment of fixed assets0.2 3.4 1.0Impairment of goodwill— 7.4 —Gain on sale of building— (18.2) —Gain on lease termination— (0.7) — 101.6 98.3 99.8Operating (loss) income(1.6) 1.7 0.2(Gain) loss on extinguishment of debt(9.5) (4.2) 0.1Interest expense3.5 4.9 4.2Equity in the earnings of investees and rental income(0.1) (0.6) (0.5)Income (loss) before provision (benefit) for corporate income taxes4.5 1.6 (3.6)Provision (benefit) for corporate income taxes2.5 (3.4) 11.6Net income (loss)2.0 % 5.0 % (15.2)%38Table of ContentsYear ended December 31, 2016 compared to year ended December 31, 2015RevenueRevenue (in thousands) was comprised of the following for the periods indicated: Year Ended December 31, 2016 2015 Revenue % Revenue Revenue % Revenue % VarianceMembership dues$296,795 74.8% $309,096 72.8% (4.0)%Initiation and processing fees7,636 1.9% 13,644 3.2% (44.0)%Membership revenue304,431 76.7% 322,740 76.0% (5.7)%Personal training revenue66,487 16.8% 73,191 17.3% (9.2)%Other ancillary club revenue19,642 4.9% 22,138 5.2% (11.3)%Ancillary club revenue86,129 21.7% 95,329 22.5% (9.7)%Fees and other revenue6,361 1.6% 6,254 1.5% 1.7 %Total revenue$396,921 100.0% $424,323 100.0% (6.5)%Revenue decreased $27.4 million, or 6.5%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, as a result of lowermembership revenue and ancillary club revenue. Revenue decreased approximately $16.8 million at our clubs opened over than 24 months (“mature clubs”)and $13.6 million at closed clubs. These decreases were partially offset by a $3.0 million increase in revenue from our clubs that were opened within the last24 months.Membership dues revenue decreased $12.3 million, or 4.0% in the year ended December 31, 2016 compared to the year ended December 31, 2015,primarily reflecting lower average dues per membership and the effect of club closures, partially offset by an increase in annual fees.Initiation and processing fees revenue decreased $6.0 million, or 44.0% in the year ended December 31, 2016 compared to the year endedDecember 31, 2015, primarily reflecting a decrease in initiation fees collected per new membership which began in the third quarter of 2015, and a reductionin new memberships. Initiation and processing fees are amortized over the estimated average membership life and as a lesser amount of fees is collected, therevenue recognized will continue to decrease for the amortization period. As the high initiation fees that were initially collected in relation to the conversionto the lower pricing model in 2014 and the first half of 2015 continue to fully amortize and are no longer part of the calculation, we expect this revenue todecrease further. The decrease was also due to the effect of higher estimated average membership life of 25 months for the full year of 2016 versus 22 monthsfor the same prior-year period, which resulted in initiation and processing fees being amortized over the longer time period and therefore less revenue wasrecognized.Personal training revenue decreased $6.7 million, or 9.2% in the year ended December 31, 2016 compared to the year ended December 31, 2015,primarily due to a decline in sales volume for our personal training products, as well as the impact of club closures.Other ancillary club revenue decreased $2.5 million, or 11.3%, in the year ended December 31, 2016 compared to the year ended December 31, 2015,primarily due to decreased revenue from our Sports Clubs for Kids programs.Comparable club revenue decreased 4.1% in the year ended December 31, 2016 compared to the year ended December 31, 2015. The price ofmembership dues and enrollment fees decreased on average which was partially offset by an increase in memberships at our comparable clubs.39Table of ContentsOperating ExpensesOperating expenses (in thousands) were comprised of the following for the periods indicated: Year Ended December 31, 2016 2015 $ Variance % VariancePayroll and related $149,029 $175,898 $(26,869) (15.3)%Club operating 185,104 196,725 (11,621) (5.9)%General and administrative 24,702 30,683 (5,981) (19.5)%Depreciation and amortization 43,727 47,887 (4,160) (8.7)%Impairment of fixed assets 742 14,571 (13,829) (94.9)%Impairment of goodwill — 31,558 (31,558) (100.0)%Gain on sale of building — (77,146) 77,146 100.0 %Gain on lease termination — (2,967) 2,967 100.0 %Operating expenses $403,304 $417,209 $(13,905) (3.3)%Operating expenses increased due to the following factors:Payroll and related. Payroll and related expenses for the year ended December 31, 2016 decreased $26.9 million, or 15.3%, compared to the year endedDecember 31, 2015, primarily reflecting decreased overhead and club payroll associated with club closures, headcount reductions and other cost savingsinitiatives. In the years ended December 31, 2016 and 2015, Payroll and related expenses also included $1.7 million and $3.0 million, respectively, ofseparation expense primarily related to the departure of certain executive officers.Club operating. Club operating expenses decreased $11.6 million or 5.9% in the year ended December 31, 2016 compared to the year endedDecember 31, 2015. This decrease was principally attributable to the following:•Marketing expenses decreased $4.7 million mainly due to reduced spending in the year ended December 31, 2016 related to our cost-savingsinitiatives, and the increased advertising spend in the year ended December 31, 2015 associated with the roll-out of the lower pricing model.•Repair and maintenance expenses decreased $2.9 million primarily reflecting a decrease in vendor costs as well as other cost-savings initiatives. Thedecline also reflected the effect of club closures.•Utilities expenses decreased $2.3 million primarily reflecting the effect of club closures, and lower electric rates, lower energy prices due to the mildweather experienced in our markets in the year ended December 31, 2016.•Rent and occupancy expenses decreased $327,000 in the year ended December 31, 2016 compared to the year ended December 31, 2015. Thedecrease was driven by savings of $3.3 million for closed clubs, and a decrease in early lease termination penalties of $1.3 million. Offsetting thesedecreases was an increase of $2.9 million at mature clubs primarily due to rent escalations and an increase of $1.4 million related to newly openedclubs and one future club.General and administrative. General and administrative expense decreased $6.0 million, or 19.5%, in the year ended December 31, 2016 compared tothe year ended December 31, 2015, primarily reflecting the results of our cost savings initiatives. In addition, for the year ended December 31, 2015, itincluded costs of $899,000 associated with the changes to our Board of Directors and other related expenses.Depreciation and amortization. In the year ended December 31, 2016 compared to the year ended December 31, 2015, depreciation and amortizationexpense decreased $4.2 million, or 8.7%, primarily due to a decline in our depreciable fixed assets base resulting from club closures and impairment charges.Impairment of fixed assets. We recorded fixed asset impairment charges of $742,000 and $14.6 million at underperforming clubs in the year endedDecember 31, 2016 and 2015, respectively.Impairment of goodwill. We did not have goodwill impairment charges in the year ended December 31, 2016. In the year ended December 31, 2015, asa 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, we performed an interim impairment test as of May 31, 2015. Weconcluded that there would be no remaining implied fair value of goodwill attributable to the NYSC and BSC regions. Accordingly, we wrote off $31.6million of goodwill associated with these reporting units. 40Table of ContentsGain on Sale of Building. On September 12, 2014, we completed the legal sale of our property (building and land) on East 86th Street, New York City,to an unaffiliated third-party for gross proceeds of $85.7 million. Concurrent with the closing of the transaction, we leased back the portion of the propertycomprising our health club (“Initial Lease”) and had agreed to vacate the property in connection with the purchaser's future development of a new luxury,high-rise multi-use building. In connection with vacating the property, we had agreed to enter into a new lease (“New Club Lease”) for approximately 24,000square feet in the new building for the purpose of operating a health club upon completion of construction by the purchaser/landlord. This sale-leasebacktransaction was characterized as a financing arrangement for accounting purposes rather than a sale until any continuing involvement has ceased. In March2015, we received the remaining proceeds that had been held in escrow of $500,000.On December 23, 2015, we terminated the Initial Lease and the agreement to enter into the New Club Lease and received gross proceeds of $3.5 millionin connection with the termination. 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 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 the consolidated statements of operations for the year ended December 31, 2015.Gain on lease termination. In the year ended December 31, 2015, we recorded a $3.0 million net gain on lease termination related to the termination ofa lease for a planned club opening that was not yet effective.Gain on Extinguishment of DebtOn April 21, 2016, TSI Holdings settled a transaction to purchase $8.7 million principal amount of debt outstanding under the 2013 Senior CreditFacility for $3.8 million, or 43.5% of face value. On May 6, 2016, TSI Holdings settled another transaction to purchase $62.4 million principal amount ofdebt outstanding under the 2013 Senior Credit Facility for $26.0 million, or 41.6% of face value. The April and May transactions created gains onextinguishment of debt in 2016 of $37.9 million. The gain was net of the write-off of deferred financing costs and debt discount of $545,000 and $1.6million, respectively, and other costs related to the transaction. The purchased debt described above was transferred to TSI, LLC and canceled.In the year ended December 31, 2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under the 2013 Senior CreditFacility in the open market for $10.9 million, and such debt was transferred to TSI, LLC and cancelled, which resulted in a gain on extinguishment of debt of$17.9 million, including the write-off of related deferred financing costs and debt discount of $249,000 and $707,000, respectively.Interest ExpenseInterest expense decreased by $6.6 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily reflectingthe effect of principal payments made on, and purchases of debt outstanding under, the 2013 Term Loan Facility in late 2015 and early 2016. Additionally,in 2015, we recorded approximately $2.0 million of non-cash rental income related to our former tenant following the legal sale of this location in September2014. Because the legal sale of our East 86th Street property was characterized for accounting purposes as a financing rather than a sale, the rental paymentswere treated as interest on the financing arrangement until any continuing involvement in the property ceased. In December 2015, we terminated our currentlease and the agreement to enter into our future lease with the purchaser/landlord, so this sale-leaseback transaction was accounted for as a completed sale inDecember 2015.Provision (Benefit) for Corporate Income TaxesWe recorded income tax expense of $9.8 million during the year ended December 31, 2016. For year ended December 31, 2015, we recorded an incometax benefit of $14.4 million, which included a decrease of $17.3 million (net of the elimination of federal effect of state deferred taxes); to the full valuationallowance against the U.S. net deferred tax assets. Our effective tax rate was 55% and (211)% for the years ended December 31, 2016 and 2015, respectively.Separate from the impact of valuation allowance, our effective tax rate was 37% and 38% for the years ended December 31, 2016 and 2015, respectively.As of both December 31, 2016 and 2015, we have a net deferred tax liability of $61,000 as there is a full valuation allowance recorded against the U.S.net deferred tax assets. The state net deferred tax liability balance was $17,000 as of both December 31, 2016 and 2015.In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of thedeferred tax assets will be realized. A valuation allowance, if needed reduces the deferred tax assets to the amount expected to be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of future41Table of Contentstaxable income in those periods in which temporary differences become deductible and/or net operating loss carry forwards can be utilized. We assess allpositive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidenceincludes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxableincome. 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 ateach reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of thedeferred 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. We recorded valuation allowances in the amounts of $54.2 million and $52.6 million as of December31, 2016 and 2015, respectively.In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets generally cannot be used as a source ofincome to realize deferred tax assets with a definitive loss carry forward period. We do not amortize goodwill for book purposes but have amortized goodwillwith tax basis for tax purposes. The deferred tax liabilities recorded at December 31, 2016 and 2015 related to the tax effect of differences between the bookand tax basis of goodwill that is not expected to reverse until some indefinite future period for our goodwill from operations of our clubs in Switzerland(“Swiss Operations”).We are currently under examination in New York State (2006 through 2014). In May 2016, we consented to extend the assessment period for tax years2006 - 2012 through June 30, 2017. In a revised letter dated December 12, 2016, we received a revised assessment from the State of New York related to taxyears 2006-2009 for $4.7 million, inclusive of $2.0 million of interest. We disagreed with the proposed assessment and have scheduled a conciliationconference with the State of New York to appeal the assessment. We have not recorded a tax reserve related to the proposed assessment. It is difficult topredict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of the reasonably possible change tounrecognized tax benefits within the next 12 months cannot be made. Additionally, we are also under examination in New York City (2006 through 2012),which we have consented to extend the assessment period through December 31, 2017. We were also recently notified by the Internal Revenue Service thatthey intend to examine federal income tax returns for the years ended December 31, 2014 and 2015.Year ended December 31, 2015 compared to year ended December 31, 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 fees 13,644 3.2% 12,044 2.7% 13.3 %Membership revenue 322,740 76.0% 355,229 78.3% (9.1)%Personal training revenue 73,191 17.3% 70,338 15.5% 4.1 %Other ancillary club revenue 22,138 5.2% 22,304 4.9% (0.7)%Ancillary club revenue 95,329 22.5% 92,642 20.4% 2.9 %Fees and other revenue 6,254 1.5% 5,971 1.3% 4.7 %Total revenue $424,323 100.0% $453,842 100.0% (6.5)%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 of lowermembership 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 millionincrease in revenue from our clubs that were opened or acquired subsequent to December 31, 2013.Membership dues revenue decreased $34.1 million, or 9.9%, in the year ended December 31, 2015 compared to the year ended December 31, 2014. Theeffect of new members enrolling at lower monthly dues combined with members who canceled who were paying higher monthly dues was only partiallyoffset by an increase in membership sales volume. The decline was also partially offset by an increase in annual fees recognized of $9.9 million. Beginning inthe third quarter of 2014, new42Table of Contentsmemberships charged an annual fee in the first month of membership and on each annual anniversary date thereafter and were deferred and recognized, on astraight-line basis over 12 months.Initiation and processing fees revenue increased $1.6 million, or 13.3%, in the year ended December 31, 2015 compared to the yearended December 31, 2014, primarily reflecting an increased amount of initiation fees charged during the first half of 2015 associated with an increase inmembership sales volume, partially offset by a reduction in these fees charged during the second half of 2015 due to sales promotion. Our total member countincreased 64,000 to 541,000 in 2015 compared to a decrease of 13,000 members in 2014 primarily due to the implementation of the lower pricing model.Initiation and processing fees are recognized into revenue over the estimated average membership life.Personal training revenue increased $2.9 million, or 4.1%, to $73.2 million in the year ended December 31, 2015 compared to the yearended December 31, 2014. Personal training revenue increased as a percentage of total revenue from 15.5% in 2014 to 17.3% in 2015. 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, or 0.7%, in the year ended December 31, 2015 compared to the year ended December 31, 2014,primarily driven by decreased 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 were partially offset by increased revenue from our studio classes.Comparable club revenue decreased 5.6% in the year ended December 31, 2015 compared to the year ended December 31, 2014. The price ofmembership dues and enrollment fees decreased on average which was partially offset by an increase in memberships at our comparable clubs.Operating 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/A - 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 year endedDecember 31, 2014. Personal training payroll increased $2.4 million which was related to the increase in personal training revenue. The increase alsoincluded $3.0 million separation obligations related to the departure of certain executive officers and severance charges of $817,000 associated with certainemployees. These increases were more than offset by decreased overhead expenses and club expenses of $7.3 million associated with headcount reductionsand other cost savings initiatives. These cost reductions primarily occurred in the second half of 2015.Club operating. Club operating expenses increased $4.0 million, or 2.1%, in the year ended December 31, 2015 compared to the yearended December 31, 2014. This increase was principally attributable to the following:•Marketing expenses increased $3.2 million in the year ended December 31, 2015 compared to the year ended December 31, 2014 principally due toincreased advertising spend associated with the lower pricing model.•Rent and occupancy expenses increased $2.5 million in the year ended December 31, 2015 compared to the year ended December 31, 2014principally 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 increased $919,000.43Table of Contents◦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 costsof $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 ofdirectors and 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 $4.6million in 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 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 28,2015 and 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 ofgoodwill attributableto 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 February28, 2014 annual impairment test resulted in a goodwill impairment charge of $137,000 associated with one outlier club 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 an unaffiliated third-party for gross proceeds of $85.7 million. Concurrent with the closing of the transaction, we entered into Initial Lease and agreed tovacate the property in connection with the purchaser's future development of a new luxury, high-rise multi-use building. In connection with vacating theproperty, we agreed to enter into the New Club Lease. This sale-leaseback transaction was characterized as a financing arrangement for accounting purposesrather than a sale until any continuing involvement has ceased.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$3.5 million in connection with the termination. 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 recorded a $77.1 million 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 in the year ended December 31, 2015.Gain on lease termination. In the year ended December 31, 2015, we recorded a $3.0 million net gain on lease termination related to the termination ofa 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 CreditFacility 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 debtof $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 anddebt discount in connection with the November 2014 mandatory prepayment of $13.5 million on the 2013 Term Loan Facility. This mandatory payment wasrelated to the sale of the East 86th Street property pursuant to the terms of the 2013 Senior Credit Facility as described in the Liquidity and Capital Resourcessection.Interest ExpenseInterest expense increased by $1.5 million in the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily reflectingthe non-cash rental income related to our former tenant at the East 86th Street property. Because the legal sale of our East 86th Street property wascharacterized for accounting purposes as a financing rather than a sale, the rental payments following the sale during portions of the years ended December31, 2014 and 2015 were treated as interest on the financing arrangement until any continuing involvement in the property ceased. In December 2015, we44Table of Contentsterminated our current lease and the agreement to enter into our future lease with the purchaser/landlord, so this sale-leaseback transaction was accounted foras a completed sale in December 2015. This was partially offset by a decrease in interest expense due to principal payments made on and purchases of debtoutstanding under our 2013 Term Loan Facility.