Town Sports International Holdings, Inc.
Annual Report 2017

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 1934 For the fiscal year ended December 31, 2017¨Transition Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number: 001-36803Town Sports International Holdings, Inc.(Exact name of Registrant as specified in its charter) DELAWARE 20-0640002(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)1001 US North Highway 1, Suite 201, Jupiter, Florida 33477(Address and zip code of Registrant’s principal executive office)399 Executive Boulevard, Elmsford, New York 10523(Mailing address)(212) 246-6700(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which 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 past 90 days. Yes þ No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost 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, a smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company þ Emerging growth company ¨If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þThe aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2017 (the last business day of the registrant’s most recentlycompleted second fiscal quarter) was approximately $69.6 million (computed by reference to the last reported sale price on The Nasdaq National Market on that date). The registrantdoes not have any non-voting common stock outstanding.As of February 23, 2018, there were 27,210,377 shares of Common Stock of the Registrant outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, to be filed not later than April 30, 2018 are incorporated by reference intoItems 10, 11, 12, 13 and 14 of Part III of this Form 10-K.Table of ContentsTABLE OF CONTENTS PART I Item 1.Business1Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments23Item 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 Risk53Item 8.Financial Statements and Supplementary Data53Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure53Item 9A.Controls and Procedures53Item 9B.Other Information54 PART III Item 10.Directors, Executive Officers and Corporate Governance55Item 11.Executive Compensation55Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters55Item 13.Certain Relationships and Related Transactions, and Director Independence55Item 14.Principal Accountant Fees and Services55 PART IV Item 15.Exhibits And Financial Statements56SIGNATURES57INDEX 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 “forward-looking” statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including, without limitation, statements regarding future financial results and performance, potential sales revenue, potentialclub closures, results of cost savings initiatives, legal contingencies and tax benefits and contingencies, future declarations and payments of dividends, andthe existence of adverse litigation and other risks, uncertainties and factors set forth under Item 1A., entitled “Risk Factors,” of this Annual Report and in ourother reports and documents filed with the Securities and Exchange Commission (“SEC”). You can identify these forward-looking statements by the use ofwords such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,”“estimates,” “anticipates,” “target,” “could,” or the negative version of these words or other comparable words. These statements are subject to various risksand uncertainties, many of which are outside our control, including, among others, the level of market demand for our services, economic conditionsaffecting our business, the success of our pricing model, the geographic concentration of our clubs, competitive pressure, the ability to achieve reductions inoperating costs and to continue to integrate acquisitions, outsourcing of certain aspects of our business, environmental matters, the application of federal andstate tax laws and regulations, any security and privacy breaches involving customer data, the levels and terms of the Company’s indebtedness, and otherspecific factors discussed herein and in other SEC filings made by us. We believe that all forward-looking statements are based on reasonable assumptionswhen made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipatedresults or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the datewhen made, and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results may differ materiallyfrom 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 “the Company,” “we,” “our,” “TSI Holdings” and similarreferences refer to Town Sports International Holdings, Inc. and its subsidiaries. References to “TSI, LLC” refer to Town Sports International, LLC, and “TSIGroup” refer to Town Sports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company. The Company is a diversified holdingcompany owning subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI, LLC, has beeninvolved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of theUnited States (“U.S.”). TSI Group was formed in 2017 to invest in public and private equities and real estate. TSI Holdings’ corporate structure providesflexibility to make investments across a broad spectrum of industries in order to create long-term value for stockholders.GeneralBased on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast region of the United States. As ofDecember 31, 2017, the Company, through its subsidiaries, owned and operated 165 fitness clubs (“clubs”). Our clubs collectively served approximately587,000 members as of December 31, 2017. As of December 31, 2017, we owned and operated a total of 119 clubs in the New York metropolitan region (102of which were under the “New York Sports Clubs” brand name, 16 of which were under the “Lucille Roberts” brand name and one of which was under the“TMPL” brand name), including 39 locations in Manhattan where we are one of the largest fitness club owners and operators. Additionally, we owned andoperated 28 clubs in the Boston metropolitan region under our “Boston Sports Clubs” brand name, 10 clubs (one of which is partly-owned) in theWashington, D.C. metropolitan region under our “Washington Sports Clubs” brand name and five clubs in the Philadelphia metropolitan region under our“Philadelphia Sports Clubs” brand name, and three clubs in Switzerland. In addition, as of December 31, 2017, we have one partly-owned club that operatesunder a different brand name in Washington, D.C. We employ localized brand names for our clubs to create an image and atmosphere consistent with thelocal community and to foster recognition as a local network of quality fitness clubs rather than a national chain.1Table of ContentsIn 2017, we acquired a total of 18 clubs. We acquired the Lucille Roberts Health Club business (“Lucille Roberts”), which added 16 clubs to ourportfolio. These 16 clubs continue to operate as women only clubs under the Lucille Roberts trade name. We also acquired one existing club in Massapequa,NY, currently operating under the New York Sports Clubs brand name, including the land and the building such club occupies, as well as TMPL Gym(“TMPL”), an existing club in Manhattan, which continues to operate under the TMPL brand name. TMPL is the Company’s luxury brand that the Companyplans to expand. All 18 acquisitions were additions to our portfolio in the New York metropolitan region. The results of operations of the clubs acquired havebeen included in our consolidated financial statements from the respective dates of such acquisitions.We develop clusters of clubs to serve densely populated major metropolitan regions and we service such populations by clustering clubs near 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 regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban marketsof the region and then branching out from these urban centers to suburbs and neighboring communities.Over our 44-year history, since incorporating in 1973, we have developed and refined our club formats, which allows us to cost-effectively constructand efficiently operate our fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately 19,000square feet, while our multi-recreational clubs average approximately 38,000 square feet. The aggregate average size of our clubs is approximately 25,000square feet. Our clubs typically have an open fitness area to accommodate cardiovascular and strength-training equipment, as well as special purpose roomsfor group fitness classes and other exercise programs. We seek to provide a broad array of high-quality exercise programs and equipment that are popular andeffective, promoting a quality exercise experience for our members. When developing clubs, we carefully examine the potential membership base and thelikely demand for supplemental offerings such as swimming, basketball, children’s programs, tennis or squash and, provided suitable real estate is available,we will add one or more of these offerings to our fitness-only format. For example, a multi-recreational club in a family market may include Sports Clubs forKids programs, which can include swim lessons and sports camps for children.Industry OverviewAccording to the most recent information released by the International Health, Racquet and Sports Club Association (“IHRSA”), the U.S. health clubindustry posted growth in revenue, memberships, and number of club locations. Revenue grew from 6.9% to $27.6 billion in 2016 from $25.8 billion in2015, while club count increased 1.1% to 36,540 sites in 2016 from 36,160 in 2015. Roughly 57.3 million Americans belonged to a health club in 2016, upfrom 55.3 million in 2015. According to the IHRSA, the health club landscape extends beyond traditional, full-service fitness centers that serve localcommunities and all age groups as well as affordable fitness centers with basic amenities. Studio concepts, including boxing, yoga, Pilates, group cycling,barre, boot camps, and sports-specific training, also shape the club market.According to the IHRSA, the average age of a health club member in 2016 was 39 years old. One-third of health club members, which is the mostrepresented age group, were between the ages of 35-54 years old. The second most represented age group was 18-34 years old, which represented 28% ofhealth club members. The oldest, the over-55 age group, represented 24% of all health club members, while those under age 18 represented 15% of all healthclub members. The number of health club members under age 18 has grown from 5.3 million in 2012 to 8.7 million in 2016.As the numbers showed in 2016, the health club industry reported growth in all three key indicators: revenue, membership, and club count. Still, morethan 27% of Americans remain inactive, as reported by the Physical Activity Council. More than two out of five Americans do not participate in any of the120 activities measured by the Physical Activity Council. We are in a unique position to address physical inactivity as the health club serves as a hub forhealth, wellness and exercise. As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, we believe that we are wellpositioned to benefit from these dynamics as a large operator with recognized brand names, leading regional market shares and an established operatinghistory.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 largest owners and operators of fitness clubs in the Northeastregion of the U.S. In 2017, we acquired 18 clubs in the New York metropolitan region. Our strong real estate presence in the New York, Boston, Washington,D.C., and Philadelphia metropolitan regions enhances convenience to our members. We attribute our positions in these markets in part to the strength of ourlocalized owner and operator brand names, which foster recognition as a local network of quality fitness clubs.2Table of ContentsRegional 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 of our clubs, which provides the convenience of having fitnessclubs near a member’s workplace and home. This is also a benefit to our corporate members, as many corporations have employees that will take advantage ofmultiple gym locations. Approximately 226,000, or 39%, of our members currently have a passport, elite or flagship membership, and because thesememberships offer enhanced privileges and greater convenience, they typically generate higher monthly dues than our single club memberships in eachrespective region. Regional clustering also allows us to provide special facilities to all of our members within a local area, such as swimming pools andsquash, tennis and basketball courts, without offering them at every location. In the year ended December 31, 2017, approximately 28% of all club usage wasby 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.Business StrategyIn the long-term, we seek to maximize our net member growth, revenues, earnings and cash flows using the following strategies:Growth through acquisitions. We plan to expand our club base through selective acquisitions. We believe this is an important element of our corporatestrategy as it strengthens our competitive position and expands and enhances the services that we can offer to members. In 2017, we acquired 18 clubs in theNew York metropolitan region and constructed and opened two clubs. In January 2018, we acquired two additional clubs. We expect to continue to acquireselective clubs to continue our expansion of club offerings, including clubs outside of our current regions. In the event we build and acquire additional newclubs, the club expansion is expected to be funded with cash on hand or through internally generated cash flows. We may also consider certain acquisitionsother than health clubs to diversify the business while enhancing shareholder value.Grow membership revenues. We seek to grow our membership revenues in existing clubs through driving membership growth and optimizing dues andmember retention. We believe our offerings are compelling because we include group exercise classes, top of the line equipment, pools and courts in the priceof certain memberships, when available. Our member count increased by 43,000 members for a total member count of 587,000 in 2017 and we will continueto 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 addition, we offer Sports Clubs for Kids programs at select clubs.Optimization of our clubs. We remain committed to optimizing our existing club base, including club closures when appropriate. We closed five clubsin 2017. We expect these profit margin initiatives will enable us to improve in club level economics across our portfolio, and to offset the competitivepressure in the geographic regions in which we compete.Retain members by focusing on the member experience. Our Company’s mission is “Bring the best out of every body.” By building and nurturing astrong consumer centric culture, we are able to provide a clear road map for how we serve our members and deliver a superior experience. We tailor the 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 and Sports Clubs for Kids programs. We offer a variety of different sports facilities in each regional cluster of clubs; modern,varied and well-maintained exercise and fitness equipment; and an assortment of additional amenities including access to babysitting. Through hiring,developing and training a qualified and diverse team that is passionate about fitness and health; maintaining and enhancing our programs and services;continually increasing our attention to individual member needs; and investing in our digital ecosystem, we expect to demonstrate our commitment toincrease the quality of the member experience, and thereby increase net membership. To better measure the member experience, we utilize social media tohelp analyze the areas we can improve upon as well as the areas in which the members are satisfied overall.3Table of ContentsProvide 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, we have a functional training zone within our clubs that features an array of innovative equipment designed to maximize the member’sworkout. The functional training zones include a variety of functional training equipment, such as Total Body Resistance Exercise (“TRX” brand)suspension training frame, Kettle Bells, Battle Ropes and Power Sleds. Our functional training zones are open to members for free self-guided workouts,personal training sessions and fee-based programs.MarketingOur in-house marketing team is responsible for brand positioning, brand strategy, and product innovation for the Company and all of its subsidiaries.The primary objective is to ensure that our brands seize market share and opportunities through well-defined and coordinated go-to-market strategies. We areorganized to enable close collaboration between our marketing, sales and operations staff, which helps to align efforts around operational objectives and newproduct development. We seek to inspire brand experiences and in doing so, drive sustainable and quality growth, while building a strong reputation andloyalty with both existing members and future members. In order to have credible and authentic connections to create such desirability with our audience, weutilize a market segmentation strategy. A marketing segmentation strategy divides our target market into subgroups, whereby consumers in each of thesesubgroups share one or more characteristics. Using this knowledge, we develop specific plans, including