(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, we had recorded a tax provision of $52.6 million. Our effective tax rate was (211)% and (321)% for the years ended December 31, 2015 and 2014,respectively. Separate from the impact of valuation allowance, our effective tax rate was 38% and 48% for the years ended December 31, 2015 and 2014. Oureffective tax rates for 2015 and 2014 were favorably impacted by tax benefits derived from the captive insurance arrangement by approximately 14% and7%, respectively. Additionally, our effective rate was adversely impacted to 369% in connection with recording a valuation allowance against U.S. deferredtax assets during the year ended December 31, 2014 and by 249% for the change in valuation allowance against U.S. deferred tax assets during the yearended December 31, 2015.As of December 31, 2015, we had a net deferred tax liability of $61,000 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, 2015 was $17,000. For the year ended December 31, 2014 we had a net deferred taxliability 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 balanceat 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.We were 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. On January 13, 2016, we received a revised assessment from the State ofNew York related to tax years 2006-2009 for $4.1 million, inclusive of $1.6 million of interest. We continued to evaluate the merits of the proposedassessment as new information becomes available during continued discussions with the State of New York. We had not recorded a tax reserve related to theproposed assessment. It was difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate ofthe reasonably possible change to unrecognized tax benefits within the next 12 months cannot be made. Additionally, we were also under examination inNew York City (2006 through 2012), which we consented to extend the assessment period through December 31, 2016.Liquidity and Capital ResourcesWe have been experiencing declining revenue from members for several years as the fitness industry continues to be highly competitive in thegeographic regions in which we compete. New members have been joining at lower monthly rates and cancellations of members paying higher rates willcontinue to negatively impact our results and liquidity if these trends are not reversed. In response to this, we initiated cost savings initiatives in 2015 thatcontinued through 2016 to help mitigate the impact the decline in revenue has had on our profitability and cash flow from operations.In December 2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under its senior credit facility in the open market for$10.9 million, or 36.7% of face value. On April 21, 2016, TSI Holdings settled a transaction to purchase $8.7 million principal amount of debt outstandingunder the senior credit facility for $3.8 million, or 43.5% of face value. On May 6, 2016, TSI Holdings settled another transaction to purchase $62.4 millionprincipal amount of debt outstanding under the senior credit facility for $26.0 million, or 41.6% of face value. All of the above purchased debt wastransferred to TSI, LLC and canceled.Our ability to fund operations and capital expenditures 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 to fund anticipated capitalexpenditures and currently scheduled debt service for at least the next 12 months. As further described in Note 7 - Long-Term Debt to our consolidatedfinancial statements to this Annual Report, we maintain the 2013 Senior Credit Facility, the 2013 Term Loan Facility and the 2013 Revolving Loan Facility.The 2013 Term Loan Facility carries a gross principal balance of $202.0 million and will mature on November 15, 2020. The terms of the 2013 Senior CreditFacility include a financial covenant under which we are not able to utilize more than 25%, or $11,250 in accordance with terms of the credit agreement, ofthe 2013 Revolving Loan Facility if the total leverage ratio (as defined) exceeds 4.50:1.00 (calculated on a proforma basis to give effect to any borrowing).As of December 31, 2016, the total leverage ratio was slightly below 4.50:1.00. Any new borrowings on the 2013 Revolving Loan Facility would be pursuantto the terms and subject to the conditions applicable to borrowings under our 2013 Senior Credit Facility, which conditions we may or may not be able tosatisfy at the time of borrowing. The 2013 Revolving Loan Facility is scheduled to mature in November 2018 and under this facility we have $2.9 million inletters of credit that, if still outstanding, will likely need to be funded by our cash.45Table of ContentsWe continue to focus on increasing membership in existing clubs to increase revenue. We may consider additional actions within our control, includingthe sale of certain assets, club acquisitions, additional club closures and entering into arrangements with revenue generating partnerships, some of which willutilize a “shop-in-shop” concept. We may also consider additional strategic alternatives including opportunities to reduce TSI, LLC's existing debt andfurther cost savings initiatives, among other possibilities, if any. Our ability to continue to meet our obligations is dependent on our ability to generatepositive cash flow from a combination of initiatives, including those mentioned above. Failure to successfully implement these initiatives could have amaterial adverse effect on our liquidity and our operations and we would need to implement alternative plans that could include additional asset sales,additional reductions in operating costs, deferral of capital expenditures, further reductions in working capital and debt restructurings. There can be noassurance that such alternatives would be available to us or that we would be successful in their implementation.As of December 31, 2016, we had $45.6 million of cash and cash equivalents. Financial instruments that potentially subject us to concentrations ofcredit risk consist of cash and cash equivalents. Although we deposit our cash with more than one financial institution, as of December 31, 2016, $21.0million was held at one financial institution. We have not experienced any losses on cash and cash equivalent accounts to date and we do not believe that,based on the credit ratings of the aforementioned institutions, we are exposed to any significant credit risk related to cash at this time.Historically, we have satisfied our liquidity needs through cash generated from operations and various borrowing arrangements. Principal liquidityneeds have included the acquisition and development of new clubs, debt service requirements, debt purchases and other capital expenditures necessary toupgrade, expand and renovate existing clubs. Failure to maintain our club equipment could lead to decreased member satisfaction and increased memberattrition and therefore could negatively affect future operating results and cash generated from operations. In March 2014 and June 2014, we paid a cashdividend of $0.16 per share. Any determination to pay future dividends will be made by the board of directors and will take into account such matters as cashon hand, general economic and business conditions, our strategic plans, our financial results and condition, contractual, legal and regulatory restrictions onthe payment of dividends by us and our subsidiaries and such other factors as our board of directors may consider to be relevant. We believe that our existingcash and cash equivalents, cash generated from operations and our existing credit facility will be sufficient to fund capital expenditures, working capitalneeds and other liquidity requirements associated with our operations through at least the next 12 months.Operating Activities. Net cash provided by operating activities decreased $3.7 million for the year ended December 31, 2016 compared to the yearended December 31, 2015. Decreases in operating cash included the following:•Cash collected for membership dues decreased by $24.2 million.•Cash collected for member enrollment, including the initial annual fee paid upon joining, decreased by $9.7 million, which was related to thedecrease in memberships sold and a reduction in joining fees collected per membership.•Cash collected for personal training memberships decreased by $6.5 million.•Cash collected for the termination of a lease related to a future club opening decreased $3.1 million.•Cash collected for tax refunds decreased by $783,000.•Cash paid for income taxes increased by $11.2 million primarily resulting from the gain from purchases of debt outstanding under the 2013 TermLoan Facility.Offsetting increases in operating cash included the following:•Cash paid for various operating expenses decreased due to our cost savings initiatives including, among others, cash paid for payroll of $27.5million, marketing of $4.6 million, repair and maintenance of $3.2 million, utilities of $3.0 million.•Cash paid for interest decreased by $4.5 million due to principal payments made on, and purchases of debt outstanding under the 2013 Term LoanFacility.•Cash paid for lease termination penalties decreased by $1.3 million.•Cash collected for recurring annual and rate lock fees increased by $3.8 million.•Cash collected for landlord contributions increased by $792,000.Net cash provided by operating activities for the year ended December 31, 2015 increased $20.1 million compared to the year ended December 31, 2014primarily due to the following.•Cash paid for income taxes decreased by $23.4 million primarily related to the legal sale of the East 86th Street property in the year ended December31, 2014, which was treated as a financing arrangement for accounting purposes, but recognized as of the date of sale for federal and state incometaxes at the time of the legal sale. We also received an income tax refund of $7.8 million in the year ended December 31, 2015.46Table of Contents•Cash collected for member enrollment, including the initial annual fee paid upon joining, increased by $10.8 million, which was related to theincrease in memberships sold, and recurring annual and rate lock fees collected increased by $1.6 million.•Cash collected for personal training memberships increased by $2.7 million.•Cash collected for the termination of a lease related to a future club opening increased by $3.1 million.•Accrued payroll expenses decreased by $4.9 million in 2014 and increased by $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.Investing Activities. Net cash used in investing activities decreased $11.6 million in the year ended December 31, 2016 compared to the year endedDecember 31, 2015, primarily due to the decreased activity in building new clubs as well as fewer clubs operating in the 2016 period. Also, the $1.1 millionfunding for a separation obligation was recorded as restricted cash in 2015, which generated a favorable cash variance for 2016.Net cash used in investing activities decreased $10.5 million in the year ended December 31, 2015 compared to the year ended December 31,2014. The decrease was primarily due to the decreased activity in the building of new clubs. The decrease also included a $1.1 million executive separationobligation related to our former Executive Chairman in 2015.The 2016 investing activities included approximately $5.0 million of capital expenditures related to 2016 and 2017 club openings, $5.0 million tocontinue to enhance or upgrade existing clubs, including approximately $1.8 million related to our new brand refresh completed at five clubs, andapproximately $2.8 million related to major renovations at clubs, including the purchase of new fitness equipment. We also invested approximately $3.3million related to the expansion of our laundry facility and $1.8 million to enhance our management information and communication systems, including ournew website and member application.The 2015 investing activities included approximately $9.1 million related to 2015 and 2016 openings, approximately $14.4 million to continue toenhance or upgrade existing clubs and $4.5 million principally related to major renovations at clubs, including the purchase of new fitness equipment. Inaddition, we invested $2.5 million to enhance our management information and communication systems.Capital expenditures are funded by cash flow from operations and available cash on hand.Financing Activities. Net cash used in financing activities for the year ended December 31, 2016 was $31.8 million compared to $10.5 million for theyear ended December 31, 2015. In the year ended December 31, 2016, TSI Holdings settled two transactions to purchase a total of $71.1 million principalamount of debt outstanding under the 2013 Senior Credit Facility for $29.8 million, or an average of 41.8% of face value. In the year ended December 31,2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under the 2013 Senior Credit Facility in the open market for $10.9million. The purchased debt described above was transferred to TSI, LLC and canceled. The total principal payments made on the 2013 Term Loan Facilitywere $2.3 million in the year ended December 31, 2016, compared to $3.0 million in the year ended December 31, 2015. In the year ended December 31,2015, financing activities also consisted of gross cash proceeds from the sale of the East 86th Street property of $4.0 million.Net cash used in financing activities for the year ended December 31, 2015 was $10.5 million compared to net cash provided by financing activities of$57.5 million for the year ended December 31, 2014, which was primarily related to the legal sale of the East 86th Street property in 2014 and the buyback ofdebt in 2015. In the years ended December 31, 2015 and 2014, we received gross cash proceeds related to the sale of the East 86th Street property of $4.0million and $83.4 million, respectively. The 2014 cash proceeds were partially offset by $3.2 million of real property transfer taxes, broker fees and othercosts associated with this property sale. In the year ended December 31, 2015, TSI Holdings used $10.9 million to purchase debt outstanding under the 2013Senior Credit Facility in the open market (see paragraph above). In addition, total principal payments made on the 2013 Term Loan Facility were $3.0million in the year ended December 31, 2015 compared to $16.7 million in the year ended December 31, 2014. Also, in the year ended December 31, 2015,we paid cash dividends to common stockholders of $213,000 and a $246,000 redemption price to the holders of the rights pursuant to a stockholder rightsplan, compared to a dividend payment of $7.9 million in the year ended December 31, 2014.47Table of Contents2013 Senior Credit FacilityOn November 15, 2013, TSI, LLC, an indirect, wholly-owned subsidiary, entered into the 2013 Senior Credit Facility, pursuant to a credit agreementamong TSI, LLC, TSI Holdings II, LLC, a newly-formed, wholly-owned subsidiary of the Company (“Holdings II”), as a Guarantor, the lenders party thereto,Deutsche Bank AG, as administrative agent, and Keybank National Association, as syndication agent. The 2013 Senior Credit Facility consists the 2013Term Loan Facility and the 2013 Revolving Loan Facility. Proceeds from the 2013 Term Loan Facility of $323.4 million were issued, net of an original issuediscount (“OID”) of 0.5%, or $1.6 million. Debt issuance costs recorded in connection with the 2013 Senior Credit Facility were $5.1 million and are beingamortized as interest expense and are recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheets. The Company alsorecorded additional debt discount of $4.4 million related to creditor fees. The proceeds from the 2013 Term Loan Facility were used to pay off amountsoutstanding under the Company’s previously outstanding long-term debt facility originally 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 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 2013Senior Credit Facility are guaranteed and secured by assets and pledges of capital stock by Holdings II, TSI, LLC, and, subject to certain customaryexceptions, 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 administrativeagent’s base 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 CreditFacility. With respect to the outstanding term loans, the Eurodollar Rate has a floor of 1.00% and the base rate has a floor of 2.00%. Commencing with thelast business 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 maybe reduced by voluntary prepayments. As of December 31, 2016, TSI LLC made a total of $22.0 million in principal payments on the 2013 Term LoanFacility.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 purchased by TSI Holdings will be canceled in accordance with the terms of the credit agreement, as amended by the Amendment.The Company may from time to time purchase term loans in market transactions, privately negotiated transactions or otherwise; however the Company isunder no obligation to make any such purchases. Any such transactions, and the amounts involved, will depend on prevailing market conditions, liquidityrequirements, contractual restrictions and other factors. The amounts involved may be material. As of December 31, 2016, TSI Holdings had a cash balance ofapproximately $506,000.In December 2015, TSI Holdings purchased $29.8 million principal amount of debt outstanding under the 2013 Senior Credit Facility in the openmarket for $10.9 million, or 36.7% of face value, which resulted in a gain on extinguishment of debt of $17.9 million, including the write-off of relateddeferred financing costs and debt discount of $249,000 and $707,000, respectively. On April 21, 2016, TSI Holdings settled a transaction to purchase $8.7million principal amount of debt outstanding under the 2013 Senior Credit Facility for $3.8 million, or 43.5% of face value. On May 6, 2016, TSI Holdingssettled another transaction to purchase $62.4 million principal amount of debt outstanding under the 2013 Senior Credit Facility for $26.0 million, or 41.6%of face value. The April and May transactions created gains on extinguishment of debt in 2016 of $37.9 million with a tax effect of $13.5 million. When thiswas netted with our operating loss, it resulted in a tax provision for 2016 of $9.8 million. The gain on extinguishment of debt was net of the write-off ofdeferred financing costs and debt discount of $545,000 and $1.6 million, respectively, and other costs related to the transaction. All of the above purchaseddebt was transferred to TSI, LLC and canceled.The terms of the 2013 Senior Credit Facility provide for a financial covenant in the situation where the total utilization of the revolving loancommitments (other than letters of credit up to $5.5 million at any time outstanding) exceeds 25% of the aggregate amount of those commitments. In suchevent, TSI, LLC is required to maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.50:1.00. As of December 31,2016, the total leverage ratio was slightly below 4.50:1.00. Other than $2.9 million of letters of credit, we did not have any amounts utilized on the 2013Revolving Loan Facility and therefore we were not subject to this financial covenant as of December 31, 2016. The terms of the 2013 Senior Credit Facilityinclude a financial covenant under which the Company is not able to utilize more than 25%, or $11.3 million, in accordance with terms of credit agreement,of the 2013 Revolving Loan Facility if the total leverage ratio exceeds 4.50:1:00 (calculated on a proforma basis to give effect to any borrowing). The 2013Senior Credit Facility also contains certain affirmative and negative covenants, including covenants that may limit or restrict TSI, LLC and Holdings II’sability to, among other things, incur indebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; make investments; pay dividendsand make payments to shareholders; make payments on certain indebtedness; and enter into sale leaseback transactions, in each case, subject to certainqualifications 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 ofTSI, LLC and Holdings II to, among other things,48Table of Contentsmake certain distributions of cash to TSI Holdings. The 2013 Senior Credit Facility also includes customary events of default (including non-compliancewith the covenants or other terms of the 2013 Senior Credit Facility) which may allow the lenders to terminate the commitments under the 2013 RevolvingLoan Facility and declare all outstanding term loans and revolving loans immediately 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 commencingin 2015 in certain circumstances relating to excess cash flow (as defined) for the prior fiscal year, as described below, in excess of certain expenditures.Pursuant to the terms of the 2013 Senior Credit Facility, the Company is required to apply net proceeds in excess of $30.0 million from sales of assets in anyfiscal year towards mandatory prepayments of outstanding borrowings. In connection with the sale of the East 86th Street property, accounted for as abuilding financing arrangement, described in Note 8 - Sale of Building to our consolidated financial statements in this Annual Report, the Company receivedapproximately $43.5 million in net sales proceeds (after taxes, before giving effect to utilization of net operating losses and carryforward). Accordingly, theCompany made a mandatory prepayment of $13.5 million on the 2013 Term Loan Facility in November 2014. In connection with this mandatoryprepayment, during the year ended December 31, 2014, the Company recorded loss on extinguishment of debt of $493,000, consisting of the write-off ofunamortized debt issuance costs and debt discount of $119,000 and $374,000, respectively, and was included in loss on extinguishment of debt in theaccompanying consolidated statements of operations for the year ended December 31, 2014. To the extent the proceeds of the sale of the East 86th Streetproperty were not reinvested within 30 months of the date of sale, the Company may have been required to use such amounts, other than amounts used in2014 to repay debt, to pay down its outstanding debt, as provided under the terms of its 2013 Senior Credit Facility. The Company has reinvested all theremaining net proceeds from the sale.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined, to be applied against outstanding2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days after the fiscal yearend. The applicable excess cash flow repayment percentage is applied to the excess cash flow when determining the excess cash flow payment. Earnings,changes in working capital and capital expenditure levels all impact the determination of any excess cash flow. The applicable excess cash flow repaymentpercentage 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 leverageratio is greater than or equal 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 excess cash flow calculationperformed as of December 31, 2016 did not result in any required payments.As of December 31, 2016, the 2013 Term Loan Facility has a gross principal balance of $202.0 million and a balance of $196.8 million net ofunamortized debt discount of $3.9 million and unamortized debt issuance costs of $1.3 million. As of December 31, 2016, both the unamortized balance ofdebt issuance costs and unamortized debt discount are recorded as a contra-liability to long-term debt on the accompanying condensed consolidated balancesheet and are being amortized as interest expense using the effective interest method.As of December 31, 2016, there were no outstanding 2013 Revolving Loan Facility borrowings and outstanding letters of credit issued totaled $2.9million. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2016 was $42.1 million, with borrowings under such facility subjectto the conditions applicable to borrowings under the Company’s 2013 Senior Credit Facility, which conditions the Company may or may not be able tosatisfy at the time of borrowing.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 ofsuch fluctuations on our cash flows, we may enter into derivative financial instruments (“derivatives”), such as interest-rate swaps. Derivatives are not enteredinto for trading purposes and we only use commonly traded instruments. Currently, we have used derivatives solely relating to the variability of cash flowsfrom interest rate fluctuations.We originally entered into an interest rate swap arrangement on July 13, 2011 in connection with a previous senior secured credit facility that has beenterminated. In connection with entering into the 2013 Senior Credit Facility, we amended and restated the interest rate swap agreement initially entered into(and amended in August 2012 and November 2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rateswap arrangement had a notional amount of $160.0 million and will mature on May 15, 2018. The swap effectively converts $160.0 million of the currentoutstanding principal of the total variable-rate debt under the 2013 Senior Credit Facility 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 this swap as a cash flow hedge, the effects of which have been reflected inour consolidated financial statements as of and for the49Table of Contentsyears ended December 31, 2016, 2015 and 2014. The objective of this hedge is to manage the variability of cash flows in the interest payments related to theportion of the variable-rate debt designated 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 withre-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, weperform 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, 2016, 2015 and 2014, hedge ineffectiveness was evaluated using the hypotheticalderivative method. There was no hedge ineffectiveness in the years ended December 31, 2016, 2015 and 2014.The counterparty to our derivatives is a major banking institution with a credit rating of investment grade or better and no collateral is required, andthere are no significant risk concentrations. We believe the risk of incurring losses on derivative contracts related to credit risk is unlikely.Consolidated DebtAs of December 31, 2016, our total principal amount of debt outstanding was $202.0 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;•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 RevolvingLoan Facility and partially variable on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing ourability to use our cash flow to fund working capital, capital expenditures and acquisitions of new clubs and general corporate requirements;•increasing our vulnerability to interest rate fluctuations in connection with borrowings under our 2013 Senior Credit Facility, some of which are 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 plans through the next 12 months. Anymaterial 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 acceptableterms.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 for gross proceeds of $85.7 million. Concurrent with the closing of the transaction, we entered into the Initial Lease and agreed to vacate the property inconnection with the purchaser's future development of a new luxury, high-rise multi-use building. In connection with vacating the property, we agreed toenter into the New Club Lease. This sale-leaseback transaction was characterized as a financing arrangement for accounting purposes rather than a sale untilany continuing involvement has ceased. In March 2015, we received the remaining proceeds that had been held in escrow of $500,000.On December 23, 2015, we terminated the Initial Lease and the agreement to enter into the New Club Lease and received gross proceeds of $3.5 millionin connection with the termination. 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 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 the consolidated statements of operations for the year ended December 31, 2015.50Table of ContentsContractual Obligations and CommitmentsAs of December 31, 2016, 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) $202,000 $2,082 $4,165 $195,753 $—Interest payments on long-term debt(2) 36,991 10,608 18,604 7,779 —Operating lease obligations(3) 565,279 89,846 162,337 131,794 181,302Total contractual obligations $804,270 $102,536 $185,106 $335,326 $181,302Notes:(1)Principal amounts paid each year may increase if annual excess cash flow amounts are required (as described above). Excess cash flow was calculated asof December 31, 2016 and no payments are currently required in 2017 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, 2016.(3)Operating lease obligations include base rent only. Certain leases provide for additional rent based on real estate taxes, common area maintenance anddefined amounts based on our operating results.(4)The table above does not reflect potential commitments in connection with our agreement with CYC Fitness Partners, LLC. Refer to Note 17 - OtherCommitments to our consolidated financial statements in this Annual Report.The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes (including uncertaintax positions or benefits), insurance accruals and other accruals. We are unable to estimate the timing of payments for these items.We had working capital deficit of $6.3 million as of December 31, 2016, compared to positive working capital of $27.9 million as of December 31,2015. Major components of our working capital deficit on the current liability side are deferred revenues, accounts payable, accrued expenses (including,among others, accrued payroll and occupancy costs), and the current portion of long-term debt. As of December 31, 2016, these current liabilities more thanoffset the current assets, which consist of cash and cash equivalents, accounts receivable, prepaid corporate income taxes, and prepaid expenses and othercurrent assets. This decrease of $34.3 million is primarily due to payment of cash for the purchases of long-term debt of $29.8 million as well as the decreasein prepaid income taxes of $5.4 million. The deferred revenue that is classified as a current liability relates to dues and services paid-in-full in advance andfees paid at the time of enrollment and totaled $34.6 million and $40.2 million at December 31, 2016 and December 31, 2015, respectively. Initiation andprocessing fees received are deferred and amortized over the estimated average membership life of a club member and all annual fees are deferred andamortized over a 12 month period. Prepaid dues and fees for prepaid services are generally realized over a period of up to 12 months. In periods when weincrease the number of members and consequently increase the level of payments received in advance, we would expect to see increased deferred revenuebalances. By contrast, any decrease in demand for our services or reductions in initiation fees collected would have the effect of reducing deferred revenuebalances, which would likely require us to rely more heavily on other sources of funding. In either case, a significant portion of the deferred revenue is notexpected to constitute a liability that must be funded with cash. At the time a member joins our club, we incur enrollment costs, a portion of which aredeferred over the estimated average membership life or 12 months to the extent these costs are related to the first annual fee paid at the time of enrollment orwithin the first month of membership. These costs are recorded as a long-term asset and as such do not affect working capital. We expect to record a workingcapital deficit in future periods and believe our cash and cash equivalents and our 2013 Senior Credit Facility, which includes a 2013 Revolving LoanFacility, are sufficient to fund our operating, investing and financing requirements for the next twelve months.Recent Changes in or Recently Issued Accounting StandardsFor details of applicable new accounting standards, please, see Note 3 — Recent Accounting Pronouncements to our consolidated financial statementsin this 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 requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities51Table of Contentsand disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during thereporting 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 intangibleassets, deferred income tax valuation, valuation of and expense incurred in connection with stock options, valuation of interest-rate swap arrangements,insurance reserves, legal contingencies and the estimated average membership life.Estimated average membership life. Initiation and processing fees, as well as related direct and incremental expenses of membership acquisition, whichmay include sales commissions, bonuses and related taxes and benefits, are deferred and recognized, on a straight-line basis, in operations over the estimatedaverage membership 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 over12 months. As of December 31, 2016, the average membership life was 25 months. The Company monitors factors that might affect the estimated averagemembership life including retention trends, attrition trends, membership sales volumes, membership composition, competition, and general economicconditions, and adjusts the estimate as necessary.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, whichare 30 years for building and improvements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computersoftware. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Payroll costsdirectly related to the construction or expansion of the Company’s locations are capitalized with leasehold improvements. Expenditures for maintenance andrepairs are charged to operations as incurred. The cost and related accumulated depreciation of assets retired or sold, is removed from the respective accountsand any gain or loss is recognized in operations. The costs related to developing web applications, developing web pages and installing or enhancingdeveloped applications on the web servers are capitalized and classified as computer software. Web site hosting fees and maintenance costs are expensed asincurred.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 Financial Accounting Standards Board (“FASB”) guidance. The Company’s long-lived assetsand liabilities are grouped at the individual club level, which is the lowest level for which there are identifiable cash flows. To the extent that estimatedfuture undiscounted net cash flows attributable to the assets are less than the carrying amount, an impairment charge equal to the difference between thecarrying value of such asset and their fair values is recognized.In the year ended December 31, 2016, 2015 and 2014, we recorded fixed asset impairment charges of $742,000, $14.6 million and $4.6 million,respectively. The fixed asset impairment charges are included as a component of operating expenses in a separate line on the condensed consolidatedstatements of operations. We will continue to monitor the performance of the clubs on a quarterly basis. If we under-perform against forecasts, we may recordadditional impairment charges in future quarters.Goodwill was allocated to reporting units that closely reflect the regions served by the Company’s four trade names: New York Sports Clubs, BostonSports Clubs, Washington Sports Clubs and Philadelphia Sports Clubs, with certain more remote clubs that do not benefit from a regional cluster beingconsidered single reporting units, and the Company’s three clubs located in Switzerland being considered a single reporting unit (“SSC”). As ofDecember 31, 2016, only the SSC region had a remaining goodwill balance.Both the February 29, 2016 and 2015 annual impairment tests supported the goodwill balance and as such no impairment of goodwill was required.The Company also performed an interim impairment test as of May 31, 2015 and concluded that there would be no remaining implied fair value of goodwillattributable to the NYSC and BSC regions. Accordingly, as of May 31, 2015, the Company wrote off $31,558 of goodwill associated with these reportingunits. The Company did not have a goodwill impairment charge in the SSC region as a result of the interim test given the profitability of this unit.2016 Impairment TestFor the February 29, 2016 impairment test, fair value was determined by using an income approach, as this was deemed to be the most indicative of theCompany’s fair value. Under this income approach, the Company determined fair value based on estimated future cash flows of the SSC reporting unit,discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return anoutside investor would expect to earn, which are unobservable Level 3 inputs. See Note 2 - Summary of Significant Accounting Policies to our consolidatedfinancial statements in this Annual Report. The discounted estimates of future cash flows include significant management assumptions such as revenuegrowth rates, operating margins, weighted average cost of capital, and future economic and market conditions. The estimated weighted-average cost ofcapital of SSC was 11.2% as of February 29, 2016. Determining the fair value of a52Table of Contentsreporting 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 separately for each reporting unit. The Company believes itsassumptions are reasonable, however, there can be no assurance that the Company’s estimates and assumptions made for purposes of the Company’s goodwillimpairment testing as of February 29, 2016 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue ormargin growth rates of certain reporting units are not achieved, the Company may be required to record goodwill impairment charges in future periods,whether in connection with the Company’s next annual impairment testing or prior to that, if any such change constitutes a triggering event outside thequarter when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result.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 theexisting club base. Terminal growth rates were calculated for years beyond the three year forecast. As of February 29, 2016, the Company used a terminalgrowth rate of 2%.2015 Impairment TestsFor the May 31, 2015 and February 28, 2015 impairment tests, fair value was determined by using a weighted combination of two market-basedapproaches (weighted 50% collectively) and an income approach (weighted 50%), as this combination was deemed to be the most indicative of theCompany’s fair value in an orderly transaction between market participants. Under the market-based approaches, the Company utilized information regardingthe Company, the Company’s industry as well as publicly available industry information to determine earnings multiples and sales multiples that are used tovalue the Company’s reporting units. Under the income approach, the Company determined fair value based on estimated future cash flows of each reportingunit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return anoutside investor would expect to earn, which are unobservable Level 3 inputs. The discounted estimates of future cash flows include significant managementassumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. The estimatedweighted-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 of significant estimates and assumptions, including revenuegrowth rates and operating margins, discount rates and future market conditions, among others. These assumptions were determined separately for eachreporting unit. The Company believes its assumptions are reasonable.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 theexisting club base. Terminal growth rates were calculated for years beyond the three year forecast. As of May 31, 2015, the Company used discount ratesranging from 8.2% to 11.2% and terminal growth rates ranging from 1.0% to 3.0%. As of February 28, 2015, the Company used discount rates rangingfrom 13.2% to 13.9% and terminal growth rates ranging from 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, market growth, operating cash flowsand discount rates, and future market conditions, among others. We will complete interim evaluations of the goodwill by reporting unit if a triggering eventexists.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 advisorsand is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjectiveand can involve matters that are in litigation, which, by its nature are unpredictable. We believe that our assessment of the probability of loss contingencies isreasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to beincorrect, which could materially impact the consolidated financial statements.Self-insurance reserves. We limit our exposure to casualty losses on insurance claims by maintaining liability coverage subject to specific andaggregate liability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon a number of factorsincluding sales estimates for each insurance year, claim amounts, claim settlements and number of claims, our historical loss experience and valuationsprovided by independent third-party consultants. To the extent that estimated self-insurance losses differ from actual losses realized, our insurance reservescould differ significantly and may result in either higher or lower insurance expense in future periods.53Table of ContentsDeferred income taxes. Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts andthe tax 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 hasbeen recorded 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 makingsuch determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected futuretaxable income, tax planning strategies and recent financial operations. Significant weight is given to positive and negative evidence that is objectivelyverifiable.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 consistentwith the plans and estimates we are using to manage our business. When actual results do not meet our forecasted results or there are changes to futurebusiness results, such changes can lead to a change in judgment related to the realization of the deferred tax asset.Based on the weight of the evidence at December 31, 2014, 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 wouldbe losses 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 lowermembership revenue. We continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth. However,because the accounting guidance for income taxes considers a projection of future earnings inherently subjective, it does not carry significant weight toovercome the objectively verifiable evidence of cumulative losses in recent years. Based on these factors, most notably the projected three year cumulativeloss, in the fourth quarter 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, 2016, we continue to maintain a full valuation allowance of $54.2 million against outstanding net deferred taxassets as the company continues to have a three year cumulative loss position excluding one-time extraordinary income and expense items.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 largestamount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated withunrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new oremerging legislation. Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact of changes inthe liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The number of years with open tax auditsvaries 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 liabilityfor unrecognized tax benefits is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in our tax provision andeffective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit or a recognized tax position under examination couldincrease the tax provision and effective tax rate and may require the use of cash in the period of resolution. Interest and penalties recognized on the liabilityfor unrecognized tax benefits is recorded as income 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 resultsof operations or financial condition. Should there be periods of high inflation in the future, our results of operations or financial condition would be exposedto the effects of inflation, such as higher rents for our leases under escalation terms based on the consumer price index and higher interest expense on thevariable rate portion 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. Weregularly evaluate our exposure to these risks and take measures to mitigate these risks on our consolidated financial results. We do not participate inspeculative derivative trading.Interest rates on borrowings for the 2013 Term Loan Facility are for one-month periods in the case of Eurodollar borrowings. Our exposure to marketrisk for changes in interest rates relates to interest expense on variable rate debt. As of December 31, 2016, we had $202.0 million of outstanding borrowingsunder our 2013 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. Changesin the fair value of the interest rate swap derivative instrument is recorded each period in accumulated other comprehensive income (loss). Based on54Table of Contentsthe amount of our variable rate debt and our interest rate swap agreement as of December 31, 2016, a hypothetical 100 basis point interest increase wouldincrease our annual interest cost by approximately $680,000.For additional information concerning the terms of our 2013 Term Loan Facility, see Note 7 - Long-Term Debt to our consolidated financial statementsin this 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 DisclosureNoneItem 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) and15d-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 usunder the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such informationis accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonableassurances of achieving the desired controls.As of December 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures defined above.Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2016, our disclosure controlsand procedures were effective at the reasonable assurance level.Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintainingadequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervisionand with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our management’sassessment using those criteria, our management concluded that, as of December 31, 2016, 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 thepreparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherentlimitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financialreporting as of December 31, 2016, 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, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.55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 thefollowing sections of the Company’s definitive Proxy Statement relating to the Company’s 2016 Annual Meeting of Stockholders to be filed with the SECwithin 120 days of the Company’s fiscal year ended December 31, 2015 (the “Proxy Statement”): “Matters to be Considered at Annual Meeting —Proposal One — Election of Directors,” “Corporate Governance and Board Matters — Corporate Governance Documents,” “Corporate Governance and BoardMatters — Committee Membership — Audit Committee,” “Section 16(A) Beneficial Ownership Reporting Compliance,” “Executive Officers,” and“Deadline for Receipt of Stockholder Proposals.”The following are the members of our Board of Directors and our Executive Officers:Board of Directors: Patrick Walsh Chairman and Chief Executive Officer, Town Sports International Holdings, Inc.and Chief Executive Officer, PW Partners Atlas Funds, LLCMartin Annese Principal, MJA Consulting, LLCJason M. Fish Chief Investment Officer and member, Alliance Partners, LLCThomas J. Galligan III Former Executive Chairman, Papa Gino’s Holdings Corp.Spencer Wells Partner, Drivetrain Advisors, LLC Executive Officers: Patrick Walsh Chief Executive 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:“Executive Compensation.”The information with respect to compensation of directors is incorporated herein by reference to the following section of the Proxy Statement:“Corporate Governance and Board Matters — Directors’ Compensation for the 2016 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 sectionof the Proxy 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 followingsection of 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 thefollowing sections of the Proxy Statement: “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters — DirectorIndependence.”