personalized and mass marketing, to reach thesetargeted customers effectively. We seek to identify and understand consumers’ individual motivations and goals in an effort to create meaningful products,services and experiences that build a lasting impression and brand loyalty.SalesWe sell our memberships primarily through three channels: direct sales at the club level; through corporate and group sales; and through our onlinewebsite. Through our corporate and group sales approach we concentrate on building long-term relationships with local and regional companies,organizations and other large groups.We also sell individual memberships online for our standard membership types and the websites enable us to sell memberships for pre-establishedcorporate and group programs. The websites also allow our members to give us direct feedback about our service levels and enables prospective members tosign up for a free one-day pass or purchase a 30 day guest pass. The online sales channel offers a high degree of convenience for customers who know andtrust our brand and do not require up-front interaction with a membership sales consultant to make their decision. In addition, selling online significantlyreduces our cost of sale. The websites also provide information about the respective club locations, program offerings, exercise class schedules and salespromotions. Job seekers can also begin the employment application process through the respective websites and investors can access financial informationand resources.MembershipsWe believe that clustering clubs allows us to sell memberships based upon the opportunity for members to utilize multiple club locations near theirworkplace and their home. We offer various types of memberships at our clubs that include either single club or multiple club access and either month-to-month or one-year commitment options.Our single club memberships are sold in the range of $19.99 and $64.99 per month.We also offer various multiple-club memberships that include access to certain clusters of clubs, including our Passport Membership which providesaccess to all of the clubs in our four regions with the exception of certain “Elite” clubs and one “flagship” club. The Passport Membership is currently pricedat $89.99 for the month-to-month option and $79.99 for the one-year commitment option. Additionally, the Company offers both Elite and FlagshipMemberships. The Flagship Membership provides access to all of our clubs, including our Flagship club and all Elite clubs. The Elite Membership includesaccess to all clubs, including our Elite clubs, with the exception of our Flagship club. Elite and Flagship memberships range in price generally from $89.99 to$120.00 per month.4Table of ContentsThe membership prices above are dependent on club location and whether the member joins under a “month-to-month” or a “commit” contract. Underthe commit contract, new members commit to a one year membership, generally at a lower monthly rate than a month-to-month membership. A member maycancel a commit membership at any time for a fee. When the members’ commit period is over, they retain membership as a month-to-month member until theychoose to cancel. As of December 31, 2017, approximately 85% of our total members were on a month-to-month basis.In joining a club, a new member signs a membership agreement that typically obligates the member to pay fees (“Joining Fees”) including a one-timeinitiation fee and the first annual fee. Initiation fees generally range between $0 and $99 while the annual fee generally charged between $59.99 and $69.99for all memberships. These one-time Joining Fees averaged $60, $61 and $72 per sale for the years ended December 31, 2017, 2016 and 2015, respectively.The annual fee is also charged on each anniversary of the enrollment date, however is no longer considered a joining fee after the first payment.Monthly electronic fund transfers (“EFT”) of individual membership dues on a per-member basis, including the effect of promotions, averagedapproximately $46, $45 and $50 per month for the years ended December 31, 2017, 2016 and 2015, respectively. Currently, approximately 99% of ourmembers pay their membership dues the first of each month through EFT, with EFT membership revenue constituting approximately 75% of totalconsolidated revenue for the year ended December 31, 2017.UsageOur total club usage, based on the number of member visits, was 30.2 million and 31.7 million member visits for the years ended December 31, 2017and 2016, respectively. In the year ended December 31, 2017, approximately 28% of total usage or club visits was to members’ non-home clubs, indicatingthat our members take advantage of our network of clubs. Our membership plans allow for club members to elect to pay a per visit fee to use clubs that are notdefined in their membership plan.Non-Membership RevenueThe table below presents non-membership revenue components as a percentage of total revenue for the years ended December 31, 2013 through 2017. For the Years Ended December 31, ($ in thousands) 2017 % 2016 % 2015 % 2014 % 2013 %Total revenue$403,042 100.0% $396,921 100.0% $424,323 100.0% $453,842 100.0% $470,225 100.0%Non-MembershipRevenue: Personal trainingrevenue69,735 17.3% 66,487 16.8% 73,191 17.2% 70,338 15.5% 66,367 14.1%Other ancillaryclub revenue(1)17,197 4.3% 19,642 4.9% 22,138 5.2% 22,304 4.9% 24,720 5.3%Fees and Otherrevenue(2)5,876 1.4% 6,361 1.6% 6,254 1.5% 5,971 1.3% 5,985 1.3%Total non-membershiprevenue$92,808 23.0% $92,490 23.3% $101,583 23.9% $98,613 21.7% $97,072 20.7% (1)Other ancillary club revenue primarily consists of Sports Clubs for Kids, Small Group Training and racquet sports.(2)Fees and other revenue primarily consist of rental income, laundry revenue, marketing revenue and management fees. The year ended December 31, 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 regions, we have created clusters of clubs in urban areas and their commuter suburban areas alignedwith our operating strategy of offering our target members the convenience of multiple locations close to where they live and work, reciprocal use privileges,and standardized facilities and services.5Table of ContentsApproximately 68% 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 19,000 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, 2013 to December 31, 2017, we constructed ten new clubs, acquired 24 clubs and closed or relocated 29 clubs. Currently, 67 of our clubs, orapproximately 41% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31,2017, we acquired 18 clubs, constructed and opened two clubs and closed five clubs, ending the year with 165 total clubs under operation. This compares toconstructing and opening of one club, converting of two studio locations to clubs, and closing of five clubs during the year ended December 31, 2016. Inboth 2017 and 2016, we also upgraded certain existing clubs and plan to continue to do so in 2018. Our facilities include a mix of cardiovascular and strength equipment from some of the best manufacturers including Life Fitness, Technogym, Nautilus,Cybex®, Precor®, Star Trac®, Hammer®, Woodway® and Octane®. At many locations, additional amenities are also offered, including swimming pools,racquet and basketball courts, functional training zones and babysitting services. Personal training services are offered at all locations for an 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 session with a fitness manager or apersonal trainer who helps to develop a customized routine that supports the member’s fitness goals. This initial assessment session includes a workoutevaluation, cardio, strength and endurance testing, and movement screening. Members who elect to receive personal training can benefit from one-on-onecoaching and guidance, with refreshed programs that evolve as the members achieve their fitness goals. All of our fitness clubs offer our personal trainingmembership products where members can select from a package of four to 12 personal training sessions per month. The personal training membership productprovides members with a certified personal trainer who works with the member to create an individualized goal-based program. Our fitness teams are trainedto provide superior fitness solutions to address member needs. We believe the qualifications of the personal training staff help to ensure that members receivea consistent level of quality service throughout our clubs and that our personal training programs provide valuable guidance to our members as well as asignificant source of incremental revenue for us. We believe that members who participate in personal training programs typically have a longer membershiplife.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.6Table of ContentsIn addition to group exercise, we offer a variety of ancillary programming for children under our Sports Clubs for Kids brand. As of December 31, 2017,Sports Clubs for Kids was being offered in 33 club locations throughout our various regions. Our Sports Clubs for Kids programming positions our multi-recreational clubs as family clubs, which we believe provides us with a competitive advantage. Depending upon the facilities available at a location, SportsClubs for Kids programming can include traditional youth offerings such as day camps, sports camps, swim lessons, hockey and soccer leagues, gymnastics,dance, and birthday parties. It also can include non-competitive “learn-to-play” sports programs.Our facilities and equipment management teams are dedicated to ensuring our clubs and fitness equipment are operating at the highest standard 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.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 monitor, replace or upgrade keytechnology services and infrastructure.All of our clubs use a third-party hosted management system to process memberships, bill members, process point of sales transactions, and trackmember usage of the clubs. In addition, the management system tracks and analyzes key operating measurements such as membership statistics,cancellations, cross-club utilization, member tenure, and demographics profiles.We continue to create a more customizable and efficient experience for members through updated digital tools, which included an enhanced websiteand mobile application. These digital tools enable enable feature membership sign up, club location search, class schedules and booking, traininginformation, custom profiles for group fitness instructors and trainers. In addition, members are able to customize their group fitness experience based onfitness goals and preferences through a personalized search feature. We continue to enhance the digital tools accessibility to increase our online presence andmember engagement.Our back-office computer systems are comprised of a variety of technologies designed to assist in the management and analysis of our revenues, costsand key operational metrics, as well as support the daily operations of our clubs and corporate offices. These systems include an on premise financial system,a third-party hosted data warehouse, a third-party hosted telephone system and call center software to manage and track member service experiences.We regularly implement cost effective technology solutions to accommodate growth, provide network redundancy, secure operating practices, bettermanage telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical architecture,including business continuity and recovery. Improvements in the IT infrastructure will continue to be made in the future in order to better serve our businessneeds.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, LUCILLEROBERTS, TMPL, UXF, SPORTS CLUBS FOR KIDS, COMPANIESGETFIT.COM, BFX STUDIO, RIDE REPUBLIC, and MASTER CLASS. Wecontinue to register 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 from30,500 in 2012 to 36,540 in 2016, based on the most recent information available according to the IHRSA. In each of the regions in which we operate, wecompete with other fitness clubs, physical fitness and recreational facilities.7Table of ContentsWe consider the following groups to be our primary competitors in the health and fitness industry:•commercial, multi-recreational and fitness-only chains;•private studios, and other boutique fitness offerings;•the YMCA and similar non-profit organizations;•physical fitness and recreational facilities established by local governments, hospitals and businesses;•exercise and small fitness clubs; racquet, tennis and other athletic clubs;•amenity gyms in apartments, condominiums and offices;•weight-reducing salons;•country clubs; •the home-use fitness equipment industry; and•online fitness coaching.The principal methods of competition include pricing and ease of payment, required level of members’ contractual commitment, level and quality 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 ourregions 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 regions in which we operate. Competitors, who may include companies that are larger and havegreater resources than us, may enter these regions 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 theseregions. However, such a competitor could enter these regions 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 through increased sales at the beginning ofeach year and experience an increased rate of membership attrition during the summer months. In addition, during the summer months, we experience a slightincrease in operating expenses due to our outdoor pool and summer camp operations, generally matched by seasonal revenue recognition from season poolmemberships and camp revenue.8Table of ContentsGovernment 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 types of federal and state regulations governing the sale of memberships. Theselaws and regulations are subject to varying interpretations by a number of state and federal enforcement agencies and courts. We maintain internal reviewprocedures to comply with these requirements and believe that our activities are in substantial compliance with all applicable statutes, rules and decisions.We primarily accept payments for our memberships through EFT from credit cards, and, therefore, we are subject to both federal and state 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, 2017, we had approximately 7,500 employees, of whom approximately 1,600 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.9Table of ContentsAvailable InformationWe make available through our web site at https://www.townsportsinternational.com in the “Investor Relations — SEC Filings” section, free of charge,all reports and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Occasionally, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on andaccessible at https://www.townsportsinternational.com. In addition, you may automatically receive email alerts and other information about the Company byenrolling through the “Email Alerts” section at https://www.townsportsinternational.com.The foregoing information regarding our website and its content is for convenience only. The content of our website is not deemed to be incorporatedby reference into this report nor should it be deemed to have been filed with the SEC.Item 1A. Risk FactorsInvestors should carefully consider the risks described below and all other information in this Annual Report. 