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 ProxyStatement: “Matters to be Considered at Annual Meeting — Proposal Two — Ratification of Independent Registered Public Accounting Firm.”56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, 2016 and 2015 F-3 Consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 F-4 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014 F-5 Consolidated statements of stockholders’ deficit for the years ended December 31, 2016, 2015 and 2014 F-6 Consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014 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 notesthereto.(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-35 of this AnnualReport.57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 February 22, 2017. TOWN SPORTS INTERNATIONAL HOLDINGS, INC. By: /s/ PATRICK WALSH Chairman and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date By: /s/ PATRICK WALSH Chairman and Chief Executive Officer February 22, 2017 Patrick Walsh (principal executive officer) By: /s/ CAROLYN SPATAFORA Chief Financial Officer February 22, 2017 Carolyn Spatafora (principal financial and accounting officer) By: /s/ MARTIN ANNESE Director February 22, 2017 Martin Annese By: /s/ JASON M. FISH Director February 22, 2017 Jason M. Fish By: /s/ THOMAS J. GALLIGAN III Director February 22, 2017 Thomas J. Galligan III By: /s/ L. SPENCER WELLS Director February 22, 2017 L. Spencer Wells 58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, 2016 and 2015F-3 Consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014F-4 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014F-5 Consolidated statements of stockholders’ deficit for the years ended December 31, 2016, 2015 and 2014F-6 Consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014F-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 itssubsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Companymaintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in InternalControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company'smanagement is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control Over Financial Reporting appearingunder Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting basedon our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statementsincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it presents deferred income taxes in 2016.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate./s/ PRICEWATERHOUSECOOPERS LLPNew York, New YorkFebruary 22, 2017F-2Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2016 and 2015(All figures in thousands except share and per share data) 2016 2015ASSETSCurrent assets:Cash and cash equivalents$45,596$76,217Accounts receivable, net1,2211,923Inventory238337Deferred tax assets—1,549Prepaid corporate income taxes1,5056,895Prepaid expenses and other current assets10,27413,170Total current assets58,834100,091Fixed assets, net170,580195,341Goodwill1,0081,025Intangible assets, net135171Deferred tax assets—219Deferred membership costs1,0923,029Other assets4,2293,225Total assets$235,878$303,101LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Current portion of long-term debt$2,082$2,810Accounts payable2,4772,615Accrued expenses25,90726,129Accrued interest119129Deferred revenue34,57240,225Deferred tax liabilities— 236Total current liabilities65,15772,144Long-term debt194,743263,930Deferred lease liabilities49,66051,136Deferred tax liabilities611,593Deferred revenue440319Other liabilities11,48710,224Total liabilities321,548399,346Commitments and Contingencies (Note 14)Stockholders’ deficit:Preferred stock, $0.001 par value; no shares issued and outstanding at both December 31, 2016 andDecember 31, 2015Common stock, $0.001 par value; issued and outstanding 26,560,547 and 24,818,786 shares atDecember 31, 2016 and 2015, respectively2424Additional paid-in capital(6,261)(8,386)Accumulated other comprehensive loss(168)(523)Accumulated deficit(79,265)(87,360)Total stockholders’ deficit(85,670)(96,245)Total liabilities and stockholders’ deficit$235,878$303,101See notes to consolidated financial statements.F-3Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYears Ended December 31, 2016, 2015 and 2014(All figures in thousands except share and per share data) 201620152014Revenues:Club operations$390,560$418,069$447,871Fees and other6,3616,2545,971 396,921424,323453,842Operating Expenses:Payroll and related149,029175,898177,009Club operating185,104196,725192,716General and administrative24,70230,68331,352Depreciation and amortization43,72747,88747,307Impairment of fixed assets742 14,571 4,569Impairment of goodwill— 31,558 137Gain on sale of building— (77,146) —Gain on lease termination— (2,967) — 403,304417,209453,090Operating (loss) income(6,383)7,114752(Gain) loss on extinguishment of debt(37,893)(17,911)493Interest expense13,94020,57919,039Interest income(2)——Equity in the earnings of investees and rental income(242)(2,361)(2,402)Income (loss) before provision (benefit) for corporate income taxes17,8146,807(16,378)Provision (benefit) for corporate income taxes9,771(14,351)52,611Net income (loss)$8,043$21,158$(68,989)Earnings (loss) per share:Basic$0.31$0.86$(2.84)Diluted$0.31$0.84$(2.84)Weighted average number of shares used in calculating earnings (loss) per share:Basic25,568,37124,630,89824,266,407Diluted26,074,73525,114,05724,266,407Dividends declared per common share$—$—$0.32See 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, 2016, 2015 and 2014(All figures in thousands) 2016 2015 2014Net income (loss)$8,043 $21,158 $(68,989)Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of tax of $0 for the years ended in December31, 2016, 2015 and 2014(176) (165) (545)Interest rate swap, net of tax of $0 for the years ended in December 31, 2016, 2015 and2014531 (753) (1,112)Total other comprehensive income (loss), net of tax355 (918) (1,657)Total comprehensive income (loss)$8,398 $20,240 $(70,646)See notes to consolidated financial statements.F-5Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITYears Ended December 31, 2016, 2015 and 2014(All figures in thousands except share and per share data) Common Stock($.001 par) AdditionalPaid-inCapital AccumulatedOtherComprehensiveIncome RetainedEarnings(Deficit) TotalStockholders’(Deficit) Equity Shares Amount Balance at December 31, 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 and restricted 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 and restricted 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)Stock option exercises226,011 — 318 — — 318Common stock grants206,750 — 246 — — 246Restricted stock grants1,711,000 — — — — —Forfeiture of restricted stock(402,000) — — — — —Compensation related to stock options and restricted stock grants— — 1,561 — — 1,561Dividend forfeitures— — — — 52 52Net income— — — — 8,043 8,043Derivative financial instruments— — — 531 — 531Foreign currency translation adjustment— — — (176) — (176)Balance at December 31, 201626,560,547 24 (6,261) (168) (79,265) (85,670)See notes to consolidated financial statements.F-6Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31, 2016, 2015 and 2014(All figures in thousands)201620152014Cash flows from operating activities:Net income (loss)$8,043 $21,158 $(68,989)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization43,727 47,887 47,307Impairment of fixed assets742 14,571 4,569Impairment of goodwill— 31,558 137Gain on sale of building— (77,146) —(Gain) loss on extinguishment of debt(37,893) (17,911) 493Amortization of debt discount1,006 1,288 1,304Amortization of debt issuance costs644 778 627Amortization of building financing costs— 124 31Noncash rental income, net of non-cash rental expense(3,617) (3,647) (5,399)Share-based compensation expense1,807 1,386 1,911Net change in deferred taxes— (11,519) 40,129Net change in certain operating assets and liabilities1,500 9,185 (20,994)Decrease in membership costs1,937 4,367 1,329Landlord contributions to tenant improvements2,080 1,288 1,684Increase in insurance reserves1,130 1,087 482Other84 416 137Total adjustments13,147 3,712 73,747Net cash provided by operating activities21,190 24,870 4,758Cash flows from investing activities: Capital expenditures(19,723) (30,471) (42,054)Change in restricted cash— (1,100) —Other(280) — —Net cash used in investing activities(20,003) (31,571) (42,054)Cash flows from financing activities: Proceeds from building financing arrangement— 4,000 83,400Building financing arrangement costs— — (3,160)Principal payments on 2013 Term Loan Facility(2,266) (3,038) (16,716)Repurchase of 2013 Term Loan Facility(29,765) (10,947) —Debt issuance costs— (350) —Cash dividends paid(50) (213) (7,877)Redemption paid pursuant to the Rights Plan— (246) —Proceeds from stock option exercises318 283 133Tax benefit from restricted stock vesting— — 1,723Net cash (used in) provided by financing activities(31,763) (10,511) 57,503Effect of exchange rate changes on cash(45) (23) (353)Net (decrease) increase in cash and cash equivalents(30,621) (17,235) 19,854Cash and cash equivalents beginning of period76,217 93,452 73,598Cash and cash equivalents end of period$45,596 $76,217 $93,452Summary of the change in certain operating assets and liabilities: Decrease in accounts receivable$763 $1,446 $25Decrease (increase) in inventory99 219 (101)Decrease (increase) in prepaid expenses and other current assets2,997 596 (1,549)(Decrease) Increase in accounts payable, accrued expenses and accrued interest(2,298) 1,011 (9,856)Change in prepaid corporate income taxes and corporate income taxes payable5,471 4,774 (12,773)(Decrease) increase in deferred revenue(5,532) 1,139 3,260Net change in certain working capital components$1,500 $9,185 $(20,994)See notes to consolidated financial statements.F-7Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016, 2015 and 2014(In thousands except share and per share data)1. Basis of PresentationAs of December 31, 2016, Town Sports International Holdings, Inc. (the “Company” or “TSI Holdings”), through its wholly-owned subsidiary, TownSports International, LLC (“TSI, LLC”), operated 150 fitness clubs (“clubs”). The clubs are composed of 102 clubs in the New York metropolitan marketunder the “New York Sports Clubs” brand name, 28 clubs in the Boston market under the “Boston Sports Clubs” brand name, 12 clubs (one of which ispartly-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, 2016.The Company’s operating segments are New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs, Washington Sports Clubs and theclubs the Company owns in Switzerland, which is the level at which the chief operating decision makers review discrete financial information and makedecisions about segment profitability based on earnings before income tax depreciation and amortization. The Company has determined that these operatingsegments have similar economic characteristics and meet the criteria which permit them to be aggregated into one reportable segment.Beginning in the first quarter of 2016, the Company's chief operating decision maker discontinued the review of BFX Studio financial informationseparately for purposes of making operating decisions and assessing financial performance. Also, in the second half of 2016, all BFX Studio locations wereconverted to clubs, discontinuing the BFX Studio brand. Accordingly, the Company manages and reports results through one reportable segment. Previously,the Company managed and reported results through two reportable segments: clubs and BFX Studio.Certain reclassifications were made to the reported amounts on the condensed consolidated balance sheet as of December 31, 2015 to conform to thepresentation as of December 31, 2016.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 higherrates will continue to negatively impact the Company's results and liquidity if these trends are not reversed. In response to this, the Company initiated costsavings initiatives in 2015 that continued through 2016 to help mitigate the impact the decline in revenue has had on its profitability and cash flow fromoperations.In December 2015, TSI Holdings purchased $29,829 principal amount of debt outstanding under its senior credit facility in the open market for$10,947, or 36.7% of face value. On April 21, 2016, TSI Holdings settled a transaction to purchase $8,705 principal amount of debt outstanding under thesenior credit facility for $3,787, or 43.5% of face value. On May 6, 2016, TSI Holdings settled another transaction to purchase $62,447 principal amount ofdebt outstanding under the senior credit facility for $25,978, or 41.6% of face value. All of the above purchased debt was transferred to TSI, LLC andcanceled.The Company’s ability to fund operations and capital expenditures 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 to fundanticipated capital expenditures and currently scheduled debt service for at least the next 12 months. Failure to maintain club equipment could lead todecreased member satisfaction and increased member attrition and could therefore negatively affect future operating results and cash generated fromoperations. As further described in Note 7 - Long-Term Debt, the Company maintains a senior credit facility with its lenders which contains a term loanfacility and a revolving loan facility. The term loan facility carries a gross principal balance of $202,000 and will mature on November 15, 2020. The terms ofthe senior credit facility include a financial covenant under which the Company is not able to utilize more than 25%, or $11,250 in accordance with terms ofthe credit agreement, of the revolving loan facility if the total leverage ratio (as defined in the credit agreement) exceeds 4.50:1.00 (calculated on a proformabasis to give effect to any borrowing). As of December 31, 2016, the total leverage ratio was slightly below 4.50:1.00. Any new borrowings on the revolvingloan facility would be pursuant to the terms and subject to the conditions applicable to borrowings under the Company’s senior credit facility, whichconditions the Company may or may not be able to satisfy at the time of borrowing. The revolving loan facility is scheduled to mature in November 2018and under this facility we have $2,851 in letters of credit that, if still outstanding, will likely need to be funded by the Company's cash.F-8Table of ContentsThe Company continues to focus on increasing membership in existing clubs to increase revenue. The Company may consider additional actionswithin its control, including the sale of certain assets, club acquisitions, additional club closures and entering into arrangements with revenue generatingpartnerships, some of which will utilize a “shop-in-shop” concept. The Company may also consider additional strategic alternatives including opportunitiesto reduce TSI, LLC's existing debt and further cost savings initiatives, among other possibilities, if any. The Company’s ability to continue to meet itsobligations 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 the Company's liquidity and its operations and the Company would need toimplement alternative plans that could include additional asset sales, additional reductions in operating costs, further reductions in working capital, debtrestructurings and deferral of capital expenditures. There can be no assurance that such alternatives would be available to the Company or that the Companywould be successful in their implementation.2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements include the accounts of TSI Holdings and all wholly-owned subsidiaries. All intercompanyaccounts and transactions have been eliminated in consolidation. Revenue RecognitionThe Company generally receives one-time non-refundable joining fees and monthly dues from its members. The Company offers both month-to-monthand one-year commit memberships. Members can cancel their membership with a fee charged to those still under contract. Membership dues are recognizedin the period in which access to the club is provided.The Company's membership plans allow for club members to elect to pay a per visit fee to use non-home clubs. These usage fees are recorded tomembership revenue in the month the usage occurs. Usage fees recorded were $1,015, $719 and $2,248 for the years ended December 31, 2016, 2015 and2014, respectively.Initiation and processing fees, as well as related direct and incremental expenses of membership acquisition, which include sales commissions, bonusesand related taxes and benefits, are deferred and recognized, on a straight-line basis, in operations over the estimated average membership life or 12 months tothe extent these costs are related to the first annual fee paid within one month of enrollment. Annual fees are amortized over 12 months. Deferred membershipcosts were $1,092 and $3,029 at December 31, 2016 and 2015, respectively.The average membership life was 25 months for the year ended December 31, 2016, and 22 months for the years ended December 31, 2015 and 2014.The Company monitors factors that might affect the estimated average membership life including retention trends, attrition trends, membership salesvolumes, membership composition, competition, and general economic conditions, 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 expireafter 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 theCompany that it is considering whether the Company is required to remit the amount collected for unused, expired personal training sessions to the State ofNew York as unclaimed property. As of December 31, 2016 and 2015, the Company had approximately $15,079 and $14,968, respectively, of unused andexpired personal training sessions. We have not recognized any revenue from these sessions and have recorded the amounts as deferred revenue. TheCompany does not believe that these amounts are subject to the escheatment or abandoned property laws of any jurisdiction, including the State of NewYork. However, it is possible that one or more of these jurisdictions may not agree with the Company’s position and may claim that the Company must remitall or a portion of these amounts to such jurisdictions. 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 four to 12 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 ratablyover this 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 eightmanaged sites. Revenue generated from managed sites was $1,892, $1,802 and $1,502 for the years ended December 31, 2016, 2015 and 2014, 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 $3,112 and $3,900 as of December 31, 2016and 2015, 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 relatedto television and radio advertisements, which are expensed when the related commercials are first aired. Total advertising costs incurred by the Company forthe years ended December 31, 2016, 2015 and 2014 totaled $6,384, $11,057 and $7,903, 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 balanceof at least $250. Cash related to this wholly-owned subsidiary of $276 and $275 are included in cash and cash equivalents at December 31, 2016 and 2015,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 thelife of the lease beginning upon the commencement date of the lease. Rent concessions, primarily received in the form of free rental periods, are also deferredand amortized on a straight-line basis over the life of the lease.The Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In addition tobase rent, the facility leases generally provide for additional rent to cover common area maintenance charges incurred and to pass along increases in realestate taxes. The Company accrues for any unpaid common area maintenance charges and real estate taxes on a club-by-club basis.Upon entering into certain leases, the Company receives construction allowances from the landlord. These construction allowances are recorded asdeferred lease liability credits on the balance sheet when the requirements for these allowances are met as stated in the respective lease and are amortized as areduction of rent expense over the term of the lease. Amortization of deferred construction allowances were $3,190, $2,920 and $2,771 as of December 31,2016, 2015 and 2014, 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 inexcess of defined break-points during a specified year. The Company records contingent rent expense over the related contingent rental period at the time therespective contingent targets are probable of being met.Lease termination gains and losses are recognized at fair value based on the expected settlement amount with the landlord when the Companyterminates the contract before the lease termination date. In closing a club, the Company discontinues operating 30 days prior to giving back the space to thelandlord, and uses this time to remove equipment and clean the premises. Accordingly, lease termination gains and losses related to certain club closures alsoinclude one month additional rent to the landlord. The Company recorded $329, $1,550 and $1,482 of lease termination losses in the years endedDecember 31, 2016, 2015 and 2014. In the year ended December 31, 2014, the lease termination losses of $1,482 was partially offset by write-offs of deferredrent at clubs with early lease terminations of $2,924, which resulted in a lease termination gain of $1,442. The above lease termination gains (losses) wereincluded in Club operating expenses in the accompanying consolidated statements of operations for each respective year.F-10Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In the year ended December 31, 2015, in addition to the $1,550 lease termination losses recorded in Club operating expenses in the accompanyingstatements of operations, the Company also recorded an additional $2,967 net gain on lease termination in a separate line item on the accompanyingconsolidated statements of operations. This net gain on lease termination was related to the termination of a lease for a planned club opening that was not yeteffective. The Company received one-time gross proceeds of $3,090 from a landlord related to this lease termination in November 2015.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable consists of amounts due from the Company’s membership base and was $4,133 and $5,056 at December 31, 2016 and 2015,respectively, before the allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from theinability of the Company’s customers to make required payments. The Company considers factors such as: historical collection experience, the age of thereceivable balance and 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, 2016, 2015 and 2014: Balance Beginningof the Year Additions Write-offs Net ofRecoveries Balance atEnd of YearDecember 31, 2016$3,133 $6,704 $(6,925) $2,912December 31, 2015$2,511 $11,237 $(10,615) $3,133December 31, 2014$2,309 $9,826 $(9,624) $2,511InventoryInventory primarily consists of cleaning and locker room supplies. Inventories are valued at the lower of costs 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. Leaseholdimprovements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Payroll costs directly related to theconstruction or expansion of the Company’s club base 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 onthe web servers are capitalized and classified as computer software. Web site hosting fees and maintenance costs are expensed as incurred.Intangible Assets and Debt Issuance 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 25months, management contracts are amortized over their current contractual lives of between nine and 11 years and trade names are amortized over theirestimated useful lives 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 toseven years, using the interest method. Amortization of debt issue costs was $644, $778 and $627, for the years ended December 31, 2016, 2015 and 2014,respectively. Building financing costs were classified within other assets and were being amortized as additional interest expense over the life of theunderlying financing arrangement, 25 years, using the interest method. Amortization of building financing costs was $124 and $31 for the years endedDecember 31, 2015 and 2014. There was no amortization of building financing costs in December 31, 2016. 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 was included in Gain on sale of building in theaccompanying 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 valuationtechniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect theCompany’s market assumptions. These two types of inputs create the following fair value hierarchy:•Level 1 — Quoted prices for identical instruments in active markets.•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active;and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.•Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determiningfair value.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 valuemay not be recoverable. Estimated undiscounted expected future cash flows are used to determine if an asset group is impaired, in which case the assetcarrying value would be reduced to its fair value, calculated considering a combination of market approach and a cost approach. In determining therecoverability of fixed assets Level 3 inputs were used in determining undiscounted cash flows, which are based on internal budgets and forecasts through theend of the life of the primary asset in the asset group which is normally the life of leasehold improvements. The most significant assumptions in those budgetsand forecasts relate to estimated membership and ancillary revenue, attrition rates, discount rates, income tax rates, estimated results related to new programlaunches and maintenance capital expenditures, which are generally estimated at approximately 2% of total revenues depending upon the conditions andneeds of a given club. If the Company continues 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 orgroup of clubs. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-20, Intangibles – Goodwill and Other,requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. TheCompany’s impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value.Goodwill impairment testing is a two-step process. Prior to performing this two-step process, companies also have the option to apply a qualitativeapproach to assess goodwill for impairment. Under the qualitative approach, an entity has the option to first assess qualitative factors to determine whetherthe existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carryingamount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the estimated fair value of a reportingunit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Companies that do not elect to perform the qualitativeapproach may proceed directly to the two-step process. Step 1 involves comparing the estimated fair value of the Company’s reporting units to their carryingamounts. If the estimated fair value of the reporting unit is greater than its carrying amount, there is no requirement to perform Step 2 of the impairment test,and there is no impairment. If the reporting unit’s carrying amount is greater than the estimated fair value, the second step must be completed to measure theamount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the estimated fair value of all tangible and intangible assets,excluding goodwill, of the reporting unit from the estimated fair value of the reporting unit as determined in Step 1. The implied fair value of goodwilldetermined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, animpairment charge is recognized equal to the difference. The Company performs this analysis annually as of the last day of February and in the interim if atriggering event occurs. The February 29, 2016 annual impairment test supported the goodwill balance and as such no impairment of goodwill was required.For the February 29, 2016 impairment test, fair value was determined by using an income approach, as this was deemed to be the most indicative of theCompany’s fair value. Under the income approach, the Company determined fair value based on estimated future cash flows of each reporting unit,discounted by an estimated weighted-average cost of capital, which reflectsF-12Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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, weightedaverage cost of capital, and future economic and market conditions. Determining the fair value of a reporting unit is judgmental in nature and requires the useof significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others.These assumptions were 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 Companydeveloped long-range financial forecasts (three years) for all reporting units and assumed known changes in the existing club base. Terminal growth rateswere calculated for years beyond 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 retainsa portion of risk internally related to general liability losses. Where the Company retains risk, provisions are recorded based upon the Company’s estimates ofits ultimate 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 thisconnection, under the provision of the deductible agreement related to the payment and administration of the Company’s insurance claims, we are required tomaintain irrevocable letters of credit, totaling $615 as of December 31, 2016 and 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 atthe dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from thoseestimates.The most significant assumptions and estimates relate to the useful lives of long-term assets, recoverability and impairment of fixed and intangibleassets, deferred income tax valuation, valuation of and expense incurred in connection with stock options, valuation of interest-rate swap arrangements,insurance reserves, legal contingencies and the estimated average membership life and the underlying forecasts for these assumptions and estimates.Income TaxesDeferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statementsor tax returns. The Company also recognizes deferred tax in relation to the U.S. taxes on the total cumulative earnings of the Company's Swiss clubs. Deferredtax liabilities and assets are determined on the basis of the difference between the financial statement and tax basis of assets and liabilities (“temporarydifferences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. A valuation allowance is recorded to reducedeferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive andnegative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recentfinancial operations. Based on the weight of the evidence at December 31, 2014, the Company was projected to be in a cumulative loss during the three yearperiod ending in December 31, 2015, which was considered a significant piece of negative evidence, the Company recorded a $60,368 non-cash charge toincome tax expense to establish a full valuation allowance against its U.S. net deferred tax assets in the fourth quarter of 2014. As of December 31, 2016, theCompany continues to maintain a full valuation allowance of $54,193 against outstanding net deferred tax assets as the company continues to have a threeyear cumulative loss position excluding one-time extraordinary income and expense items.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,disclosure and 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, 2016 20152014Cash paid: Interest paid (net of amounts capitalized)$12,289 $16,749 $17,103Income taxes paid$11,286 $105 $23,553Cash received: Income taxes refund$6,985 $7,768 $—Noncash investing and financing activities: Acquisition of fixed assets included in accounts payable and accrued expenses$2,058 $2,031 $4,822Note: Interest includes cash payments under the Initial Lease (as defined below) resulting from the sale of the East 86th Street property in the years endedDecember 31, 2015 and 2014. See Notes 7 and 8 for additional noncash financing 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 otherevents and circumstances from non-owner sources, including changes in the fair value of the Company’s derivative financial instrument and foreign currencytranslation adjustments. 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. Thederivative financial instrument is recorded at fair value on the balance sheet and changes in the fair value are either recognized in accumulated othercomprehensive income (a component of shareholders’ equity) or net income depending on the nature of the underlying exposure, whether the hedge isformally designated as a hedge, and if designated, the extent to which the hedge is effective. The Company’s derivative financial instrument has beendesignated as a cash flow hedge. See Note 9 - Derivative Financial Instruments for more information on the Company’s risk management program andderivatives.At December 31, 2016, 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 exchangerate for the period. For all periods presented, foreign exchange transaction gains and losses were not material. Adjustments resulting from the translation offoreign functional currency financial statements into U.S. dollars are included in the currency translation adjustment in the consolidated statements ofstockholders’ deficit and the consolidated statements of comprehensive income (loss). The effect of foreign exchange translation adjustments was $(176), netof tax of $0; $(165), net of tax of $0 and $(545), net of tax of $0, for the years ended December 31, 2016, 2015 and 2014, 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 rateswap. Although the Company deposits its cash with more than one financial institution, as of December 31, 2016, $20,965 of the cash balance of $45,596was held at one financial institution. The Company has not experienced any losses on cash and cash equivalent accounts to date, and the Company believesthat, based on the credit ratings of these financial institutions, it is not exposed to any significant credit risk related to cash at this time.The counterparty to the Company’s interest rate swap is a major banking institution with a credit rating of investment grade or better and no collateral isrequired, and there are no significant risk concentrations. The Company believes the risk of incurring losses on derivative contracts related to credit risk isunlikely.Earnings (Loss) Per ShareBasic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) applicable to common stockholders by the weighted average numbersof shares of common stock outstanding during the period. Diluted EPS is computed similarly toF-14Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)basic EPS, except that the denominator is increased for the assumed exercise of dilutive stock options and unvested restricted stock calculated using thetreasury stock method.The following table summarizes the weighted average common shares for basic and diluted EPS computations. For The Year Ended December 31, 2016 2015 2014Net income (loss)$8,043 $21,158 $(68,989)Weighted average number of common share outstanding — basic25,568,371 24,630,898 24,266,407Effect of dilutive share-based awards506,364 483,159 —Weighted average number of common shares outstanding — diluted26,074,735 25,114,057 24,266,407Earnings (loss) per share: Basic$0.31 $0.86 $(2.84)Diluted$0.31 $0.84 $(2.84)For the years ended December 31, 2016 and December 31, 2015, the Company did not include options to purchase 810,571 and 276,846 shares of theCompany’s common stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than the average marketprice and such inclusion would be anti-dilutive. For the year ended December 31, 2014, there was no effect of diluted stock options and unvested restrictedcommon stock on the calculation of diluted EPS as the Company had a net loss for this period. There would have been 378,285 anti-dilutive shares for thisperiod had the Company not been in a net loss position.Stock-Based CompensationThe Company accounts for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718requires that the cost resulting from all share-based payment transactions be treated as compensation and recognized in the consolidated financial statements.We record share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. Thefair value of stock options is determined using the Black-Scholes option-pricing model. The assumptions in the Black-Scholes model include risk-freeinterest rate, the Company's expected stock price volatility over the term of the awards, expected term of the award, and dividend yield. The fair value of therestricted stock awards is based on the closing price of the Company’s common stock on the date of the grant.3. Recent Accounting PronouncementsIn August 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of CertainCash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force).” This ASU provides specific guidance over eight identified cashflow issues. This standard is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption ofthis guidance is not expected to have a material impact on the Company's financial statements.In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” Under this standard, all excess taxbenefits and tax deficiencies will be recorded as an income tax expense or benefit in the income statement in the period in which the awards vest or areexercised. Excess tax benefits will be classified as an operating activity in the statement of cash flows. The standard also allows an entity to elect anaccounting policy to either estimate the number of forfeitures or account for forfeitures when they occur. In addition, entities can withhold up to themaximum individual statutory tax rate without classifying the awards as a liability. This standard is effective for interim and annual reporting periodsbeginning after December 15, 2016, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on theCompany's financial statements.In February 2016, the FASB issued ASU No. 2016-02, “Leases (topic 842),” to increase transparency and comparability among organizations byrecognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard is effective forannual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of this standard is permitted. TheCompany is evaluating the impact of this standard on its financial statements.F-15Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred taxliabilities and assets be classified as noncurrent in a classified statement of financial position. This standard is effective for annual periods beginning afterDecember 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company has prospectively adopted this change inaccounting principle for the fiscal year beginning January 1, 2016. Prior periods were not retrospectively adjusted. The adoption of this standard did not havea material impact on the Company's consolidated financial statements as it only pertains to a change in the balance sheet presentation of deferred taxes.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 relateddebt liability 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-Credit Arrangements.” ASU 2015-15 clarifies that the Securities Exchange Commission (the “SEC”) would not object to the deferral and presentation of debtissuance costs as an asset and subsequent amortization of debt issuance costs over the term of the line-of-credit arrangement, whether or there are anyoutstanding borrowings on the line-of-credit arrangement. These standards are effective for annual reporting periods beginning after December 15, 2015. TheCompany has retrospectively adopted this change in accounting principle for the fiscal year beginning January 1, 2016 and accordingly reclassified $2,259of deferred financing costs from other assets to long-term debt on its consolidated balance sheet as of December 31, 2015. The adoption of this amendedguidance did not impact the Company's consolidated financial position, results of operations or cash flows.In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 35-40): Customer's Accountingfor Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes asoftware license. If an arrangement includes a software license, the accounting for the license will be consistent with licenses of other intangible assets. If thearrangement does not include a license, the arrangement will be accounted for as a service contract. ASU 2015-05 is effective for interim and annual periodsbeginning after December 15, 2015. The Company adopted the updated guidance for the fiscal year beginning January 1, 2016 with no impact on theCompany’s 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 generallyaccepted accounting principles in the U.S. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinaryoperations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose incometaxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for anevent that is unusual in nature or infrequent in occurrence. This guidance is effective for interim and annual periods beginning after December 15, 2015.Early adoption was permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company adopted the updatedguidance for the fiscal year beginning January 1, 2016 with no 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 moreakin to debt or to equity. The ASU is effective for annual periods and interim periods with those annual periods beginning after December 15, 2015, withearly adoption permitted. The Company adopted the updated guidance for the fiscal year beginning January 1, 2016 with no impact on the Company’sfinancial 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.” Thestandard requires management to evaluate, at each annual and interim reporting period, the Company’s ability to continue as a going concern within one yearof the date the financial statements are issued and provide related disclosures. This guidance is effective for the annual period ending after December 15,2016 and for annual periods and interim periods thereafter. The adoption of this amended guidance did not impact the Company’s financial statements.However, it will be required to evaluate and determine if further disclosure is necessary at each balance sheet date beginning December 31, 2016.F-16Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). The standard provides a single,comprehensive revenue recognition model for all contracts with customers and supersedes current revenue recognition guidance. The revenue standardcontains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that anentity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange forthose goods or services. The new standard also includes enhanced disclosures which are significantly more comprehensive than those in existing revenuestandards. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 for all entities by one year, to annualreporting periods beginning after December 15, 2017. Early adoption will be permitted for annual reporting periods beginning after December 15, 2016. Thestandard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption,meaning the standard is applied only to the most current period presented in the financial statements. In addition, the FASB issued ASU 2016-08, ASU 2016-10, and ASU 2016-12 in March 2016, April 2016, and May 2016, respectively, to help provide interpretive clarifications on the new guidance in ASC Topic606. To date, the Company has formed a committee to evaluate the impact on its financial statement and has preliminarily concluded that it will notsignificantly affect how revenue for contracts with customers is recognized. At this time, the Company does not plan to early adopt this guidance and has notdetermined the transition method that will be used. During 2017, the Company plans to further evaluate the transition approach and consider its method ofadoption.4. Fixed AssetsFixed assets as of December 31, 2016 and 2015 are shown at cost, less accumulated depreciation and amortization and are summarized below: December 31, 2016 2015Leasehold improvements$495,515 $498,394Club equipment107,905 105,998Furniture, fixtures and computer equipment71,222 69,383Computer software25,813 24,047Construction in progress3,617 4,882 704,072 702,704Less: Accumulated depreciation and amortization(533,492) (507,363) $170,580 $195,341Depreciation and leasehold amortization expense for the years ended December 31, 2016, 2015 and 2014, was $43,691, $47,664 and $46,794,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 individualclub level which is the lowest level for which there are identifiable cash flows. To the extent that estimated future undiscounted net cash flows attributable tothe assets are less than the carrying amount, an impairment charge equal to the difference between the carrying value of such asset and their fair values isrecognized.In the year ended December 31, 2016, the Company tested its underperforming clubs and recorded impairment charges of $742 on leaseholdimprovements and furniture and fixtures at clubs that experienced decreased profitability and sales levels below expectations during this period. TheCompany will continue to monitor the results and changes in expectations of its clubs closely during 2017 to determine if additional fixed asset impairmentcharges will be necessary. In the years ended December 31, 2015 and December 31, 2014, the Company recorded impairment charges of $14,571 and $4,569,respectively, related to underperforming clubs.F-17Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table presents the long-lived assets measured at fair value on a nonrecurring basis for the period ended December 31, 2016: 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, 2016$742 $— $— $742December 31, 2015$14,571 $— $— $14,5715. Goodwill and Intangible AssetsGoodwill was 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 benefitfrom a regional cluster being considered single reporting units (“Outlier Clubs”), and the Company’s three clubs located in Switzerland being considered asingle reporting unit (“SSC”). As of December 31, 2016, 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 whichwould indicate the fair value of goodwill is below its carrying amount. The determination as to whether a triggering event exists that would warrant aninterim review of goodwill and whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projectionsof the Company. As a result of the significant decrease in market capitalization and a decline in the Company’s 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 28,2015 and May 31, 2015, the Company performed an interim impairment test as of May 31, 2015.The Company’s annual goodwill impairment test as of February 29, 2016 and 2015, and the interim test performed as of May 31, 2015 were performedusing the two-step goodwill impairment analysis. Step 1 involves comparing the estimated fair value of the Company’s reporting units to their carryingamounts. If the estimated fair value of the reporting unit is greater than its carrying amount, there is no requirement to perform Step 2 of the impairment test,and there is no impairment. If the reporting unit’s carrying amount is greater than the estimated fair value, the second step must be completed to measure theamount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the estimated fair value of all tangible and intangible assets,excluding goodwill, of the reporting unit from the estimated fair value of the reporting unit as determined in Step 1. The implied fair value of goodwilldetermined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, animpairment charge is recognized equal to the difference.Both the February 29, 2016 and 2015 annual impairment tests supported the goodwill balance and as such no impairment of goodwill was required.The Company also performed an interim impairment test as of May 31, 2015 and concluded that there would be no remaining implied fair value of goodwillattributable to the NYSC and BSC regions. Accordingly, as of May 31, 2015, the Company wrote off $31,558 of goodwill associated with these reportingunits. The Company did not have a goodwill impairment charge in the SSC region as a result of the interim test given the profitability of this unit.2016 Impairment TestFor the February 29, 2016 impairment test, fair value was determined by using an income approach, as this was deemed to be the most indicative of theCompany’s fair value. Under this income approach, the Company determined fair value based on estimated future cash flows of the SSC reporting unit,discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return anoutside investor would expect to earn, which are unobservable Level 3 inputs. The discounted estimates of future cash flows include significant managementassumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. The estimatedweighted-average cost of capital of SSC was 11.2% as of February 29, 2016. Determining the fair value of a reporting unit is judgmental in nature andrequires 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 separately for each reporting unit. The Company believes its assumptions are reasonable, however, therecan be no assurance that the Company’s estimates and assumptions made for purposes of the Company’s goodwill impairment testing as of February 29, 2016will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or margin growth rates of certain reportingunits are not achieved, the Company may be required to recordF-18Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing or prior to that, if any such changeconstitutes a triggering event outside the quarter when the annual goodwill impairment test is performed. It is not possible at this time to determine if anysuch future impairment charge would result.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 theexisting club base. Terminal growth rates were calculated for years beyond the three year forecast. As of February 29, 2016, the Company used a terminalgrowth rate of 2%.2015 Impairment TestsFor the May 31, 2015 and February 28, 2015 impairment tests, fair value was determined by using a weighted combination of two market-basedapproaches (weighted 50% collectively) and an income approach (weighted 50%), as this combination was deemed to be the most indicative of theCompany’s fair value in an orderly transaction between market participants. Under the market-based approaches, the Company utilized information regardingthe Company, the Company’s industry as well as publicly available industry information to determine earnings multiples and sales multiples that are used tovalue the Company’s reporting units. Under the income approach, the Company determined fair value based on estimated future cash flows of each reportingunit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return anoutside investor would expect to earn, which are unobservable Level 3 inputs. The discounted estimates of future cash flows include significant managementassumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. The estimatedweighted-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 of significant estimates and assumptions, including revenuegrowth rates and operating margins, discount rates and future market conditions, among others. These assumptions were determined separately for eachreporting unit. The Company believes its assumptions are reasonable.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 theexisting club base. Terminal growth rates were calculated for years beyond the three year forecast. As of May 31, 2015, the Company used discount ratesranging from 8.2% to 11.2% and terminal growth rates ranging from 1.0% to 3.0%. As of February 28, 2015, the Company used discount rates rangingfrom 13.2% to 13.9% and terminal 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, 2015 through December 31, 2016 are detailed in the charts below. NYSC BSC SSC Outlier Clubs TotalGoodwill$31,549 $15,775 $1,175 $3,982 $52,481Changes due to foreign currency exchange rate fluctuations— — (150) — (150)Less: accumulated impairment of goodwill(31,549) (15,775) — (3,982) (51,306)Balance as of December 31, 2015— — 1,025 — 1,025Changes due to foreign currency exchange rate fluctuations— — (17) — (17)Balance as of December 31, 2016$— $— $1,008 $— $1,008F-19Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Intangible assets as of December 31, 2016 and 2015 are as follows: As of December 31, 2016 Gross CarryingAmount AccumulatedAmortization NetIntangiblesMembership lists$11,344 $(11,344) $—Management contracts250 (146) 104Trade names40 (9) 31 $11,634 $(11,499) $135 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) $171Intangible assets were acquired in connection with the Company’s acquisitions during 2013. Amortization expense of intangible assets for the yearsended December 31, 2016, 2015 and 2013 was $36, $223 and $513 respectively.The aggregate amortization expense for the next five years and thereafter of the acquired intangible assets is as follows:Year Ending December 31, 2017$302018242019192020162021132022 and thereafter33 $1356. Accrued ExpensesAccrued expenses as of December 31, 2016 and 2015 consisted of the following: December 31, 2016 2015Accrued payroll and related$6,817 $5,674Accrued construction in progress and equipment917 1,235Accrued occupancy costs8,594 8,563Accrued insurance claims2,786 2,346Accrued other6,793 8,311 $25,907 $26,129F-20Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)7. Long-Term DebtLong-term debt as of December 31, 2016 and 2015 consisted of the following: December 31, 2016 20152013 Term Loan Facility$202,000 $275,417Less: Unamortized discount(3,851) (6,418)Less: Deferred financing costs(1,324) (2,259)Less: Current portion due within one year(2,082) (2,810)Long-term portion$194,743 $263,930The aggregate long-term debt obligations maturing during the next five years and thereafter are as follows: Amount DueYear Ending December 31, 2017$2,08220182,08220192,0822020195,7542021—2022 and thereafter— $202,0002013 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 lendersparty thereto, Deutsche Bank AG, as administrative agent, and Keybank National Association, as syndication agent. The 2013 Senior Credit Facility consistsof a $325,000 term loan facility maturing on November 15, 2020 (“2013 Term Loan Facility”) and a $45,000 revolving loan facility maturing onNovember 15, 2018 (“2013 Revolving Loan Facility”). Proceeds from the 2013 Term 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 the 2013 Senior Credit Facility were $5,119 and are being amortized as interestexpense and are recorded as a contra-liability to long-term debt on the accompanying consolidated balance sheets. The Company also recorded additionaldebt discount of $4,356 related to creditor fees. The proceeds from the 2013 Term Loan Facility were used to pay off amounts outstanding under theCompany’s previously outstanding long-term debt facility originally entered into on May 11, 2011 (as amended from time to time), and to pay related feesand expenses. None of the revolving loan facility was drawn upon as of the closing date on November 15, 2013, but loans under the 2013 Revolving LoanFacility may be drawn from time to time pursuant to the terms of the 2013 Senior Credit Facility. The borrowings under the 2013 Senior Credit Facility areguaranteed and secured by assets and pledges of capital stock by Holdings II, TSI, LLC, and, subject to certain customary exceptions, the wholly-owneddomestic 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 administrativeagent’s base 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 CreditFacility. With respect to the outstanding term loans, the Eurodollar Rate has a floor of 1.00% and the base rate has a floor of 2.00%. Commencing with thelast business 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 maybe reduced by voluntary prepayments. As of December 31, 2016, TSI LLC has made a total of $22,019 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 purchased by TSI Holdings will be canceled in accordance with the terms of the credit agreement, as amended by the Amendment.The Company may from time to time purchase term loans in market transactions, privately negotiated transactions or otherwise; however the Company isunder no obligation to make any such purchases. Any such transactions, and the amounts involved, will depend on prevailing market conditions, liquidityF-21Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)requirements, contractual restrictions and other factors. The amounts involved may be material. As of December 31, 2016, TSI Holdings had a cash balance ofapproximately $506.In December 2015, TSI Holdings purchased $29,829 principal amount of debt outstanding under the 2013 Senior Credit Facility in the open market for$10,947, or 36.7% of face value, which resulted in a gain on extinguishment of debt of $17,911, including the write-off of related deferred financing costsand debt discount of $249 and $707, respectively. On April 21, 2016, TSI Holdings settled a transaction to purchase $8,705 principal amount of debtoutstanding under the 2013 Senior Credit Facility for $3,787, or 43.5% of face value. On May 6, 2016, TSI Holdings settled another transaction to purchase$62,447 principal amount of debt outstanding under the 2013 Senior Credit Facility for $25,978, or 41.6% of face value. The April and May transactionscreated gains on extinguishment of debt in 2016 of $37,893 with a tax effect of $13,451. When this was netted with our operating loss, it resulted in a taxprovision for 2016 of $9,771. The gain on extinguishment of debt was net of the write-off of deferred financing costs and debt discount of $545 and $1,561,respectively, and other costs related to the transaction. All of the above purchased debt was transferred to TSI, LLC and canceled.The terms of the 2013 Senior Credit Facility provide for a financial covenant in the situation where the total utilization of the revolving loancommitments (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 required to maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.50:1.00. As of December 31, 2016,the total leverage ratio was slightly below 4.50:1.00. Other than $2,851 of letters of credit, we did not have any amounts utilized on the 2013 RevolvingLoan Facility and therefore we were not subject to this financial covenant as of December 31, 2016. The terms of the 2013 Senior Credit Facility include afinancial covenant under which the Company is not able to utilize more than 25%, or $11,250, in accordance with terms of credit agreement, of the 2013Revolving Loan Facility if the total leverage ratio exceeds 4.50:1:00 (calculated on a proforma basis to give effect to any borrowing). The 2013 Senior CreditFacility also contains certain affirmative and negative covenants, including covenants that may limit or restrict TSI, LLC and Holdings II’s ability to, amongother things, incur indebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; make investments; pay dividends and makepayments to shareholders; make payments on certain indebtedness; and enter into sale leaseback transactions, in each case, subject to certain qualificationsand 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 andHoldings II to, among other things, make certain distributions of cash to TSI Holdings. The 2013 Senior Credit Facility also includes customary events ofdefault (including non-compliance with the covenants or other terms of the 2013 Senior Credit Facility) which may allow the lenders to terminate thecommitments under the 2013 Revolving Loan Facility and declare all outstanding term loans and revolving loans immediately due and payable and enforceits 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 commencingin 2015 in certain circumstances relating to excess cash flow (as defined) for the prior fiscal year, as described below, in excess of certain expenditures.Pursuant to the 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 fiscalyear towards mandatory prepayments of outstanding borrowings. In connection with the sale of the East 86th Street property, which was accounted for as abuilding financing arrangement, as described in Note 8 - Sale of Building, the Company received approximately $43,500 in net sales proceeds (after taxes,before giving effect to utilization of net operating losses and carryforward). Accordingly, the Company made a mandatory prepayment of $13,500 on the2013 Term Loan Facility in November 2014. In connection with this mandatory prepayment, during the year ended December 31, 2014, the Companyrecorded loss on extinguishment of debt of $493, consisting of the write-off of unamortized debt issuance costs and debt discount of $119 and $374,respectively, and was included in loss on extinguishment of debt in the accompanying consolidated statements of operations for the year ended December31, 2014. To the extent the proceeds of the sale of the East 86th Street property were not reinvested within 30 months of the date of the sale, the Companymay have been required to use such amounts, other than amounts used in 2014 to repay debt, to pay down its outstanding debt, as provided under the termsof its 2013 Senior Credit Facility. The Company has reinvested all the remaining net proceeds from the sale.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined, to be applied against outstanding2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days after the fiscal yearend. The applicable excess cash flow repayment percentage is applied to the excess cash flow when determining the excess cash flow payment. Earnings,changes in working capital and capital expenditure levels all impact the determination of any excess cash flow. The applicable excess cash flow repaymentpercentage 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 leverageratio is greater than or equal to 2.00:1.00 but less than 2.50:1.00 and 0% when the total leverageF-22Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)ratio is less than 2.00:1.00. The excess cash flow calculation performed as of December 31, 2016 did not result in any required payments.As of December 31, 2016, the 2013 Term Loan Facility has a gross principal balance of $202,000 and a balance of $196,825 net of unamortized debtdiscount of $3,851 and unamortized debt issuance costs of $1,324. As of December 31, 2016, both the unamortized balance of debt issuance costs andunamortized debt discount are recorded as a contra-liability to long-term debt on the accompanying condensed consolidated balance sheet and are beingamortized as interest expense using the effective interest method.As of December 31, 2016, there were no outstanding 2013 Revolving Loan Facility borrowings and outstanding letters of credit issued totaled $2,851.The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2016 was $42,149, with borrowings under such facility subject to theconditions applicable to borrowings under the Company’s 2013 Senior Credit Facility, which conditions the Company may or may not be able to satisfy atthe time of borrowing.Fair Market ValueBased on quoted market prices, the 2013 Term Loan Facility had a fair value of approximately $163,115 and $104,658, respectively, at December 31,2016 and December 31, 2015, respectively, and is classified within level 2 of the fair value hierarchy. Level 2 is based on quoted prices for similarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which allsignificant inputs and significant value drivers are observable in active markets. The fair value for the Company’s 2013 Term Loan Facility is determinedusing observable current market information such as the prevailing Eurodollar interest rate and Eurodollar yield curve rates and includes consideration ofcounterparty credit risk.For the fair market value of the Company’s interest rate swap instrument refer to Note 9 — 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, 2016, 2015 and 2014 were as follows: Year Ended December 31, 2016 2015 2014Interest costs expensed$13,904 $17,914 $18,228Interest costs capitalized28 72 300Total interest expense and amounts capitalized$13,932 $17,986 $18,528Note: The table above does not include $2,666 and $810 of interest expense related to the building financing arrangement in the years ended December 31,2015 and 2014, respectively.8. 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. Concurrent with the closing of the transaction, the Company leased back the portion of the property comprising itshealth club (“Initial Lease”) and had agreed to vacate the property in connection with the purchaser's future development of a new luxury, high-rise multi-usebuilding. In connection with vacating the property, the Company agreed to enter into a new lease (“New Club Lease”) for approximately 24,000 square feetin the new building for the purpose of operating a health club upon completion of construction by the purchaser/landlord. This sale-leaseback transactionwas characterized as a financing arrangement for accounting purposes rather than a sale until any continuing involvement has ceased. In March 2015, theCompany received the remaining proceeds that had been 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$3,500 in connection with the termination. Because the lease was terminated with no continuing involvement, this sale-leaseback transaction was accountedfor as a completed sale as of December 23, 2015. Under this treatment, the Company recorded a $77,146 gain, previously accounted for as a financing, on thesale of the property, recorded in Gain on sale of building in the consolidated statements of operations for the year ended December 31, 2015.F-23Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)9. 