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. We believe the lossof Mr. Walsh could have a material adverse effect on us and our financial performance. Currently, we do not have any long-term employment agreements withour 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.10Table of ContentsNegative 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 regions in which we operate, we competewith other fitness clubs, private studios, physical fitness and recreational facilities established by local governments, hospitals and businesses for theiremployees, amenity and condominium clubs, the YMCA and similar organizations and, to a certain extent, with racquet and tennis and other athletic clubs,country clubs, weight reducing salons and the home-use fitness equipment industry. We also compete with other entertainment and retail businesses for thediscretionary income in our target demographics. We might not be able to compete effectively in the future in the regions in which we operate. Competitorsinclude companies that are larger and have greater resources than us and also may enter these regions to our detriment. These competitive conditions maylimit our ability to increase dues without a material loss in membership, attract new members and attract and retain qualified personnel. Additionally,consolidation in the fitness club industry could result in increased competition among participants, particularly large multi-facility operators that are able tocompete for attractive acquisition candidates or newly constructed club locations, thereby increasing costs associated with expansion through bothacquisitions and lease negotiation and real estate availability for newly constructed club locations.The number of competitor clubs that offer lower pricing and a lower level of service continue to grow in our regions. These clubs have attracted, 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 regions in which we operate to open a chain of clubs in these regions through one, or a series of,acquisitions.The success of our business depends on our ability to retain the value of our brands.Our ability to maintain our brand image and reputation is integral to our business. Maintaining, promoting and growing our brand will depend largely onthe success of our marketing efforts and our ability to provide a consistent, high-quality member experience. Our reputation could be jeopardized if we fail tomaintain high standards for member experiences, fail to maintain high ethical, social, and environmental standards for all of our operations and activities, orwe fail to appropriately respond to concerns associated with any of the foregoing or any other concerns from our members. We could be adversely impacted ifwe fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adversepublicity about regulatory or legal action against us, or by us, could damage our reputation and brand image. Damage to our reputation or loss of consumerconfidence for any of these reasons may result in fewer memberships sold or renewed, which in turn could materially and adversely affect our results ofoperations and financial condition.11Table of ContentsThe lower average membership dues have and may in the future negatively impact our comparable club revenue growth and our operating margins.In the past several years, we lowered monthly dues and/or initiation and processing fees at certain clubs in order to attract more members and, as a result,initially experienced lower revenues and margin pressure. Recently, the Company has been increasing monthly dues to more accurately reflect themembership value; however, if we are unable to attract a sufficient number of new members or if we experience higher attrition as a result of these increases inmonthly dues, the pressure on the Company's revenue and result of operations could be adversely impacted.Declines in revenue have adversely affected our results or operations and cash flow from operations and we may be compelled to take additional actionswhich may not be successful in mitigating such effects.We continue to experience revenue pressure from members as the fitness industry continues to be highly competitive in the geographic regions inwhich we compete. Also, our previous strategy of converting to a low-cost gym implemented in 2014 resulted in additional revenue pressure for the past fewyears. New members joined at lower monthly rates and cancellations of members paying higher rates negatively impacted our results and liquidity. Inresponse to this, we implemented cost-savings initiatives in 2015, 2016 and 2017, which mitigated the impact the decline in revenue had on its profitabilityand cash flow from operations.We continue to strategize on improving our financial results. We focus on increasing membership in existing clubs to increase revenue. We mayconsider additional actions within our control, including certain acquisitions, license arrangements, and the closure of unprofitable clubs upon leaseexpiration and the sale of certain assets. We may also consider additional strategic alternatives, including opportunities to reduce TSI, LLC’s existing debtand further cost-savings initiatives. Our ability to continue to meet our obligations is dependent on our ability to generate positive cash flow from acombination of initiatives, including those mentioned above. Failure to successfully implement these initiatives could have a material adverse effect on ourliquidity and our operations, and we would need to implement alternative plans that could include additional asset sales, additional reductions in operatingcosts, additional reductions in working capital, debt restructurings and the deferral of capital expenditures. There can be no assurance that such alternativeswould 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 each of the years ended December 31, 2017 and 2016, we closed five clubs. In the year ended December 31, 2017 and 2016, we recognized fixed assetimpairment charges of $6.5 million and $742,000, respectively, at underperforming clubs. In addition, we recorded goodwill impairment charges of $31.6million in the year ended December 31, 2016. The goodwill impairment charges in 2016 was primarily due to existing members downgrading theirmemberships to those with lower monthly dues and new members enrolling at lower rates. Some of our club closures and impairments were due, in large part,to the economic and consumer environment, and increased competition in areas in which our clubs operate. If the economic and consumer environment wereto deteriorate or not improve or if we are unable to improve the overall competitive position of our clubs, our operating performance may experience declinesand we may need to recognize additional impairments of our fixed assets and goodwill and may be compelled to close additional clubs. In addition, wecannot ensure that we will be able to replace any of the revenue lost from these closed clubs from our other club operations. We will continue to monitor theresults and changes in expectations of these clubs closely to determine if additional fixed asset or goodwill impairment charges will be necessary.Our geographic concentration heightens our exposure to adverse regional developments.As of December 31, 2017, we operated 119 fitness clubs in the New York metropolitan region, 28 fitness clubs in the Boston region, 10 fitness clubs inthe Washington, D.C. region, five fitness clubs in the Philadelphia region 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.12Table of ContentsAny 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 our markets, our operating results or the market on which our common stock trades. Our geographic concentration in the major cities in theNortheast and Mid-Atlantic regions and, in particular, the New York City and Washington, D.C. areas, heightens our exposure to any such future terroristattacks, which may adversely affect our clubs and result in a decrease in our revenues. The potential near-term and long-term effect these attacks may have forour members, the markets for our services and the market for our common stock are uncertain; however, their occurrence can be expected to further negativelyaffect the U.S. economy generally and specifically the regional markets in which we operate. The consequences of any terrorist attacks or any armed conflictsare 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 be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptableterms, if at all. Transitioning to new suppliers would be time consuming and expensive and may result in interruptions in our operations. If we shouldencounter delays or difficulties in securing the quantity of equipment we require to open new and refurbish existing stores, our suppliers encounterdifficulties meeting our demands for products or services, our websites experience delays or become impaired due to errors in the third-party technology orthere is a deficiency, lack or poor quality of products or services provided, our ability to serve our members and grow our brand would be interrupted. If anyof these events occur, it could have a material adverse effect on our business and operating results.Our trademarks and trade names may be infringed, misappropriated or challenged by others.We believe our brand names and related intellectual property are important to our business. We seek to protect our trademarks, trade names and 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.13Table of ContentsWe 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 fail to comply with applicable privacy, security, and data laws, regulations and standards, our business could be materially and adversely affected.We use electronic mail (“email”), text messages and phone calls to market our services to potential members and as a means of communicating with ourexisting members. The laws and regulations governing the use of telephonic communication, including but not limited to emails, text messages and phonecalls, for commercial purposes continue to evolve. Because messaging and phone calls are important to our business, if we are unable to successfully delivermessages or make phone calls to existing members and potential members, if there are legal restrictions on delivering these messages to consumers, or ifconsumers do not or cannot receive our messages or phone calls, our revenues and profitability could be adversely affected. If new laws or regulations areadopted, or existing laws and regulations are interpreted, to impose additional restrictions on our ability to call or send email or text messages to our membersor potential members, we may not be able to communicate with them in a cost-effective manner and it may limit our ability to utilize such forms ofcommunication. In addition to legal restrictions on the use of emails, text messages and phone calls for commercial purposes, service providers and othersattempt to block the transmission of unsolicited messages, commonly known as “spam.” Many service providers have relationships with organizations whosepurpose it is to detect and notify the service providers of entities that the organization believes is sending unsolicited messages. If a service provideridentifies messaging from us as “spam” as a result of reports from these organizations or otherwise, we could be placed on a restricted list that will block ourmessages to members or potential members. If we are restricted or unable to communicate through emails, text messages or phone calls with our members andpotential members as a result of legislation, regulation, blockage or otherwise, our business, operating results and financial condition could be adverselyeffected.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 region. 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.Acquisitions could result in operating difficulties, dilution, and other consequences that may adversely impact our business and results of operations.Part of our key strategy is to grow through acquisitions. We expect to continue to evaluate and enter into discussions regarding a wide array of potentialstrategic transactions. There can be no assurance that we will continue to be able to successfully integrate these acquisitions into our existing businesswithout substantial costs, delays or other operational or financial difficulties. The areas where we face risks include:•diversion of management time and focus from operating our business to acquisition integration challenges;•difficulties in the transition of acquired members onto our systems;•the acquired businesses failing to provide, or delays in realizing, the benefits originally anticipated;•integration of the acquired company's accounting, human resource, and other administrative systems, and coordination of sales and marketingfunctions;•challenges related to the lack of experience in operating in the geographical regions of the acquired business;•unanticipated contract or regulatory issues and the assumption of, and exposure to, unknown or contingent liabilities of the acquired businesses. 14Table of ContentsWe anticipate that any future acquisitions we pursue as part of our business strategy may be financed through a combination of cash on hand,operating cash flow and availability under our existing credit facility. If new debt is added to current debt levels, or if we incur other liabilities, includingcontingent liabilities, in connection with an acquisition, the debt or liabilities could impose additional constraints and requirements on our business andfinancial performance, which could materially adversely affect our financial condition and operations.If an acquisition is not successfully completed or integrated into our existing operations or does not result in the benefits we expect, as a result of thefactors mentioned above or otherwise, our business, financial condition or results of operations may be adversely affected. In addition, failure to integratesuccessfully or realize the anticipated business opportunities and growth prospects from our acquisitions, could result in unanticipated expenses and lossesand may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing operations.Accordingly, in connection with any acquisition, there can be no assurance as to whether or when any benefits or cost synergies we hope to achieve willoccur, or the extent to which they actually will be achieved.We have, and will continue to have, significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, 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, 2018 through December 31, 2022,we have leases for 25 club locations that are due to expire without any renewal options, eight of which expire in 2018, and 61 club locations that are due 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 of common area maintenance charges, real propertyinsurance, and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities 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 regions our comparable club revenuegrowth and our operating margins may be negatively impacted.Upon opening a club, we typically experience an initial period of club operating losses. 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.15Table of ContentsWe currently operate clubs throughout the Northeast and Mid-Atlantic regions of the United States. In the case of existing regions, our experience hasbeen that opening new clubs may attract some memberships away from other clubs already operated by us in those regions and diminish their revenues. Inaddition, as a result of new club openings in existing regions and because older clubs will represent an increasing proportion of our club base over time, 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 might not be able to maintain our general liability insurance on acceptable terms in the futureor maintain a level of insurance that would provide adequate coverage against potential claims.Depending upon the outcome, these matters may have a material effect on our consolidated financial position, results of operations and cash flows.We may be exposed to other litigation from time to time that can have significant adverse effects upon us.In the ordinary course of conducting our business, we are exposed to litigation from time to time that can have significant adverse effects upon 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.16Table of ContentsSecurity 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 or in their interpretation, could individually or in theaggregate cause us to change or limit our business practice, which may make our business model less attractive to our members.We are subject to a number of risks related to ACH, credit card and debit card payments we accept.We accept payments through automated clearing house (“ACH”), credit card and debit card transactions. For ACH, credit card and debit card payments,we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for 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.17Table of ContentsIf 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 or changes in the industry could place strains on our management, employees, information systems and internal controls, which may adverselyimpact our business.Future expansion or changes in the industry will place increased demands on our administrative, operational, financial and other resources. Any failureto manage such growth or changes effectively could seriously harm our business. To be successful, we will need to continue to improve managementinformation systems and our operating, administrative, financial and accounting systems and controls. We will also need to train new employees andmaintain close coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming andexpensive, 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.18Table of ContentsOur 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, 2017 totaled $19.9 million. During 2017, in any one month, the amount held in one commercial bank has been as highas approximately $45.2 million.Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not 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 stockholders 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. As of December 31, 2017, we hadapproximately $12.5 million of unused and expired personal training sessions that had not been recognized as revenue and was recorded as deferred revenue.We do not believe this amount is subject to the escheatment or abandoned property laws of any of the jurisdictions in which we conduct our business,including the State of New York. It is possible however, that one or more of these jurisdictions may not agree with our position and may claim that we mustremit all or a portion of these amounts to such jurisdiction. This could have a material adverse effect on our cash flows. The State of New York has informedus that it is considering whether we are required to remit the amount received by us for unused, expired personal training sessions to the State of New York asunclaimed property. For a total of six of the jurisdictions in which we operate, we have concluded, based on opinions from outside counsel, that monies heldby a company for unused and expired personal training sessions are not escheatable. In 2010, for three jurisdictions, we concluded, based on opinions fromoutside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. As a result, we recorded approximately$2.7 million as personal training revenue in the fourth quarter of 2010. This amount was previously recorded in deferred revenue. In 2017, for another threejurisdictions, we concluded, based on opinions from outside counsel, that money held by a company for unused and expired personal training sessions arenot escheatable. As a result, we recorded approximately $3.6 million as personal training revenue in the fourth quarter of 2017. This amount was previouslyrecorded in deferred revenue, which was primarily related to sessions purchased prior to the year ended December 31, 2015.19Table of ContentsWe 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, 2017, 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, we disagree with the proposed assessment dated December 12, 2016 from the State of New York andattended a conciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached atthe conference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, we received from the State of New York arevised assessment related to tax years 2006-2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. We currently are in theprocess of appealing the assessment with the New York State Division of Tax Appeals. We have not recorded a tax reserve related to the proposed assessment.It is difficult to predict the ultimate outcome of this or any other tax examination and the result of any such tax examination could have a material adverseeffect on our results of operations and financial condition. Additionally, on November 17, 2017, we were notified that the State of New York proposed anadjustment in the amount of approximately $3.9 million for the years 2010 to 2014, inclusive of approximately $757,000 in interest.Risks Related to Our Leverage and Our 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, 2017, our total outstanding consolidated debt was $199.9 million under our 2013Term Loan Facility. The 2013 Term Loan Facility expires on November 15, 2020. In addition, as of December 31, 2017, under the 2013 Revolving LoanFacility there were no outstanding borrowings and outstanding letters of credit issued totaled $7.0 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, 2017 was $38.0 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;20Table of Contents•limiting our ability to refinance our existing indebtedness on favorable terms before the expiration of the current 2013 Term Loan Facility, or at all;and•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they currently face could intensify.The current debt under the 2013 Senior Credit Facility has a floating interest rate and an increase in interest rates may negatively impact our 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 $39.9 million of our outstanding debt under our 2013 Senior Credit Facility as of December 31, 2017, 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 $199.9 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.Credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt.Future disruption and volatility in credit market conditions could have a material adverse impact on our ability to refinance debt when it comes due onterms similar to our current credit facilities, or to draw upon existing lines of credit or incur additional debt if needed as a result of unanticipated downturns inthe markets for our products and services, which may require us or our subsidiaries to seek other funding sources to meet our cash requirements. We cannot becertain that alternative sources of financing would be available in the future on terms and conditions that are acceptable.Our outstanding indebtedness and the inability to renew or refinance our 2013 Senior Credit Facility could materially adversely affect our financialcondition and our ability to operate our business.We will need to refinance our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of anyrefinancing may not be as favorable as the terms of our existing debt or refinance our existing debt at all. Furthermore, if prevailing interest rates or otherfactors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness wouldincrease. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities,which could adversely affect our ability to refinance existing debt or raise additional capital. These risks could impair the Company's liquidity and wouldlikely have a material adverse effect on our businesses, financial condition and results of operations.Covenant restrictions under our indebtedness may limit our ability to operate our business and, in such an event, we may not have sufficient assets to 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;21Table of Contents•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 31,2017, TSI, LLC had outstanding letters of credit of $7.0 million and a total leverage ratio that was below 4.50:1.00. Other than these outstanding letters ofcredit, TSI, LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. The terms of the 2013 Senior Credit Facility include a financialcovenant under which the Company is not able to utilize more than 25%, or $11.3 million, in accordance with terms of the 2013 Revolving Loan Facility ifthe 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.We will need to repay any indebtedness under the 2013 Revolving Loan Facility in the event the 2013 Revolving Loan Facility is not extended,restructured or refinanced.The 2013 Revolving Loan Facility will mature on November 15, 2018. Given that the 2013 Senior Credit Facility contains a restrictive covenant onobtaining secured debt, if we are unable to extend, restructure or refinance the 2013 Revolving Loan Facility prior to maturity, all letters of credit that remainoutstanding under the 2013 Revolving Loan Facility will become immediately due and payable upon maturity. As of December 31, 2017, the Company hada total of approximately $7.0 million letters of credit outstanding under the 2013 Revolving Loan Facility. This acceleration of payment related to the lettersof credit could have a material adverse effect on our businesses, financial condition and results of operations.Risks Related to Our Common StockThe stock ownership of certain large stockholders will likely limit your ability to influence corporate matters.As of February 23, 2018, the Company had two stockholders (including Patrick Walsh, the Chief Executive Officer and Chairman of our board ofdirectors) which, together with each such stockholder's affiliates, beneficially owned 13.7% and 31.2% of our outstanding common stock, respectively, basedon public filings made by such stockholders. Each of these stockholders may vote their stock with respect to certain matters, including any determinationswith respect to mergers or other business combinations, the acquisition of assets for stock consideration or disposition of all or substantially all of our assets,and the issuance of any additional common stock or other equity securities, in a manner which may not be viewed as beneficial by other stockholders.Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely 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:22Table of Contents•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.Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on 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 CommentsNone23Table of ContentsItem 2. PropertiesWe own our 1000 Sunrise Highway location in Massapequa, New York, which houses one of our clubs and a retail tenant. This property was acquired inNovember 2017. We lease the remainder of our fitness clubs pursuant to long-term leases (generally 15 to 20 years, including options). In the next five years,or the period from January 1, 2018 through December 31, 2022, we have leases for 25 club locations that are due to expire without any renewal options, eightof which are due to expire in 2018, and 61 club locations that are due to expire with renewal options. Renewal options include terms for rental increasesbased on the consumer price index, fair market rates or stated renewal terms already set in the lease agreements.We lease office space in Jupiter, Florida and New York City, both used for administrative and general corporate purposes. We lease approximately82,000 square feet in Elmsford, NY, for the operation of a centralized laundry facility for the New York Sports Clubs 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 region (New 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 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 February 2017Manhattan, NY 4 Astor Place May 2017Bronx, 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 2008Brooklyn, NY 147 Greenpoint Avenue June 2014Queens, NY 69-33 Austin Street April 199725Table of ContentsLocation Address Date Opened or Management AssumedQueens, 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 Boulevard 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 1998Great Neck, NY 15 Barstow Road July 1989East Meadow, NY 625 Merrick Avenue January 1999Commack, NY 6136 Jericho Turnpike January 1999Massapequa, NY 1000 Sunrise Highway November 2017Oceanside, 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 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 1999Jersey 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 Road February 2005Hoboken, NJ 210 14th Street December 200626Table of ContentsLocation Address Date Opened or Management AssumedEnglewood, 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 2011New York region (Lucille Roberts):Manhattan, NY 50 East 42nd Street September 2017Manhattan, NY 1387 Nicholas Avenue September 2017Bronx, NY 2449 Morris Avenue September 2017Brooklyn, NY 430 89th Street September 2017Brooklyn, NY 925 Kings Highway September 2017Brooklyn, NY 1950 Ralph Avenue September 2017Queens, NY 32-62 Steinway Street September 2017Queens, NY 135-39 38th Avenue September 2017Queens, NY 70-20 Austin Street September 2017Commack, NY 6534 Jericho Turnpike September 2017Bay Shore, NY 1850 Sunrise Highway September 2017Holbrook, NY 5801 Sunrise Highway September 2017Rockville Centre, NY 298 Sunrise Highway September 2017Valley Stream, NY 225 West Merrick Road September 2017Clifton, NJ 1075 Bloomfield Avenue September 2017Jersey City, NJ 338 Central Avenue September 2017New York region (TMPL):Manhattan, NY 355 West 49th Street December 2017Boston region (Boston 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 200827Table of ContentsLocation Address Date Opened or Management AssumedWestborough, MA 35 Chauncy Street January 2018Woburn, MA 300 Presidential Way December 2008Wayland, MA Wayland Town Center November 2014Providence, RI 131 Pittman Street December 2008Washington, D.C. region (Washington 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. 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 1998Silver Spring, MD 8506 Fenton Street November 2005Bethesda, MD 6800 Wisconsin Avenue November 2007Clarendon, VA 2700 Clarendon Boulevard November 2001Philadelphia region (Philadelphia 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 2006Florida region (Christi's Fitness): Vero Beach, FL 1250 Old Dixie Highway January 2018Switzerland region: 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.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, 2017: First Quarter$4.20 $2.45Second Quarter$4.90 $3.15Third Quarter$7.15 $4.28Fourth Quarter$7.10 $5.00Year ended December 31, 2016: First Quarter$3.02 $0.92Second Quarter$3.97 $2.38Third Quarter$3.45 $2.43Fourth Quarter$3.16 $2.10HoldersAs of February 23, 2018, there were approximately 110 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 PolicyThe Company did not declare any dividends in 2017, 2016 or 2015. The cash dividends were funded by available cash on hand.The board of directors does not currently intend to declare dividends. The declaration and payment of dividends to holders of our common stock by us,if any, are subject to the discretion of our board of directors. Our board of directors will take into account such matters as general economic and 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 $17.6 million at December 31, 2017, and distributions received from our subsidiaries to provide the funds necessary topay dividends on our common stock.The existing credit agreement of TSI, LLC restricts the ability of our subsidiaries to pay cash distributions to TSI Holdings in order for TSI Holdings topay cash dividends except (a) in an amount, when combined with certain prepayments of indebtedness, of up to $35.0 million, subject to pro formacompliance with a total leverage ratio of no greater than 4.50:1.00 and no default or event of default existing or continuing under the credit agreement, and(b) an additional amount based on excess cash flow, such additional amounts subject to pro forma compliance with a total leverage ratio of less than4.00:1.00 and no default or event of default existing or continuing under the credit agreement. In October 2017, TSI, LLC made a dividend distribution of$35.0 million to TSI Holdings, Inc.Issuer Purchases of Equity SecuritiesWe did not purchase any equity securities during the fourth quarter ended December 31, 2017.Recent Sales of Unregistered SecuritiesWe did not sell any securities during the year ended December 31, 2017 that were not registered under the Securities Act of 1933, as amended (the“Securities Act”), other than as previously reported in a Current Report on Form 8-K.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 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ended December 31. December 31, 2012 2013 2014 2015 2016 2017Town Sports International Holdings, Inc$100.00 $140.06 $59.01 $11.82 $24.83 $55.13NASDAQ Composite$100.00 $141.63 $162.09 $173.33 $187.19 $242.29Russell 2000$100.00 $138.82 $145.62 $139.19 $168.85 $193.58Notes :(1)The graph covers the period from December 31, 2012 to December 31, 2017.(2)The graph assumes that $100 was invested at the market close on December 31, 2011, in our common stock, in the Russell 2000 and in the NASDAQcomposite indexes and that all dividends were reinvested.(3)On each of November 26, 2013, March 5, 2014 and June 5, 2014, we paid a quarterly cash dividend of $0.16 per share to common stock holders.(4)Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.(5)We include a comparison against the Russell 2000 because there is no published industry or line-of-business index for our industry and we do not have 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 be deemed incorporated by reference into any of those prior filings or into any future filingsmade by the Company under those statutes, except to the extent that the Company specifically incorporates such information by reference into a previous orfuture filing, or specifically requests that such information be treated as soliciting material, in each case under those statutes.31Table of ContentsItem 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, 2017 and 2016 and the selected consolidated statement of operations and cash flowdata for the years ended December 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements included elsewhere herein.The selected consolidated balance sheet data as of December 31, 2015, 2014 and 2013 and the selected consolidated statement of operations and cash flowdata for the years ended December 31, 2014 and 2013 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, 2017 2016 2015 2014 2013Statement of Operations Data: Revenues $403,042 $396,921 $424,323 $453,842 $470,225Operating expenses: Payroll and related 145,612 149,029 175,898 177,009 174,894Club operating 180,467 185,104 196,725 192,716 179,683General and administrative 22,680 24,702 30,683 31,352 28,431Depreciation and amortization 40,849 43,727 47,887 47,307 49,099Impairment of fixed assets 6,497 742 14,571 4,569 714Impairment of goodwill — — 31,558 137 —Gain on sale of building(1) — — (77,146) — —Gain on lease termination(2) — — (2,967) — —Insurance recovery related to damaged property(3) — — — — (3,194)Operating income (loss) 6,937 (6,383) 7,114 752 40,598(Gain) loss on extinguishment of debt(4) — (37,893) (17,911) 493 750Interest expense, net of interest income 12,587 13,938 20,579 19,039 22,616Equity in the earnings of investees and rental income (333) (242) (2,361) (2,402) (2,459)(Loss) income before provision (benefit) for corporate incometaxes (5,317) 17,814 6,807 (16,378) 19,691(Benefit) provision for corporate income taxes(5) (9,686) 9,771 (14,351) 52,611 7,367Net income (loss) $4,369 $8,043 $21,158 $(68,989) $12,324Earnings (loss) per share: Basic $0.16 $0.31 $0.86 $(2.84) $0.51Diluted $0.16 $0.31 $0.84 $(2.84) $0.50Dividends declared per common share(6) $— $— $— $0.32 $0.1632Table of Contents As of December 31, 20172016201520142013Balance Sheet Data: Cash and cash equivalents $30,321 $45,596 $76,217 $93,452 $73,598Working capital surplus (deficit) 5,398 (6,323) 27,947 52,280 27,830Total assets(7) 236,671 235,878 303,101 407,150 410,588Long-term debt, including current installments(7) 196,029 196,825 266,740 297,188 311,705Total stockholders’ deficit (77,957) (85,670) (96,245) (118,084) (43,516)Net debt(8) 169,597 156,404 199,200 214,832 251,402 Year Ended December 31, 20172016201520142013Cash Flow Data: Cash provided by (used in): Operating activities $28,199 $21,190 $24,870 $4,758 $67,388Investing activities (41,531) (20,003) (31,571) (42,054) (30,606)Financing activities (1,980) (31,763) (10,511) 57,503 (975) Year Ended December 31, 201720162015 2014 2013Club and Membership Data: New clubs opened 2 1 1 4 —Clubs acquired 18 — — — 6Studio locations converted to clubs — 2 — — —Clubs closed (5) (5) (6) (8) (4)Wholly-owned clubs operated at end of period 164 149 151 156 160Total clubs operated at end of period(9) 165 150 152 158 162Studio locations at end of period — — 3 1 —Total members at end of period(10) 587,000 544,000 541,000 484,000 497,000Restricted members at end of period(11) — — — 20,000 41,000Comparable club revenue increase (decrease)(12) 1.6% (4.1)% (5.6)% (4.2)% (1.8)%Revenue per weighted average club(in thousands)(13) $2,641 $2,634 $2,777 $2,842 $2,971Average revenue per member(14) $713 $728 $823 $941 $934Average Joining Fees per member(15) $60 $61 $72 $75 $59Annual attrition(16) 47.0% 44.3 % 46.9 % 44.3 % 41.9 %(1)The $77,146 gain on sale of building in the year ended December 31, 2015 was related to the sale of our East 86th Street property. Refer to Note 9 – 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.(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 201333Table of ContentsSenior Credit Facility for $3,787. In May 2016, TSI Holdings settled another transaction to purchase $62,447 principal amount of debt outstandingunder 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.(5)Corporate income taxes for the years ended December 31, 2017, 2016 and 2015 included non-cash charges of $38,769, $54,193 and $52,637,respectively, related to tax valuation allowances. Corporate income taxes for the year ended December 31, 2013 included income tax benefits totaling$16 related to the correction of accounting errors. For the years ended December 31, 2017, 2016 and 2015, see Note 15 — Corporate Income Taxes to theCompany’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.(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 and 2013, the Company reclassified $2,259, $2,683 and $3,204, respectively, of deferredfinancing 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 four locations that are managed by us in which we do not have an equity interest.(10)Represents members (including restricted members) at wholly-owned and partly-owned clubs. Restricted members primarily include students 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.(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 per member is calculated as the first annual fees and total initiation fees divided by the number of new members during eachrespective year.(16)Annual attrition is calculated as total member losses for the year divided by the average monthly member count over the year during each respectiveyear.34Table of ContentsItem 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 region of the U.S. As of December 31,2017, the Company, through its subsidiaries, owned and operated 165 clubs. Our clubs collectively served approximately 587,000 members as ofDecember 31, 2017. As of December 31, 2017, we owned and operated a total of 119 clubs in the New York metropolitan region (102 of which were under the“New York Sports Clubs” brand name, 16 of which were under the “Lucille Roberts” brand name and one of which was under the “TMPL” brand name),including 39 locations in Manhattan where we are one of the largest fitness club owners and operators. Additionally, we owned and operated 28 clubs in theBoston metropolitan region under our “Boston Sports Clubs” brand name, 10 clubs (one of which is partly-owned) in the Washington, D.C. metropolitanregion under our “Washington Sports Clubs” brand name and five clubs in the Philadelphia metropolitan region under our “Philadelphia Sports Clubs” brandname, and three clubs in Switzerland. In addition, as of December 31, 2017, we have one partly-owned club that operates under a different brand name inWashington, 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.We focus on opening and acquiring clubs in areas where we believe the region is underserved or where new clubs are intended to replace existing clubsat lease expiration. Prior to 2017, our focus was on building new clubs. Based on our experience, a new club tends to experience a significant increase inrevenue during the first three years of operation until it reaches maturity and because there is relatively little incremental cost associated with increasing suchrevenue, there is a greater proportionate increase in profitability. In contrast, operating income margins may be negatively impacted at these locations untilthe club matures. More recently, our focus has been on acquiring health clubs that have already reached maturity and therefore operating results are moreestablished and stable upon acquisition.In 2017, we acquired a total of 18 clubs. We acquired Lucille Roberts, which added 16 clubs to our portfolio. These 16 clubs continue to operate aswomen only clubs under the Lucille Roberts trade name. We also acquired one existing club in Massapequa, NY, currently operating under the New YorkSports Clubs brand name, including the land and the building such club occupies, as well as TMPL Gym (“TMPL”), an existing club in Manhattan, whichcontinues to operate under the TMPL brand name. TMPL is the Company’s luxury brand that the Company plans to expand. All 18 acquisitions wereadditions to our portfolio in the New York metropolitan region. The results of operations of the clubs acquired have been included in our consolidatedfinancial statements from the respective dates of such acquisitions.Revenue and Operating ExpensesWe have two principal sources of revenue:•Membership revenue: Our largest sources of revenue are dues inclusive of monthly membership fees, annual maintenance fees, and 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 77.0% of our total revenue for the year ended December 31, 2017. 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.35Table of Contents•Ancillary club revenue: For the year ended December 31, 2017, we generated 17.3% of our revenue from personal training and 4.3% of ourrevenue from other ancillary programs and services consisting of Sports Clubs for Kids, racquet sports and Small Group Training programs. Wecontinue to grow ancillary club revenue by building on ancillary programs such as our personal training membership product and our fee-basedSmall Group Training programs.We also receive revenue (approximately 1.4% of our total revenue for the year ended December 31, 2017) from the rental of space in our facilities tooperators who offer wellness-related offerings, such as physical therapy and juice bars. In addition, we sell in-club advertising and sponsorships, providelaundry services to third parties, and generate management fees from certain club facilities that we do not wholly own. We refer to these revenues as Fees andother revenue.Our performance is dependent in part on our ability to continually attract and retain members at our clubs. In the years ended December 31, 2017 and2016, our attrition rate was 47.0% and 46.9%, respectively.Our operating expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other salary and related expenses,occupancy costs, including most elements of rent, utilities, housekeeping and contracted maintenance expenses, as well as depreciation. Variable costs areprimarily related to payroll associated with ancillary club revenue, membership sales compensation, advertising, certain facility repairs and club supplies.General and administrative expenses include costs relating to our centralized support functions, such as accounting, insurance, information andcommunication systems, purchasing, member relations, legal and consulting fees and real 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 routine improvements at our clubs, the construction or acquisition of new club facilities and the upgrade andrenovation of our existing clubs. The construction and equipment costs vary based on the costs of construction labor, as well as the planned service offeringsand size and configuration of the facility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for whichwe are currently budgeting approximately 2% of projected annual revenue. In this regard, facility remodeling is also considered where appropriate.Operating income is impacted by certain charges and benefits which can fluctuate year to year. In 2017 and 2016, operating income was impacted byfixed asset impairment charges of $6.5 million and $742,000, respectively, related to underperforming clubs. In 2015, operating income included a gain onsale of building of $77.1 million and gain on lease termination of $3.0 million, partially offset by goodwill impairment charges of $31.6 million associatedwith the New York and Boston regions, and fixed asset impairment charges of $14.6 million related to underperforming clubs. Year Ended December 31, 2017 2016 2015 ($ amounts in thousands)Operating income (loss) $6,937 $(6,383) $7,114Increase (decrease) over prior period 208.7 % (189.7)% 846.0%Net income $4,369 $8,043 $21,158(Decrease) increase over prior period (45.7)% (62.0)% 130.7%Cash flows provided by operating activities $28,199 $21,190 $24,870Increase (decrease) over prior period 33.1 % (14.8)% 422.7%As of December 31, 2017, 164 of our fitness clubs were wholly-owned by us and our consolidated financial statements include the operating results 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 Washington Sports Clubs brand, with a profit sharing percentage approximating 20% (after priority distributions) for which the equityaccounting method is also applied. In addition, we provide management services at four locations where we do not have an equity interest.36Table of ContentsComparable Club RevenueWe define comparable club revenue as revenue at those clubs that were operated by us for over 12 months and comparable club revenue increase (decrease) asrevenue for the 13th month and thereafter as applicable as compared to the same period of the prior year. Comparable Club RevenueIncrease (Decrease) Quarter Full-Year2015 First Quarter (3.5)% Second Quarter (5.4)% Third Quarter (7.1)% Fourth Quarter (6.7)% (5.6)%2016 First Quarter (7.6)% Second Quarter (4.5)% Third Quarter (3.0)% Fourth Quarter (2.2)% (4.1)%2017 First Quarter 0.7 % Second Quarter 1.2 % Third Quarter 1.8 % Fourth Quarter 2.8 % 1.6 %Key determinants of comparable club revenue increases (decreases) are new memberships, member retention rates, pricing and ancillary revenueincreases (decreases).The comparable club revenue increase in 2017 was primarily due to higher average dues per membership and an increase in member count incomparable clubs, partially offset by decreased initiation and processing fees and other ancillary club revenue. The comparable club revenue declineexperienced in 2016 was primarily due to lower average dues per membership, partially offset by an increase in membership sales volume and annual fees.The comparable club revenue decline experienced in 2015 was primarily due to the decline in membership dues. In 2015, the effect of new membersenrolling at lower monthly dues combined with members cancelling who were paying higher monthly dues was only partially offset by an increase inmembership sales volume.Historical Club Count Year Ended December 31, 2017 2016 2015Wholly-owned clubs operated at beginning of period 149 151 156Acquired clubs 18 — —New clubs opened 2 1 1Studio locations converted to clubs — 2 —Clubs closed (5) (5) (6)Wholly-owned clubs operated at end of period 164 149 151Partly-owned clubs operated at end of period(1) 1 1 1Total clubs operated at end of period(1)(2) 165 150 152(1)Excludes one partly-owned club that operates under a different brand name in our Washington, D.C. region.(2)Excludes locations that are managed by us in which we do not have an equity interest.37Table of ContentsConsolidated Results of OperationsThe following table sets forth certain operating data as a percentage of revenue for the periods indicated: Year Ended December 31, 2017 2016 2015Revenues100.0 % 100.0 % 100.0 %Operating expenses: Payroll and related36.1 37.5 41.5Club operating44.8 46.7 46.4General and administrative5.6 6.2 7.2Depreciation and amortization10.2 11.0 11.3Impairment of fixed assets1.6 0.2 3.4Impairment of goodwill— — 7.4Gain on sale of building— — (18.2)Gain on lease termination— — (0.7) 98.3 101.6 98.3Operating income (loss)1.7 (1.6) 1.7Gain on extinguishment of debt— (9.5) (4.2)Interest expense3.1 3.5 4.9Equity in the earnings of investees and rental income(0.1) (0.1) (0.6)(Loss) income before (benefit) provision for corporate income taxes(1.3) 4.5 1.6(Benefit) provision for corporate income taxes(2.4) 2.5 (3.4)Net income1.1 % 2.0 % 5.0 %Year ended December 31, 2017 compared to year ended December 31, 2016RevenueRevenue (in thousands) was comprised of the following for the periods indicated: Year Ended December 31, 2017 2016 Revenue % Revenue Revenue % Revenue % VarianceMembership dues$307,966 76.4% $296,795 74.8% 3.8 %Initiation and processing fees2,268 0.6% 7,636 1.9% (70.3)%Membership revenue310,234 77.0% 304,431 76.7% 1.9 %Personal training revenue69,735 17.3% 66,487 16.8% 4.9 %Other ancillary club revenue17,197 4.3% 19,642 4.9% (12.4)%Ancillary club revenue86,932 21.6% 86,129 21.7% 0.9 %Fees and other revenue5,876 1.4% 6,361 1.6% (7.6)%Total revenue$403,042 100.0% $396,921 100.0% 1.5 %Revenue increased $6.1 million, or 1.5%, for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflecting anincrease in membership dues, the favorable impact from the newly opened and acquired clubs. These increases were partially offset by the impact of clubclosures and decline in initiation and processing fees. In the year ended December 31, 2017 compared to the year ended December 31, 2016, revenueincreased approximately $8.8 million from our clubs that were opened in the last 24 months and $7.8 million at our clubs operating longer than 24 months,partially offset by a $10.5 million decrease in revenue as a result of closed clubs.Comparable club revenue increased 1.6% in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due tohigher average dues per membership and an increase in member count in comparable clubs. The comparable club revenue increase was partially offset bydecreased initiation and processing fees, and other ancillary club revenue.38Table of ContentsMembership dues revenue increased $11.2 million, or 3.8% in the year ended December 31, 2017 compared to the year ended December 31, 2016,primarily reflecting higher average dues per membership, increased annual fees and the impact of new club openings. These increases were partially offset bythe impact of club closures.Initiation and processing fees revenue decreased $5.4 million, or 70.3% in the year ended December 31, 2017 compared to the year endedDecember 31, 2016. The high initiation fees that were initially collected with the conversion to the lower pricing model in 2014 and early 2015 weresubstantially recognized into income in 2016 and prior, which resulted in a decrease in revenue recognized in the year ended December 31, 2017. Initiationand processing fees are amortized over the estimated average membership life. Additionally, the average membership life was 26 months for the full year of2017 versus 25 months for the full year of 2016, which resulted in the amortization of initiation and processing fees over the longer time period in 2017.Personal training revenue increased $3.2 million, or 4.9% in the year ended December 31, 2017 compared to the year ended December 31, 2016. Personal training revenue in 2017 included revenue recognition of $3.6 million related to unused and expired sessions in three of our states discussedfurther below. Personal training revenue on a comparable club basis increased $1.0 million. The increase in personal training revenue was also due to theimpact of newly opened clubs, partially offset by the impact of club closures.We recognize revenue from personal training sessions as the services are performed (i.e., when the session is trained). Unused personal training sessionsexpire after a set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. As of December 31, 2017, we hadapproximately $12.5 million of unused and expired personal training sessions that had not been recognized as revenue and was recorded as deferred revenue.We do not believe this amount is subject to the escheatment or abandoned property laws of any of the jurisdictions in which we conduct our business,including the State of New York. It is possible however, that one or more of these jurisdictions may not agree with our position and may claim that we mustremit all or a portion of these amounts to such jurisdiction. This could have a material adverse effect on our cash flows. The State of New York has informedus that it is considering whether we are required to remit the amount received by us for unused, expired personal