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 negativeimpact of such fluctuations on the Company's cash flows, the Company may enter into derivative financial instruments (“derivatives”), such as interest-rateswaps. Derivatives are not entered into for trading purposes and the Company only uses commonly traded instruments. Currently, the Company has usedderivatives solely relating to the variability of cash flows from 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. Inconnection with entering into the 2013 Senior Credit Facility, the Company amended and restated the interest rate swap agreement initially entered into (andamended in August 2012 and November 2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rate swaparrangement had a notional amount of $160,000 and will mature on May 15, 2018. The swap effectively converts $160,000 of the current outstandingprincipal of the total variable-rate debt under the 2013 Senior Credit Facility to a fixed rate of 5.384%, when including the applicable 3.50% margin. Aspermitted by ASC 815, Derivatives and Hedging, the Company has designated this swap as a cash flow hedge, the effects of which have been reflected in theCompany's consolidated financial statements as of and for the years ended December 31, 2016, 2015 and 2014. The objective of this hedge is to manage thevariability of cash flows in the interest payments related to the portion of the 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 atinception with re-designation being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps are designated as cash flow hedges foraccounting purposes since they are being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt). Onan ongoing basis, the Company performs a quarterly assessment of the hedge effectiveness of the hedge relationship and measures and recognizes any hedgeineffectiveness in the consolidated statements of operations. For the years ended December 31, 2016, 2015 and 2014, hedge ineffectiveness was evaluatedusing the hypothetical derivative method. There was no hedge ineffectiveness in the years ended December 31, 2016, 2015 and 2014.The fair value for the Company’s interest rate swap is determined using observable current market information such as the prevailing Eurodollar interestrate and Eurodollar yield curve rates and include consideration of counterparty credit risk. The following table presents the aggregate fair value of theCompany’s derivative 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, 2016$1,511 $— $1,511 $—Interest rate swap liability as of December 31, 2015$2,042 $— $2,042 $—The swap contract liability of $1,511 and $2,042 was recorded as a component of other liabilities as of December 31, 2016 and 2015, respectively, withthe offset to accumulated other comprehensive income ($854 and $1,154, net of taxes, as of December 31, 2016 and 2015, respectively) on theaccompanying consolidated balance sheets.There were no significant reclassifications out of accumulated other comprehensive income in 2016, 2015 and 2014 and the Company does not expectthat significant derivative losses included in accumulated other comprehensive income at December 31, 2016 will be reclassified into earnings within thenext 12 months.10. LeasesThe Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In addition tobase rent, the facility leases generally provide for additional rent based on operating results, increases in real estate taxes and other costs. Certain leasesprovide for additional rent based upon defined formulas of revenue, cash flow or operating results of the respective facilities. Under the provisions of certainof these leases, the Company is required to maintain irrevocable letters of credit, which amounted to $1,136 as of December 31, 2016.The leases expire at various times through October 31, 2031 and certain leases may be extended at the Company’s option. Escalation terms on theseleases generally include fixed rent escalations, escalations based on an inflation index such as theF-24Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)consumer price index, and fair market value adjustments. In the next five years, or the period from January 1, 2017 through December 31, 2021, the Companyhas leases for 23 club locations that are due to expire without any renewal options, three of which are due to expire in 2017, and 48 club locations that aredue to expire with renewal options.Future minimum rental payments under non-cancelable operating leases are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2017$89,846201884,749201977,588202071,202202160,592Aggregate thereafter181,302Rent expense for the years ended December 31, 2016, 2015 and 2014 was $124,952, $124,920 and $124,816, respectively. Such amounts include non-base rent items of $25,384, $24,767 and $24,340, respectively. Including the effect of deferred lease liabilities, rent expense was $124,333, $123,872 and$124,449 for the years ended December 31, 2016, 2015 and 2014.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. Thesub-leases expire at various times through December 31, 2022. Future minimum rentals receivable under non-cancelable leases are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2017$2,03220181,154201986520207552021532Aggregate thereafter99Rental income, including non-cash rental income, for the years ended December 31, 2016, 2015 and 2014 was $2,338, $4,669 and $4,791, respectively.For the years ended December 31, 2016 and 2015, such amounts included no additional rental charges above the base rent. For the year ended December 31,2014, rental income included additional rental charges above the base rent of $229. The Company previously owned the building at the 86th Street clublocation which housed a rental tenant that generated rental income of approximately $1,926 and $2,000 for the years ended December 31, 2015 and 2014.Refer to Note 8 - Sale of Building for further details.11. Stockholders’ (Deficit) EquityThe Company’s certificate of incorporation adopted in connection with the IPO provides for 105,000,000 shares of capital stock, consisting of5,000,000 shares of Preferred Stock, par value $0.001 per share (“Preferred Stock”) and 100,000,000 shares of Common Stock, par value $0.001 per share(“Common Stock”).The Company’s 2006 Stock Incentive Plan, as amended and restated in April 2015 (the “2006 Plan”), authorizes the Company to issue up to 3,500,000shares of common stock to employees, non-employee directors and consultants pursuant to awards of stock options, stock appreciation rights, restrictedstock, in payment of performance shares or other stock-based awards. In May 2016, the Company further amended the 2006 Plan to increase the aggregatenumber of shares of Common Stock issuable under the 2006 Plan by 1,000,000 shares to a total of 4,500,000. As of December 31, 2016, there were534,861 shares available to be issued under the 2006 Plan.F-25Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)On August 19, 2015, the Company granted an award of non-qualified options to purchase 250,000 shares of its common stock to its Chief OperatingOfficer (“COO”) under the Company's 2006 Plan ("In-Plan Options"). In addition to the In-Plan Options, the Company granted its COO an award of non-qualified options to purchase 450,000 shares (“Non-Plan Options”) of its common stock and 300,000 shares of restricted stock (“Non-Plan RSA”). These Non-Plan Options and Non-Plan RSA were granted outside of any shareholder-approved plan as an inducement to accept employment with the Company. InSeptember 2016, the COO's employment with the Company was terminated. As a result of the termination, the Company accelerated 17% of unvested In-PlanOptions, Non-Plan Options and Non-Plan RSA previously awarded to the COO. The Company incurred non-cash severance expense of $250 related to thisacceleration.On March 24, 2015, the Company entered into a nomination and standstill agreement (the “Nomination and Standstill Agreement”). Pursuant to theNomination and Standstill Agreement, the Company agreed to redeem, effective immediately, the rights issued pursuant to the Rights Plan. Pursuant to theterms 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, on April 20, 2015.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 entitled the holder to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock (“Preferred Share”) at an initial exerciseprice of $15 per one one-thousandth of a Preferred Share, subject to certain adjustments.a. Common Stock OptionsThe outstanding Common Stock options as of December 31, 2016 vest in full in October 2019. The vesting of certain grants will be accelerated in theevent that certain defined events occur including the sale of the Company. Stock options generally vest over a three to four year service period and expirefive to ten years from the date of grant.As of December 31, 2016, 2015 and 2014, a total of 150,207, 544,869 and 1,023,606 Common Stock options were exercisable, respectively.At December 31, 2016, the Company had 187,707 stock options outstanding under the 2006 Plan and no Non-Plan Options were 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 serviceperiod, which is generally the vesting period, net of estimated forfeitures. The total compensation expense related to options, classified within Payroll andrelated on the consolidated statements of operations was $156, $99, and $299 for the years ended December 31, 2016, 2015 and 2014, respectively, and therelated tax benefit was $67, $38 and $142 for the years ended December 31, 2016, 2015 and 2014, respectively. Each of these 2016, 2015 and 2014 taxbenefits 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.F-26Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table summarizes the stock option activity for the years ended December 31, 2016, 2015 and 2014: Common Weighted AverageExercise PriceBalance at January 1, 20141,140,231 $5.21Exercised(73,043) 1.82Canceled(34,567) 12.56Forfeited(2,100) 3.54Balance at December 31, 20141,030,521 5.29Granted850,000 2.68Exercised(171,718) 1.68Canceled(313,934) 8.61Balance at December 31, 20151,394,869 3.40Exercised(226,011) 1.41Canceled(533,484) 3.99Forfeited(447,667) 2.71Balance at December 31, 2016187,707 $5.78The following table summarizes information about stock options outstanding and exercisable as of December 31, 2016: Options Outstanding Options Exercisable Number of Options Weighted-AverageRemainingContractual Life Weighted-AverageExercise Price Number of Options Weighted-AverageExercise PriceCommon 2007 grants51,000 7 months $14.76 51,000 $14.762008 grants34,020 23 months 2.64 34,020 2.642009 grants41,372 34 months 1.75 41,372 1.752010 grants11,315 42 months 1.91 11,315 1.912015 grants50,000 105 months 2.95 12,500 2.95Total Grants187,707 44 months $5.78 150,207 $6.48At December 31, 2016, stock options outstanding have a weighted average remaining contractual life of 3.7 years and the total intrinsic value for “in-the-money” options, based on the Company’s closing stock price of $2.50, was $42. At December 31, 2016, stock options exercisable have a weightedaverage remaining contractual life of 2.4 years and the total intrinsic value for “in-the-money” exercisable options was $42. The total intrinsic value ofoptions exercised was $279 for the year ended December 31, 2016.The aggregated intrinsic value represents the pre-tax intrinsic value (the difference between the fair value of the Company’s common stock atDecember 31, 2016 of $2.50 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holdershad all option holders exercised their options on December 31, 2016. The intrinsic value is based on the fair market value of the Company’s stock andtherefore changes as the fair market 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, generallyare not 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 qualify as“non-qualified stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the fair market value of the Company’sCommon Stock on the option grant date. The Company did not grant any stock options during the years ended December 31, 2016 and 2014. In the yearended December 31, 2015, the Company granted 850,000 stock options, with an aggregate grant date fair value of $2,279.F-27Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 $2,279The weighted average fair value of stock options as of the grant date was $1.10 in 2015. The fair value of each option grant is estimated on the date ofgrant using the Black-Scholes option-pricing model with the following weighted average assumptions:Common Risk-Free Interest Rate Expected Dividend Yield Expected Term (Years) Expected Volatility2015 Grants 1.1% — 3.99 52.03%The Company calculated the weighted average expected term of stock options to be 3.99 years, which represented the period of time that options wereexpected to be outstanding. The risk free interest rate for periods within the contractual life of the option was based on the U.S. treasury yield in effect at thetime of grant. The volatility was determined based on management's estimate or historical volatilities of comparable companies.As of December 31, 2016, $52 of unrecognized compensation cost related to stock options was expected to be recognized over a weighted-averageperiod of 2.8 years.b. Common Stock GrantsRestricted Stock GrantsThe following restricted stock grants were issued to employees of the Company during the year ended December 31, 2016. Numberof Shares SharePrice Grant DateFair ValueMarch 10, 2016559,000 $2.06 $1,152September 30, 2016200,000 $3.09 618December 12, 2016952,000 $2.60 2,475Total1,711,000 $4,245F-28Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table summarizes the restricted stock activity for the years ended December 31, 2016, 2015 and 2014: Numberof Shares WeightedAverageGrant DateFair ValueBalance as of January 1, 2014363,171 $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 5.06Granted1,711,000 2.48Vested(222,495) 4.59Forfeited(402,000) 3.39Balance as of December 31, 20161,611,375 $2.80The 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 estimatedforfeitures. The total compensation expense, classified within Payroll and related on the consolidated statements of operations, related to restricted stockgrants was $1,155, $842 and $1,367 for the years ended December 31, 2016, 2015 and 2014, respectively, and the related tax benefit was $496, $321, $648for the years ended December 31, 2016, 2015 and 2014, respectively. Each of these 2016, 2015 and 2014 tax benefit were prior to the recognition of thevaluation allowance. The restricted shares contain vesting restrictions and vest in equal installments over either three or four years on the anniversary date ofthe grants. In the year ended December 31, 2016, the Company granted 1,711,000 restricted shares with an aggregate grant date fair value of $4,245. In theyears ended December 31, 2015 and 2014, the Company granted 507,000 and 196,500 restricted shares, respectively, with an aggregate grant date fair valueof $2,166 and $1,663, respectively.As of December 31, 2016, $3,702 of unrecognized compensation cost related to restricted stock was expected to be recognized over a weighted-averageperiod of 2.7 years.Non-Restricted Stock GrantsOn February 3, 2016, the Company issued 206,750 shares of Common Stock to members of the Company’s Board of Directors with respect to theirannual retainer. The fair value of the shares issued was $1.19 per share and was expensed upon the date of grant. The total compensation expense, classifiedwithin general and administrative expenses, related to Board of Director Common Stock grants was $246 in the year ended December 31, 2016. In the yearsended December 31, 2015 and 2014, the Company issued 67,609 and 21,248 shares of Common Stock, respectively, with an aggregate grant date fair valueof $445 and $245, respectively.c. Common Stock DividendsOn April 15, 2014, February 12, 2014 and November 15, 2013, the board of directors of the Company declared cash dividends of $0.16 per share,payable in June 2014, March 2014 and December 2013, respectively, to common stockholders of record at the close of business on May 22, 2014, February24, 2014 and November 26, 2013, respectively. On November 16, 2012, the board of directors of the Company declared cash dividends of $3.00 per share,payable in December 2012 to common stockholders of record at the close of business on November 30, 2012.Pursuant to the 2006 Plan, holders of unvested restricted shares as of the record dates qualify to receive the above dividends on each future vestingdate, subject to continued employment through the vesting date. As of December 31, 2016 and 2015, total dividends payable for unvested restricted shareswas $14 and $118, respectively.F-29Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2016, $9 and $5 of the remaining amount payable is expected to be paid in 2017 and 2018, respectively, and is included inAccrued expenses and Other liabilities, respectively, on the Company’s consolidated balance sheet as of December 31, 2016.12. RevenuesRevenues for the years ended December 31, 2016, 2015 and 2014 are summarized below: Years Ended December 31, 2016 2015 2014Membership dues$296,795 $309,096 $343,185Initiation and processing fees7,636 13,644 12,044Personal training revenue66,487 73,191 70,338Other ancillary club revenue(1)19,642 22,138 22,304Total club revenue390,560 418,069 447,871Fees and other revenue(2)6,361 6,254 5,971Total revenue$396,921 $424,323 $453,842(1)Other ancillary club revenue primarily consists of Sports Clubs for Kids, racquet sports, Small Group Training and studio classes.(2)Fees and other revenue primarily consist of rental income, management fees, marketing revenue and laundry revenue.13. Corporate Income TaxesThe provision for income taxes for the years ended December 31, 2016, 2015 and 2014 consisted of the following: Year Ended December 31, 2016 Federal Foreign State andLocal TotalCurrent$9,346 $(63) $488 $9,771Deferred— — — — $9,346 $(63) $488 $9,771 Year Ended December 31, 2015 Federal Foreign State andLocal TotalCurrent$(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 $52,611F-30Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of deferred tax liabilities, net consist of the following items: December 31, 2016 2015 Deferred tax assets Basis differences in depreciation and amortization$10,073 $6,578Deferred lease liabilities23,527 24,345Deferred revenue8,247 10,974Deferred compensation expense incurred in connection with stock options994 1,589Federal and state net operating loss carry-forwards8,473 10,430Accruals, reserves and other7,297 7,654 $58,611 $61,570Deferred tax liabilities Deferred costs$803 $1,751Change in accounting method3,147 6,621Undistributed foreign earnings and other529 622 $4,479 $8,994Gross deferred tax assets54,132 52,576Valuation allowance(54,193) (52,637)Deferred tax liabilities, net$(61) $(61) As of December 31, 2016 and 2015, the Company had a net deferred tax liability of $61.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 allof the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amount expected to be realized. Theultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences becomedeductible and/or net operating loss carryforward can be utilized. The Company evaluates all positive and negative evidence when determining the amountof the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduledreversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negativeevidence 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 ajurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not thatall or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred taxassets are not more likely than not realizable, we establish a valuation allowance. The Company has recorded valuation allowances in the amounts of$54,193 and $52,637 at December 31, 2016 and 2015, 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 withtax basis for tax purposes. The deferred tax liability recorded at December 31, 2016 relates to the tax effect of differences between book and tax basis ofintangible assets not expected to reverse during the Company’s net operating loss carry forward period.As of December 31, 2016, state tax net operating loss carry-forwards were $8,473. 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-in capital when the tax benefit is realized was approximately $590 as of December 31, 2016.The Company’s foreign pre-tax earnings (loss) related to the Swiss clubs were $(264), $277 and $762 for the years ended December 31, 2016, 2015 and2014, respectively, and the related current tax provisions (benefit) were $(63), $67 and $183,F-31Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)respectively. In 2011, the Company repatriated Swiss earnings through 2010. In accordance with ASC 740-30, the Company has recognized a deferred taxliability of $529 for the incremental U.S. tax cost on the total cumulative undistributed earnings of the Swiss clubs for the period through December 31, 2016.The differences between the U.S. Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years endedDecember 31, 2016, 2015 and 2014: Years Ended December 31, 2016 2015 2014Federal statutory tax rate35% 35 % 35 %State and local income taxes (net of federal tax benefit)2 11 8Change in state effective income tax rate— 3 (4)State tax (benefit) provision related to insurance premiums— (14) 7Tax reserves— 1 1Permanent differences in fines and penalties— 2 1 37 38 48Valuation allowance18 (249) (422)Elimination of federal effect of state deferred taxes— — 53 55% (211)% (321)%The effective tax rate on the Company’s pre-tax income or loss was 55% for 2016, (211)% for 2015, and (321)% for 2014, which was primarilyimpacted by the change in the valuation allowance.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, 2016 and 2015. Interest (income) expense on unrecognized tax benefits was $81 for the years ended December 31, 2016 and 2015, and $(334)for the year ended December 31, 2014. The Company recognizes both interest accrued related to unrecognized tax benefits and penalties in income taxexpenses. The Company had total accruals for interest as of December 31, 2016 and 2015 of $785 and $704, respectively.A reconciliation of unrecognized tax benefits, excluding interest and penalties, is as follows: 2016 2015 2014 Balance on January 1$1,187 $1,187 $13,830Gross decreases for tax positions taken in prior years— — (12,675)Gross increases for tax positions taken in prior years— — 32Balance on December 31$1,187 $1,187 $1,187As of December 31, 2016, the Company had $1,187 of unrecognized tax benefits and it is reasonably possible that the entire amount could be realizedby the Company in 2017 since the income tax returns may no longer be subject to audit in 2017.The Company files federal, foreign and multiple state and local jurisdiction income tax returns. The Company is no longer subject to examinations ofits federal income tax returns by the Internal Revenue Service for years 2012 and prior. U.S. net operating losses generated in closed years and utilized inopen years are subject to adjustment by tax authorities. The Company was recently notified by the Internal Revenue Service that they intend to examinefederal income tax returns for years 2014 and 2015.The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2014),and New York City (2006 through 2012).In a revised letter dated December 12, 2016, the Company received from the State of New York a revised assessment related to tax years 2006-2009 for$4,722, inclusive of $2,044 of interest. The Company disagreed with the proposed assessment and have scheduled a conciliation conference with the State ofNew York to appeal the assessment. The Company has not recorded a tax reserve related to the proposed assessment. It is difficult to predict the final outcomeor timing ofF-32Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)resolution of any particular matter regarding these examinations. An estimate of the reasonably possible change to unrecognized tax benefits within the next12 months cannot be made.14. 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 the Appellate Division, Second Department of the Supreme Court of the State of New York against it and two of its health clubsubsidiaries alleging, among other things, breach of lease in connection with the decision to close the club located in a building owned by the plaintiff andleased to a subsidiary of TSI, LLC, the tenant, and take additional space in a nearby facility leased by another subsidiary of TSI, LLC. Following adetermination of an initial award, which TSI, LLC and the tenant have paid in full, the landlord appealed the trial court’s award of damages, and on August29, 2011, an additional award (amounting to approximately $900) (the “Additional Award”), was entered against the tenant, which has recorded a liability.Separately, TSI, LLC is party to an agreement with a third-party developer, which by its terms provides indemnification for the full amount of any liability ofany nature arising out of the lease described above, including attorneys’ fees incurred to enforce the indemnity. As a result, the developer reimbursed TSI,LLC and the tenant the amount of the initial award in installments over time and also agreed to be responsible for the payment of the Additional Award, andthe tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord are currently litigating thepayment of the Additional Award and judgment was entered against the developer on June 5, 2013, in the amount of approximately $1,045, plus interest,which judgment was upheld by the appellate court on April 29, 2015. TSI, LLC does not believe it is probable that TSI, LLC will be required to pay for anyamount 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 inNew York State court on behalf of personal trainers employed in New York State. Labbe was seeking unpaid wages and damages from TSI, LLC and allegesviolations of various provisions of the New York State labor law with respect to payment of wages and TSI, LLC’s notification and record-keepingobligations. The Company completed settlement negotiations, pursuant to which TSI, LLC will pay its trainers the aggregate sum of $165 in exchange forfull releases. The settlement agreement has been executed by the parties, has been approved by the court and the class, and the Company paid the settlementamount in the fourth quarter of 2016.On January 21, 2016, in an action styled Triangle 17 Center, LLC v. Town Sports International Holdings (NJ), LLC, et al. (“TSI Holdings NJ”), filed inthe New Jersey Superior Court, a Landlord of one of TSI Holdings NJ’s competitors filed an action against TSI Holdings NJ, its affiliate and subsidiary,claiming that TSI Holdings NJ engaged in sham litigation to prevent the opening of a competitor’s facility in close proximity to TSI Holdings NJ’s locationin Ramsey, New Jersey. This matter settled for nominal consideration without any admission of liability on the Company’s part.On or about October 6, 2016, Moelis & Company LLC commenced an action against TSI, LLC in the Supreme Court of the State of New York claimingentitlement to certain fees due pursuant to a Letter Agreement between the parties dated December 28, 2015. In consideration for Moelis & Company LLC’sservices, it is claimed that TSI, LLC agreed to pay a debt discount transaction fee plus costs and expenses incurred. While the Company disagreed andobjected to Moelis' claim, solely for business purposes, TSI, LLC settled the matter in 2016.In addition to the litigation discussed above, the Company is involved in various other lawsuits, claims and proceedings incidental to the ordinarycourse of business, including personal injury, construction matters, employee relations claims and landlord tenant disputes. The results of litigation areinherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, requiresignificant amounts of management time and result in diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot bepredicted with certainty. The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss,or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. The Companyconcluded that an accrual for any such matters is not required as of December 31, 2016.15. 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 anemployer matching contribution in an amount equal to 25% of the participant’s contribution with a limit of five hundred dollars per individual, per annum.Effective January 1, 2016, the plan wasF-33Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)amended to eliminate the nondiscretionary matching contribution and to provide for a discretionary matching contribution as determined by theparticipating employer.Employer matching contributions totaling $204 and $198 were made in March 2016 and February 2015, respectively, for the plan years endedDecember 31, 2015 and 2014, respectively. The Company will not make an employer matching contribution for the plan year ended December 31, 2016.16. Separation ObligationIn September 2016, Greg Bartoli's employment with the Company as Chief Operating Officer was terminated. In connection with his termination, Mr.Bartoli received a severance payment, including a prorated bonus payment and a 17% vesting acceleration of his unvested, previously awarded In-PlanOptions, Non-Plan Options and Non-Plan RSA. The Company expensed $1,644 related to Mr. Bartoli's termination in the year ended December 31, 2016.These amounts were classified within Payroll and related expense in the consolidated statement of operations for the year ended December 31, 2016. Relatedamounts that remained unpaid as of December 31, 2016 were included in Accrued expenses in the consolidated balance sheet as of December 31, 2016.17. Other CommitmentsDuring the three months ended March 31, 2016, the Company entered into an agreement with CYC Fitness Partners, LLC (“CYC”) to provide up to$5,600 of growth capital to CYC from time to time over the next five years of which half of the growth capital will be considered a loan. CYC will use anyproceeds provided by the Company for capital to build-out specific locations within certain TSI, LLC clubs as well as other locations that the Companyprovides consent. With respect to the locations the Company has committed to fund, the Company must provide consent for the use of any proceeds prior tofunding more than $750 per location. A percentage of net earnings derived from each location funded by the Company will be applied to interest accrued onthe loan, and the remaining amount will be applied to the principal of the loan. In October 2016, the Company funded $280 to CYC for the build-out of oneof our locations.18. Selected Quarterly Financial Data (Unaudited) 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (b) (c) Net revenue$101,345 $100,935 $98,534 $96,107Operating (loss) income(3,722) (1,462) (2,624) 1,425Net (loss) income(6,925) 20,733 (5,506) (259)(Loss) earnings per share (a) Basic$(0.28) $0.81 $(0.21) $(0.01)Diluted$(0.28) $0.79 $(0.21) $(0.01) 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (d) (e) (f)Net revenue$111,424 $108,296 $103,764 $100,839Operating (loss) income(7,941) (41,451) (19,711) 76,217Net (loss) earnings(12,764) (31,068) (22,006) 86,996(Loss) earnings per share (a) Basic$(0.52) $(1.26) $(0.89) $3.50Diluted$(0.52) $(1.26) $(0.89) $3.47(a)Basic and diluted (loss) earnings per share are computed independently for each quarter presented. Accordingly, the sum of the quarterly earnings pershare may not agree with the calculated full year earnings per share.F-34Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(b)In the second quarter of 2016, the Company recorded a pre-tax gain on extinguishment of debt of $38,497 in connection with the purchase of $71,152 ofits debt.(c)In the third quarter of 2016, the Company recorded a pre-tax non-cash fixed asset impairment charge of $742 related to underperforming clubs.(d)In the second quarter of 2015, the Company recorded a pre-tax non-cash goodwill impairment charge of $31,558 associated with the NYSC and BSCregions and a pre-tax non-cash fixed asset impairment charge of $1,014 related to underperforming clubs.(e)In the third quarter of 2015, the Company recorded a pre-tax non-cash fixed asset impairment charge of $12,420 related to underperforming clubs.(f)In the fourth quarter of 2015, the Company recorded a pre-tax gain on sale of building of $77,146 related to the sale of the property on East 86th Street.The Company also recorded a pre-tax gain on extinguishment of debt of $17,911 in connection with the purchase of $29,829 of its debt. In addition, theCompany recorded a pre-tax gain on lease termination of $2,967 related to the termination of a lease for a planned club opening that was not yeteffective.19. Subsequent EventIn February 2017, the Company entered into a lease for a club location in New York City. In connection with this lease, the Company's issued a letter ofcredit for $1,000, increasing total letters of credit to $3,851.F-35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 byreference to 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,File No. 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 certainstockholders of the Company listed on the Executive Signature Pages thereto (incorporated by reference to Exhibit 10.5 of theRegistrant’s Registration Statement 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-1 Registration Statement). 10.4 Credit Agreement, dated as of November 15, 2013, among Town Sports International, LLC, TSI Holdings II, LLC, the lenders partythereto, Deutsche Bank Trust Company Americas, as Administrative Agent, and Keybank National Association, as Syndication Agent(incorporated by 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 DeutscheBank AG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form8-K, dated November 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 Form8-K, dated November 15, 2013).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 andDeutsche Bank AG New York (incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K, for the yearended December 31, 2013). 10.10 Agreement of Sale, dated December 23, 2013, by and between Town Sports International, LLC and Monty Two East 86th StreetAssociates LLC (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year endedDecember 31, 2013). 10.11 First Amendment to Agreement of Sale, dated March 26, 2014, between Town Sports International, LLC and Monte Two East86th Street Associates, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterended March 31, 2014). 10.12 Second Amendment to Agreement of Sale, dated April 11, 2014, between Town Sports International, LLC and Monte Two East86th Street Associates, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterended March 31, 2014). 10.13 Third Amendment to Agreement of Sale, dated July 7, 2014, between Town Sports International, LLC and Monte Two East 86th StreetAssociates, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedJune 30, 2014). 10.14 Agreement Regarding Termination of Nomination and Standstill Agreement (incorporated by reference to Exhibit 10.44 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2015). *10.15 Town Sports International Holdings, Inc. 2006 Stock Incentive Plan, as amended and restated effective April 2, 2015 (incorporatedherein by reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed on April 27, 2015). *10.16 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). *10.17 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). *10.18 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). *10.19 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). *10.20 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). *10.21 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).Table of Contents ExhibitNo. Description of Exhibit *10.22 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). *10.23 Letter Agreement, dated as of April 16, 2014, with Carolyn Spatafora (incorporated by reference to Exhibit 10.1 of the Registrant’sCurrent Report on Form 8-K filed April 25, 2014). *10.24 Form of Executive Severance Agreement between the Registrant and each of Carolyn Spatafora and Nitin Ajmera (incorporated byreference to Exhibit 10.28 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009). *10.25 Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.25 of the S-1 Registration Statement). *10.26 Letter Agreement, dated as of February 25, 2015, between Town Sports International Holdings, Inc. and Robert Giardina (incorporatedby reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed February 25, 2015). *10.27 Letter Agreement, dated as of February 25, 2015, between Town Sports International Holdings, Inc. and Daniel Gallagher (incorporatedby reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed February 25, 2015). *10.28 Form of Amended and Restated Executive Severance Agreement, dated as of February 25, 2015, between Town Sports InternationalHoldings, Inc. and each of Carolyn Spatafora, and Nitin Ajmera (incorporated by reference to Exhibit 10.3 of the Registrant's CurrentReport on Form 8-K filed February 25, 2015). *10.29 Nomination and Standstill Agreement, dated as of March 24, 2015, by and among Town Sports International Holdings, Inc. and PWPartners Atlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners, LLC, PW Partners CapitalManagement LLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora Capital Management, LLC and ParagVora. Holdings, Inc. and PW Partners Atlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners, LLC,PW Partners Capital Management LLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora CapitalManagement, LLC, and Parag Vora (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filedMarch 25, 2015). *10.30 Letter Agreement, dated as of 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). *10.31 Amended and Restated Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.3 of the Registrant’sCurrent Report on Form 8-K filed March 25, 2015). *10.32 Separation Letter between Town Sports International Holdings, Inc. and Daniel Gallagher (incorporated by reference to Exhibit 10.1 ofthe Registrant’s Current Report on Form 8-K filed June 18, 2015). *10.33 Letter Agreement , dated as of August 17, 2015, with Gregory Bartoli (incorporated by reference to Exhibit 10.1 of the Registrant’sCurrent Report on Form 8-K filed August 18, 2015).Table of Contents ExhibitNo. Description of Exhibit *10.34 Form of Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report onForm 10-Q for the period ended September 30, 2015). *10.35 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). *10.36 Form of Restricted Stock Agreement for Gregory Bartoli (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Reporton Form 10-Q for the period ended September 30, 2015). *10.37 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). *10.38 Agreement Regarding Termination of Nomination and Standstill Agreement (incorporated by reference to Exhibit 10.44 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2015). *10.39 Amendment to Amended and Restated Executive Severance Agreement, dated as of March 31, 2016, between Town SportsInternational Holdings, Inc. and Carolyn Spatafora (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report onForm 10-Q for the period ended March 31, 2016). *10.40 Amendment No. 1 to the Town Sports International Holdings, Inc. 2006 Stock Incentive Plan (as amended and restated effective April2, 2015) (incorporated herein by reference to Appendix A of the Company’s definitive Proxy Statement on Schedule 14A filed onMarch 29, 2016). *10.41 Form of Executive Officer Indemnification Agreement (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Reporton Form 10-Q for the period ended June 30, 2016). *10.42 Letter Agreement, dated as of September 20, 2016, between the Company and Patrick Walsh (incorporated by reference to Exhibit 10.1of the Company’s Current Report on Form 8-K filed September 21, 2016). *10.43 Separation Agreement, dated as of September 16, 2016, between Town Sports International LLC and Gregory Bartoli (incorporated byreference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed September 21, 2016). *10.44 Amendment to Amended and Restated Executive Severance Agreement, dated as of February 16, 2017, between Town SportsInternational Holdings, Inc. and Nitin Ajmera (Filed herewith). 21 Subsidiaries of the Registrant (Filed herewith). 23.1 Consent of PricewaterhouseCoopers LLP (Filed herewith). 31.1 Certification of Chairman and Chief Executive Officer 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 Chairman and Chief Executive Officer. 32.2 Section 1350 Certification of Chief Financial Officer.Table of Contents ExhibitNo. Description of Exhibit 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.Item 16. Form 10-K SummaryNone.Exhibit 10.44AMENDMENT TO AMENDED AND RESTATEDEXECUTIVE SEVERANCE AGREEMENTThis Amendment to the Amended and Restated Executive Severance Agreement is dated the 16th day of February, 2017 (this “Amendment”)between Town Sports International Holdings, Inc. (“Holdings” and collectively with its subsidiaries and affiliates being referred to as the “Company”) andNitin Ajmera (the “Executive”).WHEREAS, the Company and Executive entered into that certain Amended and Restated Executive Agreement dated February 25, 2015 whichAgreement amended and restated a prior Executive Severance Agreement between Executive and Town Sports International, LLC (“TSI LLC”), a subsidiaryof Holdings dated May 8, 2014 (The May 8, 2014 Agreement and the Amended and Restated Executive Severance Agreement are collectively referred to asthe “Severance Agreement”); andWHEREAS, Holdings and TSI LLC desire to further amend the Severance Agreement in order to induce the Executive to remain in the employ ofthe Company; andWHEREAS, Holdings and TSI LLC desire to amend the Severance Agreement to provide severance to Executive in the event he is ConstructivelyTerminated or terminated without cause as defined herein.NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legallybound hereby, the parties agree as follows:1. Terms defined herein, unless stated otherwise, shall have the same meaning set forth as in the Severance Agreement.2. Paragraph 2, Eligibility, subparagraph (a) is amended to reflect that notwithstanding anything contained in the Severance Agreement to thecontrary, Executive shall be entitled to Severance stated herein if he is terminated without cause or there is a Constructive Termination independent ofwhether such terminations are in connection with a Change in Control.3. Paragraph 2, Eligibility, is amended to reflect the insertion of the following subparagraph (a)(v):(v) Termination without Cause or a Constructive Termination. If Executive’s employment with Company is terminated by the Company withoutCause or by Executive for Constructive Termination, Executive except as set forth below shall have the right to receive Severance Payments as described inSection 3 of the Severance Agreement. Notwithstanding the language of Sub-clause (ii) to the contrary with respect to Bonus for the fiscal year in which theTermination Date occurs same will be paid provided the Company is on Budget at the Termination Date to meet the EBIDTA targets set forth in theCompany’s Bonus Plan. The provisions of this subparagraph (v) shall apply independent of and notwithstanding whether there is a Change in Control asdefined herein. 4. Except as amended, the balance of the terms of the Severance Agreement remain in full force and effect which the parties hereto ratify as of thedate hereof. IN WITNESS WHEREOF, the parties have executed this agreement, effective as of the date and year first written above.TOWN SPORTS INTERNATIONAL HOLDINGS, INC.By: /s/ Patrick WalshName: Patrick WalshTitle: Chief Executive OfficerTOWN SPORTS INTERNATIONAL, LLCBy: /s/ Patrick WalshName: Patrick WalshTitle: Chief Executive Officer /s/ Nitin AjmeraNitin AjmeraExhibit 21Company State of Incorporation Doing Business AsParent TSI Holdings II, LLC DE n/aTown Sports International, LLC NY n/aSubsidiaries Boutique Fitness, LLC DE BFX Boutique Fitness ExperienceTSI 30 Broad Street, LLC DE NYSCTSI 217 Broadway, LLC DE NYSCTSI 555 6th Avenue, LLC DE NYSCTSI 1231 Third Avenue, LLC DE NYSCTSI Alexandria, LLC DE WSCTSI Allston, LLC DE BSCTSI Astoria, LLC DE NYSCTSI Avenue A, LLC DE NYSCTSI Back Bay, LLC DE BSCTSI 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 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 Clarendon, LLC DE WSCTSI 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 WSCTSI 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 34, LLC DE NYSCTSI East 36, LLC DE NYSCTSI East 41, LLC DE NYSCTSI East 48, LLC DE NYSCCompany State of Incorporation Doing Business AsTSI East 51, LLC DE NYSCTSI East 59, LLC DE NYSCTSI East 76, LLC DE NYSCTSI East 86, LLC DE NYSCTSI East 91, LLC DE NYSCTSI East Brunswick, LLC DE NYSCTSI East Meadow, LLC DE NYSCTSI Elite Back Bay, LLC DE MATSI Englewood, LLC DE NYSCTSI F Street, LLC DE WSCTSI Fairfax, LLC DE WSCTSI Fenway, LLC DE BSCTSI First Avenue, LLC DE NYSCTSI Forest Hills, 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 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 NYSCTSI Greenwich, LLC DE NYSC and AMFIT Physical TherapyTSI Hartsdale, LLC DE NYSCTSI Hawthorne, 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 Jersey City, LLC DE NYSCTSI Larchmont, LLC DE NYSCTSI Lexington (MA), LLC DE BSCTSI Lincoln, LLC DE NYSCTSI Livingston, LLC DE NYSCTSI Long Beach, LLC DE NYSCCompany State of Incorporation Doing Business AsTSI Lynnfield, LLC DE BSCTSI 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 New Rochelle, LLC DE NYSCTSI Newark, LLC DE NYSCTSI Newbury Street, LLC DE BSCTSI Newton, LLC DE BSCTSI North Bethesda, LLC DE WSCTSI Oceanside, LLC DE NYSCTSI Old Bridge, LLC DE NYSCTSI Princeton, LLC DE NYSCTSI Providence Eastside, LLC DE BSC IITSI Radnor, LLC DE PSCTSI Ramsey, LLC DE NYSCTSI Rego Park, LLC DE NYSCTSI Ridgewood, LLC DE NYSCTSI Rodin Place, LLC DE PSCTSI Scarsdale, 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 Post, LLC DE NYSCTSI Staten Island, LLC DE NYSCTSI 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 Watertown, LLC DE BSCCompany State ofIncorporation Doing Business As TSI 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 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 Westborough, LLC DE BSCTSI Westport, LLC DE NYSCTSI Westwood, LLC DE NYSCTSI White Plains, LLC DE NYSCTSI White Plains City Center, LLC DE NYSCTSI Whitestone, LLC DE NYSCTSI 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 Statements on Forms S-8 (No. 333-135048, 333-151965, 333-175884, 333-205955, 333-211093 and 333-212726) and Form S-3 (No. 333-167377) of Town Sports International Holdings, Inc. of our report dated February 22, 2017relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K./s/ PRICEWATERHOUSECOOPERS LLPNew York, New YorkFebruary 22, 2017Exhibit 31.1CERTIFICATIONSI, Patrick Walsh, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2016 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 thisreport;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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially 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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.By:/s/ Patrick Walsh Patrick Walsh Chairman and Chief Executive OfficerFebruary 22, 2017Exhibit 31.2CERTIFICATIONSI, Carolyn Spatafora, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2016 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 thisreport;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 inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially 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 arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. By:/s/ Carolyn Spatafora Carolyn Spatafora Chief Financial OfficerFebruary 22, 2017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 31,2016 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick Walsh, 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 theCompany./s/ Patrick WalshPatrick WalshChairman and Chief Executive OfficerFebruary 22, 2017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 31,2016 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carolyn Spatafora, certify, pursuant to 18 U.S.C. 1350, asadopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany./s/ Carolyn SpataforaCarolyn SpataforaChief Financial OfficerFebruary 22, 2017

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