training sessions to the State of New York asunclaimed property. For a total of six of the jurisdictions in which we operate, we have concluded, based on opinions from outside counsel, that money heldby a company for unused and expired personal training sessions are not escheatable. In 2010, for three jurisdictions, we concluded, based on opinions fromoutside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. As a result, we recorded approximately$2.7 million as personal training revenue in the fourth quarter of 2010. This amount was previously recorded in deferred revenue. In 2017, for another threejurisdictions, we concluded, based on opinions from outside counsel, that monies held by a company for unused and expired personal training sessions arenot escheatable. As a result, we recorded approximately $3.6 million as personal training revenue in the fourth quarter of 2017. This amount was previouslyrecorded in deferred revenue, which was primarily related to sessions purchased prior to the year ended December 31, 2015.Other ancillary club revenue decreased $2.4 million, or 12.4%, in the year ended December 31, 2017 compared to the year ended December 31, 2016,primarily related to decreased membership cancellation fee and decreased revenue from our Sports Clubs for Kids programs.Operating ExpensesOperating expenses (in thousands) were comprised of the following for the periods indicated: Year Ended December 31, 2017 2016 $ Variance % VariancePayroll and related $145,612 $149,029 $(3,417) (2.3)%Club operating 180,467 185,104 (4,637) (2.5)%General and administrative 22,680 24,702 (2,022) (8.2)%Depreciation and amortization 40,849 43,727 (2,878) (6.6)%Impairment of fixed assets 6,497 742 5,755 >100%Operating expenses $396,105 $403,304 $(7,199) (1.8)%39Table of ContentsOperating expenses increased due to the following factors:Payroll and related. Payroll and related expenses for the year ended December 31, 2017 decreased $3.4 million, or 2.3%, compared to the year endedDecember 31, 2016, primarily reflecting savings from commissions, labor optimization, and the effect of club closures. These decreases were partially offsetby minimum wage increases, effective January 1, 2017, in most of the states we operate, and the impact of newly opened clubs.Club operating. Club operating expenses decreased $4.6 million or 2.5% in the year ended December 31, 2017 compared to the year endedDecember 31, 2016, primarily reflecting expense savings of $3.6 million in marketing, $1.1 million in repair and maintenance and $1.0 million in utilities,all mainly due to our continued cost-savings initiatives. These savings were partially offset by a net increase in rent and occupancy expenses of $1.2 millionprimarily due to rent escalations of $3.4 million at mature clubs, increases of $3.1 million for newly opened and acquired clubs, partially offset by savings of$5.3 million mainly due to closed clubs.General and administrative. General and administrative expense decreased $2.0 million, or 8.2%, in the year ended December 31, 2017 compared tothe year ended December 31, 2016, primarily reflecting the results of our cost-savings initiatives.Depreciation and amortization. In the year ended December 31, 2017 compared to the year ended December 31, 2016, depreciation and amortizationexpense decreased $2.9 million, or 6.6%, primarily due to the impact of closed locations and a decrease at our mature clubs. These decreases were offset bydepreciation of assets at our new clubs.Impairment of fixed assets. We recorded fixed asset impairment charges of $6.5 million and $742,000 at underperforming clubs in the year endedDecember 31, 2017 and 2016, respectively.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.Interest ExpenseInterest expense decreased by $1.3 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily reflectingthe effect of principal payments made on, and purchases of debt outstanding under, the 2013 Term Loan Facility since December 31, 2016.(Benefit) Provision for Corporate Income TaxesWe recorded income tax benefit of $9.7 million during the year ended December 31, 2017. For year ended December 31, 2016, we recorded an incometax expense of $9.8 million. Our effective tax rate was 182% and 55% for the years ended December 31, 2017 and 2016, respectively. Separate from theimpact of valuation allowance, our effective tax rate was 31% and 37% for the years ended December 31, 2017 and 2016, respectively.As of December 31, 2017 and 2016, we have a net deferred tax liability of $93,000 and $61,000, respectively, as there is a full valuation allowancerecorded against the U.S. net deferred tax assets. The state net deferred tax liability balance was $37,000 and $17,000, respectively, as of December 31, 2017and 2016.In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of 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 future taxable income in those periods in which temporary differences becomedeductible and/or net operating loss carry forwards can be utilized. We assess all positive and negative evidence when determining the amount of the netdeferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal oftaxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence thatis objectively verifiable.40Table of ContentsAs 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 $38.8 million and $54.2 million as ofDecember 31, 2017 and 2016, respectively.In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets generally cannot be used as a source 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, 2017 and 2016 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 andasset acquisitions of clubs in the U.S. during 2017.We are currently under examination in New York State (2006 through 2014). In August 2017, we consented to extend the assessment period for taxyears 2010 - 2013 through September 15, 2018. In particular, we disagree with the proposed assessment dated December 12, 2016 from the State of New Yorkand attended a conciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement wasreached at the conference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, we received from the State ofNew York a revised assessment related to tax years 2006-2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. Wecurrently are in the process of appealing the assessment with the New York State Division of Tax Appeals. We have not recorded a tax reserve related to theproposed assessment. It is 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, on November 17, 2017, we werenotified that the State of New York proposed an adjustment in the amount of approximately $3.9 million for the years 2010 to 2014, inclusive ofapproximately $757,000 in interest. We are also under examination in New York City (2006 through 2014), which we have consented to extend theassessment period through December 31, 2018. Lastly, we are under examination by the Internal Revenue Service regarding our federal income tax returns forthe years ended December 31, 2014 and 2015.Year 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 fees 7,636 1.9% 13,644 3.2% (44.0)%Membership revenue 304,431 76.7% 322,740 76.0% (5.7)%Personal training revenue 66,487 16.8% 73,191 17.3% (9.2)%Other ancillary club revenue 19,642 4.9% 22,138 5.2% (11.3)%Ancillary club revenue 86,129 21.7% 95,329 22.5% (9.7)%Fees and other revenue 6,361 1.6% 6,254 1.5% 1.7 %Total revenue $396,921 100.0% $424,323 100.0% (6.5)%Revenue decreased $27.4 million, or 6.5%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, as a result of lowermembership revenue and ancillary club revenue, as well as club closures. Revenue decreased approximately $16.8 million at our clubs operating longer than24 months 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 openedwithin the last 24 months.Membership dues revenue decreased $12.3 million, or 4.0% in the year ended December 31, 2016 compared to the year ended December 31, 2015,primarily reflecting lower average dues per membership and the effect of club closures, partially offset by an increase in annual fees.41Table of ContentsInitiation 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. The average membership life was 26 months for the full year of 2016 versus 22months for 2015, which resulted in initiation and processing fees being amortized over the longer time period and therefore less revenue was recognized.Personal training revenue decreased $6.7 million, or 9.2% in the year ended December 31, 2016 compared to the year ended December 31, 2015,primarily due to a decline in sales volume for our personal training products, as well as the impact of club closures.Other ancillary club revenue decreased $2.5 million, or 11.3%, in the year ended December 31, 2016 compared to the year ended December 31, 2015,primarily due to decreased revenue from our Sports Clubs for Kids programs.Comparable club revenue decreased 4.1% in the year ended December 31, 2016 compared to the year ended December 31, 2015. The price 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, 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 regions 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.42Table of ContentsGeneral 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 New York and Boston regions. Accordingly, we wrote off $31.6million of goodwill associated with these reporting units. Gain on Sale of Building. On September 12, 2014, we completed the legal sale of our property (building and land) on East 86th Street, New York City,to an unaffiliated third-party for gross proceeds of $85.7 million. Concurrent with the closing of the transaction, we leased back the portion of the 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.43Table of ContentsInterest 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 had 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.We were under examination in New York State (from 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 scheduled a conciliation conferencewith the State of New York to appeal the assessment. We had not recorded a tax reserve related to the proposed assessment. It was difficult to predict the finaloutcome or timing of a resolution of any particular matter regarding these examinations. An estimate of the reasonably possible change to unrecognized taxbenefits within the next 12 months cannot be made. Additionally, we were also under examination in New York City (from 2006 through 2012), which weconsented to extend the assessment period through December 31, 2017. Lastly, we were under examination by the Internal Revenue Service regarding ourfederal income tax returns for the years ended December 31, 2014 and 2015.Liquidity and Capital ResourcesWe continue to experience revenue pressure from members as the fitness industry continues to be highly competitive in the geographic regions inwhich we compete. Also, our previous strategy of converting to a low-cost gym implemented in 2014 resulted in additional revenue pressure for the past fewyears. New members joined at lower monthly rates and cancellations of members paying higher rates negatively impacted our results and liquidity. Inresponse to this, we implemented cost-savings initiatives in 2015, 2016 and 2017, which mitigated the impact the decline in revenue had on its profitabilityand cash flow from operations.We continue to strategize on improving our financial results. We focus on increasing membership in existing clubs to increase revenue. We mayconsider additional actions within our control, including certain acquisitions, license arrangements, and the closure of unprofitable clubs upon leaseexpiration and the sale of certain assets. We may also consider additional strategic alternatives, including opportunities to reduce TSI, LLC’s existing debtand further cost-savings initiatives. Our ability to continue to meet our obligations is dependent on our ability to generate positive cash flow from acombination of initiatives, including those mentioned above. Failure to successfully implement these initiatives could have a material adverse effect on ourliquidity and our operations, and we would need to implement alternative plans that could include additional asset sales, additional reductions in operatingcosts, additional reductions in working capital, debt restructurings and the deferral of capital expenditures. There can be no assurance that such alternativeswould be available to us or that we would be successful in their implementation.As of December 31, 2017, we had $30.3 million of cash and cash equivalents. Financial instruments that potentially subject us to concentrations ofcredit risk consist of cash and cash equivalents and the interest rate swap. Although we deposit our cash with more than one financial institution, as ofDecember 31, 2017, $19.9 million was held at one financial institution. We have not experienced any losses on cash and cash equivalent accounts to dateand 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 thistime.44Table of ContentsHistorically, 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. We believe that our existing cash and cash equivalents, and cash generated from operations will be sufficient tofund capital expenditures, working capital needs and other liquidity requirements associated with our operations through at least the next 12 months.Operating Activities. Net cash provided by operating activities increased $7.0 million for the year ended December 31, 2017 compared to the yearended December 31, 2016.Increases in operating cash included the following:•Cash collected for membership dues increased $11.1 million.•Cash collected for recurring annual fees increased $3.8 million.•Cash paid for taxes decreased $7.4 million.•Cash paid for marketing decreased $3.7 million due to our cost-savings initiatives.•Cash paid for interest decreased $1.1 million.Offsetting decreases in operating cash included the following:•Cash paid for prepaid rent increased $9.2 million.•Cash paid for payroll increased $3.4 million.•Cash collected for income tax refunds decreased $5.4 million.Net cash provided by operating activities decreased $3.7 million for the year ended December 31, 2016 compared to the year ended 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.Investing Activities. Net cash used in investing activities increased $21.5 million in the year ended December 31, 2017 compared to the year endedDecember 31, 2016. Investing activities in the year ended December 31, 2017 consisted of $15.4 million of cash paid for the acquisition of businesses, $12.6million of cash paid for the acquisition of a building and the land it occupies in the New York metropolitan region, as well as a single health club located onthe premises, and $2.8 million deposit paid in connection with January 2018 acquisitions. The increase in cash used in investing activities was partiallyoffset by a decrease in capital expenditures of $9.5 million, primarily due to decreased activity in conducting major renovations at clubs and the expansionof our laundry facility in 2016.The 2017 investing activities included approximately $3.0 million of capital expenditures related to club openings, $4.6 million to continue toenhance or upgrade existing clubs, approximately $1.9 million related to major renovations at clubs, including the purchase of new fitness equipment. Wealso invested approximately $700,000 related to website and information systems enhancements.45Table of ContentsThe 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, approximately $1.8 million related to our new brand refresh completed at five clubs, and approximately $2.8million related to major renovations at clubs, including the purchase of new fitness equipment. We also invested approximately $3.3 million related to theexpansion of our laundry facility and $1.8 million to enhance our management information and communication systems, including our new website andmember application.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, 2017, 2016 and 2015 was $2.0 million, $31.8 million and$10.5 million, respectively.In the year ended December 31, 2017, total principal payments made on the 2013 Term Loan Facility were $2.1 million.In the year ended December 31, 2016, TSI Holdings settled two transactions to purchase a total of $71.1 million principal amount of debt outstandingunder the 2013 Senior Credit Facility for $29.8 million, or an average of 41.8% of face value. Additionally, total principal payments made on the 2013 TermLoan Facility were $2.3 million.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. The purchased debt described above was transferred to TSI, LLC and canceled upon settlement. Additionally,financing activities consisted of gross cash proceeds from the sale of the East 86th Street property of $4.0 million and total principal payments made on the2013 Term Loan Facility of $3.0 million.2013 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 of 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, and to pay related fees and expenses. None of the revolving loan facilitywas drawn upon as of the closing date on November 15, 2013, but loans under the 2013 Revolving Loan Facility may be drawn from time to time pursuant tothe terms of the 2013 Senior Credit Facility. The borrowings under the 2013 Senior Credit Facility are guaranteed and secured by assets and pledges ofcapital stock by Holdings II, TSI, LLC, and, subject to certain customary exceptions, the wholly-owned domestic subsidiaries of TSI, LLC.Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI, LLC’s option, bear interest at either the 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, 2017, TSI LLC has made a total of $24.1 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, 2017, TSI Holdings had a cash balance ofapproximately $17.6 million.46Table of ContentsIn 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 total net gains on extinguishment of debt in 2016 of $37.9 million with a tax effect of $13.5 million.When this was 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 of deferred financing costs and debt discount of $545,000 and $1.6 million, respectively, and other costs related to the transaction. All of the abovepurchased debt was transferred to TSI, LLC and canceled.In May 2017, TSI, LLC loaned $5.0 million to TSI Group at a rate of LIBOR plus 9.55% per annum. In addition to the interest payments, TSI Group isrequired to repay 1.0% of the principal amount of the loan, $50,000 per annum, on a quarterly basis commencing September 30, 2017. The loan is secured bycertain collateral. This transaction has no impact on the Company's consolidated financial statements as it is eliminated in consolidation. In October 2017,TSI, LLC made a dividend distribution of $35.0 million to TSI Holdings, Inc.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 31,2017, TSI, LLC had outstanding letters of credit of $7.0 million and a total leverage ratio that was below 4.50:1.00. Other than these outstanding letters ofcredit, TSI, LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. The terms of the 2013 Senior Credit Facility include a financialcovenant under which the Company is not able to utilize more than 25% or $11.3 million in accordance with terms of the 2013 Revolving Loan Facility ifthe total leverage ratio exceeds 4.50:1:00 (calculated on a proforma basis to give effect to any borrowing). The 2013 Senior Credit Facility also containscertain affirmative and negative covenants, including covenants that may limit or restrict TSI, LLC and Holdings II’s ability to, among other things, incurindebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; make investments; pay dividends and make payments tostockholders; make payments on certain indebtedness; and enter into sale leaseback transactions, in each case, subject to certain qualifications andexceptions. 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 $30.0 million from sales of assets in anyfiscal year towards mandatory prepayments of outstanding borrowings.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined therein, to be applied againstoutstanding 2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days afterthe fiscal year end. 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 flowrepayment percentage is 50% when the total leverage ratio, as defined in the 2013 Senior Credit Facility, exceeds or is equal to 2.50:1.00; 25% when thetotal leverage ratio 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 cashflow calculation performed as of December 31, 2017 did not result in any required payments.As of December 31, 2017, the 2013 Term Loan Facility has a gross principal balance of $199.9 million and a balance of $196.0 million net ofunamortized debt discount of $2.9 million and unamortized debt issuance costs of $1.0 million. As of December 31, 2017, 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.47Table of ContentsAs of December 31, 2017, there were no outstanding 2013 Revolving Loan Facility borrowings and outstanding letters of credit issued totaled $7.0million. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2017 was $38.0 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. The 2013 Revolving Loan Facility will mature on November 15, 2018. Given that the 2013 Senior Credit Facility contains arestrictive covenant on obtaining secured debt, if the Company is unable to extend, restructure or refinance the 2013 Revolving Loan Facility prior tomaturity, all letters of credit that remain outstanding under the 2013 Revolving Loan Facility will terminate on the fifth Business Day prior to the RevolvingLoan Maturity Date. The Company is considering alternative means to satisfy obligations which are currently satisfied with letters of credit issued under the2013 Revolving Loan Facility, including cash collateralization of such obligations.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 our previous credit facility. In connection withentering into the 2013 Senior Credit Facility, we amended and restated the interest rate swap agreement initially entered into (and amended in August 2012and November 2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rate swap arrangement had anotional amount of $160.0 million and will mature on May 15, 2018. The swap effectively converts $160.0 million of the current outstanding principal ofthe total variable-rate debt under the 2013 Senior Credit Facility to a fixed rate of 0.884% plus the 3.5% applicable margin and the Eurodollar rate, which hasa floor of 1%. As permitted by ASC 815, Derivatives and Hedging, the Company has designated this swap as a cash flow hedge, the effects of which havebeen reflected in the Company’s consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015. The objective of thishedge is to manage the variability of cash flows in the interest payments related to the portion 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, 2017, 2016 and 2015, hedge ineffectiveness was evaluated using the hypotheticalderivative method. There was no hedge ineffectiveness in the years ended December 31, 2017, 2016 and 2015.The counterparty to our interest rate swap is a major banking institution with a credit rating of investment grade or better and no collateral is required,and there 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, 2017, our total principal amount of debt outstanding was $199.9 million, of which $195.8 million is due in 2020. This substantialamount of debt could have significant consequences, including:•making it more difficult to satisfy our obligations, including with respect to our outstanding indebtedness;•increasing our vulnerability to general adverse economic and industry conditions;•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and other generalcorporate requirements;•requiring a substantial portion of our cash flow from operations for the payment of interest on our debt, which is variable on our 2013 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;48Table of Contents•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, available on acceptable terms, orpermitted under the 2013 Credit Facility.Contractual Obligations and CommitmentsAs of December 31, 2017, 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) $199,918 $2,082 $197,836 $— $—Interest payments on long-term debt(2) 32,139 10,898 21,241 — —Operating lease obligations(3) 658,715 96,518 176,337 137,949 247,911Total contractual obligations $890,772 $109,498 $395,414 $137,949 $247,911Notes:(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, 2017 and no payments are currently required in 2018 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, 2017.(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. For the years ending December 31, 2018 and 2019, future minimum rental payments include capitallease payments of $129 and $31, respectively.(4)The table above does not reflect potential commitments in connection with our outstanding letters of credit under the 2013 Revolving Loan Facility,which matures on November 15, 2018, or our agreement with CYC Fitness Partners, LLC.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 positive working capital of $5.4 million as of December 31, 2017, compared to working capital deficit of $6.3 million as of December 31, 2016.Major components of our working capital on our current assets are cash and cash equivalents, accounts receivable, prepaid corporate income taxes, prepaidrent expense, and prepaid expenses and other current assets. As of December 31, 2017, these current assets more than offset the current liabilities, whichconsists of deferred revenues, accounts payable, accrued expenses (including, among others, accrued payroll and occupancy costs), and the current portion oflong-term debt. The deferred revenue that is classified as a current liability relates to dues and services paid-in-full in advance and fees paid at the time ofenrollment and totaled $33.5 million and $34.6 million at December 31, 2017 and December 31, 2016, respectively. Initiation and processing fees receivedare deferred and amortized over the estimated average membership life of a club member and all annual fees are deferred and amortized over a 12 monthperiod. Prepaid dues and fees for prepaid services are generally realized over a period of up to 12 months. In periods when we increase the number of membersand consequently increase the level of payments received in advance, we would expect to see increased deferred revenue balances. By contrast, any decreasein demand for our services or reductions in initiation fees collected would have the effect of reducing deferred revenue balances, which would likely requireus to rely more heavily on other sources of funding. In either case, a significant portion of the deferred revenue is not expected to constitute a liability thatmust be funded with cash. At the time a member joins our club, we incur enrollment costs, a portion of which are deferred over the estimated averagemembership life or 12 months to the extent these costs are related to the first annual fee paid at the time of enrollment or within the first month ofmembership. These costs are recorded as a long-term asset and as such do not affect working capital. Any working capital deficits in future periods, as in thepast, will be funded by our cash and cash equivalents and our 2013 Senior Credit Facility,49Table of Contentswhich includes a 2013 Revolving Loan Facility, which expires on November 15, 2018. We believe that these sources 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 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.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 within one month of enrollment. Annual fees areamortized over 12 months. As of December 31, 2017, the average membership life was 26 months. The Company monitors factors that might affect theestimated average membership life including retention trends, attrition trends, membership sales volumes, membership composition, competition, andgeneral economic conditions, and adjusts the estimate as necessary on an annual basis.Fixed and intangible assets. Fixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, 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. Website 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, 2017, 2016 and 2015, we recorded fixed asset impairment charges of $6.5 million, $742,000 and $14.6 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: New York, Boston, Washington, D.C., Philadelphiaand Switzerland, with certain more remote clubs that do not benefit from a regional cluster being considered single reporting units (“Outlier Clubs”). In thesecond half of 2017, the Company acquired Lucille Roberts and a single existing club under the TMPL trade name. In connection with theseacquisitions, $5.2 million of goodwill was added to the Company’s goodwill balance in the New York region. For more information on the Lucille Robertsand the TMPL Gym acquisitions, refer to Note 6 - Acquisitions of our consolidated financial statements in this Annual Report. As of December 31, 2017, onlythe New York and Switzerland regions had a goodwill balance.50Table of ContentsThe Company early adopted ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” in the first quarter of 2017. This standard eliminatedthe second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed tomeasure the goodwill impairment. As a result of the updated guidance, the Company’s annual goodwill impairment test as of February 28, 2017 wasperformed by comparing the fair value of the Company’s reporting unit with its carrying amount and then recognizing an impairment charge, as necessary, forthe amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.Prior to the adoption of ASU 2017-04, the impairment test required a two-step quantitative evaluation. Step 1 involved comparing the estimated fairvalue of the Company’s reporting units to their carrying amounts. If the estimated fair value of the reporting unit was greater than its carrying amount, therewas no requirement to perform Step 2 of the impairment test, and there was no impairment. If the reporting unit’s carrying amount was greater than theestimated fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculated the implied fair value of goodwill bydeducting the estimated fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the estimated fair value of thereporting unit as determined in Step 1. The implied fair value of goodwill determined in this step was compared to the carrying value of goodwill. If theimplied fair value of goodwill was less than the carrying value of goodwill, an impairment charge was recognized equal to the difference.For the years ended December 31, 2017 and 2016, the estimated fair value was determined using an income approach. For the year ended December 31,2015, the estimated fair value was determined using a combined income and market approach with equal weighting on each approach. The income approachwas based on discounted future cash flows and required significant assumptions, including estimates regarding revenue growth rates, operating margins,weighted average cost of capital, and future economic and market conditions. Under the market approach, the Company utilized information regarding theCompany, 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.The annual impairment tests as of the last day of February in 2017, 2016 and 2015 supported the goodwill balance and as such no impairment ofgoodwill was required. As a result of the significant decrease in market capitalization and a decline in our performance primarily due to existing membersdowngrading their memberships to those with lower monthly dues and new members enrolling at lower rates between February 28, 2015 and May 31, 2015,the Company performed an interim impairment test as of May 31, 2015. The Company concluded that there would be no remaining implied fair value ofgoodwill attributable to the New York and Boston regions. Accordingly, as of May 31, 2015, the Company wrote off $31.6 million of goodwill associatedwith these reporting units. The Company did not have a goodwill impairment charge in the Switzerland region as a result of the interim test given theprofitability of this unit.The Company has historically performed goodwill impairment test annually as of the last day of February and in the interim if a triggering eventoccurs. During the fourth quarter of 2017, the Company established the date of its annual goodwill impairment test for the New York region from the last dayof February to August 1. The Company believes that performing the test annually on August 1 will alleviate the information and resource constraints thathistorically existed during the first quarter and will more closely align with the timing of related forecasts, reports and analysis. The Company will perform agoodwill impairment test on the Switzerland region as of February 28, 2018.The goodwill in the New York region was acquired in connection with the Lucille Roberts and TMPL acquisitions in the third and fourth quarters of2017, respectively. As such, these intangible assets were recorded at fair value at the time of acquisitions. The next goodwill impairment test for the NewYork region will be August 1, 2018 which is within 12 months of the acquisitions. The Company believes that the resulting change in accounting principlerelated to the annual testing date will not delay, accelerate or avoid an impairment charge. The Company has also determined that it is impracticable toobjectively determine projected cash flows and related valuation estimates that would have been used as of August 1 for periods prior to August 1, 2018without the use of hindsight. As such, the Company will prospectively apply the change in the annual goodwill impairment assessment date beginningAugust 1, 2018.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.51Table of ContentsSelf-insurance reserves. We self-insure our health benefits for all U.S.-based employees and maintain stop loss coverage to limit our exposure. We alsolimit our exposure to casualty losses on insurance claims by maintaining liability coverage subject to specific and aggregate liability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon a number of factors including sales estimates for each insuranceyear, claim amounts, claim settlements and number of claims, our historical loss experience and valuations provided by independent third-party consultants.To the extent that estimated self-insurance losses differ from actual losses realized, our insurance reserves could differ significantly and may result in eitherhigher or lower insurance expense in future periods.Deferred income taxes. Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts 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, 2017, we continue to maintain a full valuation allowance of $38.8 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.Business Combinations. In connection with an acquisition of a business, the Company records all assets acquired and liabilities assumed of the acquiredbusiness at their acquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair valuedeterminations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflowsand outflows, discount rates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in makingthese fair value determinations.52Table of ContentsInflationAlthough 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, 2017, we had $199.9 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 on theamount of our variable rate debt and our interest rate swap agreement as of December 31, 2017, a hypothetical 100 basis point interest increase wouldincrease our annual interest cost by approximately $700,000.For additional information concerning the terms of our 2013 Term Loan Facility, see Note 8 - 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, 2017, 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, 2017, 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, 2017. 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, 2017, we maintained effective internal control over financial reporting.53Table of ContentsOur 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, 2017, 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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.54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 2018 Annual Meeting of Stockholders to be filed with the SECwithin 120 days of the Company’s fiscal year ended December 31, 2017 (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, LLCMarcus B. Dunlop Managing Partner, HG Vora Capital Management, LLCJason M. Fish Chief Investment Officer and member, Alliance Partners, LLCThomas J. Galligan III Former Executive Chairman, Papa Gino’s Holdings Corp.Mandy Lam General Counsel, HG Vora Capital Management, LLCL. Spencer Wells Partner, Drivetrain Advisors, LLC Executive Officers: Patrick Walsh Chief Executive OfficerCarolyn Spatafora Chief Financial OfficerStuart Steinberg General CounselNitin 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 section 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 2017 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.”55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, 2017 and 2016 F-3 Consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 F-4 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015 F-5 Consolidated statements of stockholders’ deficit for the years ended December 31, 2017, 2016 and 2015 F-6 Consolidated statements of cash flows for the years ended December 31, 2017, 2016 and 2015 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-36 of this AnnualReport.56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 28, 2018. 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 28, 2018 Patrick Walsh (principal executive officer) By: /s/ CAROLYN SPATAFORA Chief Financial Officer February 28, 2018 Carolyn Spatafora (principal financial and accounting officer) By: /s/ MARTIN ANNESE Director February 28, 2018 Martin Annese By: /s/ MARCUS B. DUNLOP Director February 28, 2018 Marcus B. Dunlop By: /s/ JASON M. FISH Director February 28, 2018 Jason M. Fish By: /s/ THOMAS J. GALLIGAN III Director February 28, 2018 Thomas J. Galligan III By: /s/ MANDY LAM Director February 28, 2018 Mandy Lam By: /s/ L. SPENCER WELLS Director February 28, 2018 L. Spencer Wells 57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, 2017 and 2016F-4 Consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015F-5 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015F-6 Consolidated statements of stockholders’ deficit for the years ended December 31, 2017, 2016 and 2015F-7 Consolidated statements of cash flows for the years ended December 31, 2017, 2016 and 2015F-8 Notes to consolidated financial statementsF-9F-1Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofTown Sports International Holdings, Inc.:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Town Sports International Holdings, Inc. and its subsidiaries as of December 31, 2017 and2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit and cash flows for each of the three years inthe period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have auditedthe Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control OverFinancial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on theCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securitieslaws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.F-2Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPNew York, New YorkFebruary 28, 2018We have served as the Company’s auditor since at least 1996. We have not determined the specific year we began serving as auditor of the Company.F-3Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2017 and 2016(All figures in thousands except share and per share data) 2017 2016ASSETSCurrent assets:Cash and cash equivalents$30,321$45,596Accounts receivable, net2,2161,221Inventory—238Prepaid corporate income taxes13,5631,505Prepaid rent expense9,153 —Prepaid expenses and other current assets12,89410,274Total current assets68,14758,834Fixed assets, net151,498170,580Goodwill6,2171,008Intangible assets, net5,134135Deferred membership costs9591,092Other assets4,7164,229Total assets$236,671$235,878LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Current portion of long-term debt$2,082$2,082Accounts payable2,2472,477Accrued expenses24,66925,907Accrued interest118119Capital lease liabilities160 —Deferred revenue33,47334,572Total current liabilities62,74965,157Long-term debt193,947194,743Deferred lease liabilities47,35649,660Deferred tax liabilities9361Deferred revenue351440Other liabilities10,13211,487Total liabilities314,628321,548Commitments and Contingencies (Note 16)Stockholders’ deficit:Preferred stock, $0.001 par value; no shares issued and outstanding at both December 31, 2017 andDecember 31, 2016Common stock, $0.001 par value; issued and outstanding 27,149,135 and 26,560,547 shares atDecember 31, 2017 and 2016, respectively2524Additional paid-in capital(4,290)(6,261)Accumulated other comprehensive income (loss)1,201(168)Accumulated deficit(74,893)(79,265)Total stockholders’ deficit(77,957)(85,670)Total liabilities and stockholders’ deficit$236,671$235,878See notes to consolidated financial statements.F-4Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYears Ended December 31, 2017, 2016 and 2015(All figures in thousands except share and per share data) 201720162015Revenues:Club operations$397,166$390,560$418,069Fees and other5,8766,3616,254 403,042396,921424,323Operating Expenses:Payroll and related145,612149,029175,898Club operating180,467185,104196,725General and administrative22,68024,70230,683Depreciation and amortization40,84943,72747,887Impairment of fixed assets6,497 742 14,571Impairment of goodwill— — 31,558Gain on sale of building— — (77,146)Gain on lease termination— — (2,967) 396,105403,304417,209Operating income (loss)6,937(6,383)7,114Gain on extinguishment of debt—(37,893)(17,911)Interest expense12,66513,94020,579Interest income(78)(2)—Equity in the earnings of investees and rental income(333) (242) (2,361)(Loss) income before (benefit) provision for corporate income taxes(5,317)17,8146,807(Benefit) provision for corporate income taxes(9,686)9,771(14,351)Net income$4,369$8,043$21,158Earnings per share:Basic$0.16$0.31$0.86Diluted$0.16$0.31$0.84Weighted average number of shares used in calculating earnings per share:Basic26,703,57725,568,37124,630,898Diluted27,422,83326,074,73525,114,057See notes to consolidated financial statements.F-5Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)Years Ended December 31, 2017, 2016 and 2015(All figures in thousands) 2017 2016 2015Net income$4,369 $8,043 $21,158Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of tax of $0 for the years ended in December31, 2017, 2016 and 201542 (176) (165)Interest rate swap, net of tax of $0 for the years ended in December 31, 2017, 2016 and20151,327 531 (753)Total other comprehensive income (loss), net of tax1,369 355 (918)Total comprehensive income$5,738 $8,398 $20,240See notes to consolidated financial statements.F-6Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITYears Ended December 31, 2017, 2016 and 2015(All figures in thousands except share and per share data) Common Stock($.001 par) AdditionalPaid-inCapital AccumulatedOtherComprehensiveIncome RetainedEarnings(Deficit) TotalStockholders’(Deficit) Equity Shares Amount Balance at December 31, 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)Stock option exercises44,114 1 110 — — 111Common stock grants108,940 — 368 — — 368Restricted stock grants506,200 — — — — —Forfeiture of restricted stock(70,666) — — — — —Compensation related to stock options and restricted stock grants— — 1,493 — — 1,493Dividend forfeitures— — — — 3 3Net income— — — — 4,369 4,369Derivative financial instruments— — — 1,327 — 1,327Foreign currency translation adjustment— — — 42 — 42Balance at December 31, 201727,149,135 $25 $(4,290) $1,201 $(74,893) $(77,957)See notes to consolidated financial statements.F-7Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31, 2017, 2016 and 2015(All figures in thousands)201720162015Cash flows from operating activities:Net income$4,369 $8,043 $21,158Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization40,849 43,727 47,887Impairment of fixed assets6,497 742 14,571Impairment of goodwill— — 31,558Gain on sale of building— — (77,146)Gain on extinguishment of debt— (37,893) (17,911)Amortization of debt discount939 1,006 1,288Amortization of debt issuance costs601 644 778Amortization of building financing costs— — 124Noncash rental income, net of non-cash rental expense(4,250) (3,617) (3,647)Share-based compensation expense1,861 1,807 1,386Net change in deferred taxes32 — (11,519)Net change in certain operating assets and liabilities(24,450) 1,500 9,185Decrease in membership costs133 1,937 4,367Landlord contributions to tenant improvements2,115 2,080 1,288Increase in insurance reserves552 1,130 1,087Other(1,049) 84 416Total adjustments23,830 13,147 3,712Net cash provided by operating activities28,199 21,190 24,870Cash flows from investing activities: Capital expenditures(10,206) (19,723) (30,471)Acquisition of businesses(15,375) — —Acquisition of assets(12,600) — —Deposit paid in connection with acquisitions(2,800) — —Change in restricted cash— — (1,100)Other(550) (280) —Net cash used in investing activities(41,531) (20,003) (31,571)Cash flows from financing activities: Proceeds from building financing arrangement— — 4,000Principal payments on 2013 Term Loan Facility(2,082) (2,266) (3,038)Repurchase of 2013 Term Loan Facility— (29,765) (10,947)Debt issuance costs— — (350)Cash dividends paid(9) (50) (213)Redemption paid pursuant to the Rights Plan— — (246)Proceeds from stock option exercises111 318 283Net cash used in financing activities(1,980) (31,763) (10,511)Effect of exchange rate changes on cash37 (45) (23)Net decrease in cash and cash equivalents(15,275) (30,621) (17,235)Cash and cash equivalents beginning of period45,596 76,217 93,452Cash and cash equivalents end of period$30,321 $45,596 $76,217Summary of the change in certain operating assets and liabilities: (Increase) decrease in accounts receivable$(984) $763 $1,446Decrease in inventory238 99 219(Increase) decrease in prepaid expenses and other current assets(9,180) 2,997 596Increase (decrease) in accounts payable, accrued expenses and accrued interest143 (2,298) 1,011Change in prepaid corporate income taxes and corporate income taxes payable(12,010) 5,471 4,774(Decrease) increase in deferred revenue(2,657) (5,532) 1,139Net change in certain working capital components$(24,450) $1,500 $9,185See notes to consolidated financial statements.F-8Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2017, 2016 and 2015(In thousands except share and per share data)1. Basis of PresentationTown Sports International Holdings, Inc. (the “Company” or “TSI Holdings”) is a diversified holding company owning subsidiaries engaged in anumber of business and investment activities. References to “TSI, LLC” refer to Town Sports International, LLC, and references to “TSI Group” refer to TownSports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company. As of December 31, 2017, the Company owned and operated165 fitness clubs. The clubs are comprised of 119 clubs in the New York metropolitan region (102 of which were under the “New York Sports Clubs” brandname, 16 of which were under the “Lucille Roberts” brand name, and one of which was under the “TMPL” brand name), including 39 locations in Manhattan.Additionally, the Company owned and operated 28 clubs in the Boston metropolitan region under the “Boston Sports Clubs” brand name, 10 clubs (one ofwhich is partly-owned) in the Washington, D.C. metropolitan region under the “Washington Sports Clubs” brand name, five clubs in the Philadelphiametropolitan region under the “Philadelphia Sports Clubs” brand name and three clubs in Switzerland. In addition, as of December 31, 2017, the Companyhas one partly-owned club that operates under a different brand name in Washington, D.C. The Company’s operating segments are classified by geographicalregions, which include the New York, Boston, Philadelphia, Washington, D.C. and Switzerland regions. These operating segments are the level at which thechief operating decision makers review discrete financial information and make decisions about segment profitability based on earnings before income taxdepreciation and amortization. The Company has determined that these operating segments have similar economic characteristics and meet the criteria whichpermit them to be aggregated into one reportable segment.The Company continues to experience revenue pressure from members as the fitness industry continues to be highly competitive in the geographicregions in which the Company competes. Also, the prior strategy of converting to a low-cost gym implemented in 2014 resulted in additional revenuepressure for the past few years. New members joined at lower monthly rates and cancellations of members paying higher rates negatively impacted theCompany's results and liquidity. In response to this, the Company implemented cost-savings initiatives in 2015, 2016 and 2017, which mitigated the impactthe decline in revenue had on its profitability and cash flow from operations.The Company continues to strategize on improving its financial results. The Company focuses on increasing membership in existing clubs to increaserevenue. The Company may consider additional actions within its control, including certain acquisitions, license arrangements, the closure of unprofitableclubs upon lease expiration and the sale of certain assets. The Company may also consider additional strategic alternatives, including opportunities to reduceTSI, LLC’s existing debt and further cost-savings initiatives. The Company’s ability to continue to meet its obligations is dependent on its 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 the Company’s liquidity and operations, and the Company would need to implement alternative plans that could includeadditional asset sales, additional reductions in operating costs, additional reductions in working capital, debt restructurings and the deferral of capitalexpenditures. There can be no assurance that such alternatives would be available to the Company or that the Company would be successful in theirimplementation.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 $1,404, $1,015 and $719 for the years ended December 31, 2017, 2016 and2015, respectively.F-9Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Initiation and processing fees, as well as related direct and incremental expenses of membership acquisition, which may include sales commissions,bonuses and related taxes and benefits, are deferred and recognized, on a straight-line basis, in operations over the estimated average membership life or 12months to the extent these costs are related to the first annual fee paid within one month of enrollment. Annual fees are amortized over 12 months. Deferredmembership costs were $959 and $1,092 at December 31, 2017 and 2016, respectively.The average membership life was 26 months, 25 months and 22 months for the years ended December 31, 2017, 2016 and 2015. The Company monitorsfactors that might affect the estimated average membership life including retention trends, attrition trends, membership sales volumes, membershipcomposition, competition, and general economic conditions, and adjusts the estimate as necessary on an annual basis.The Company recognizes revenue from personal training sessions as the services are performed (i.e., when the session is trained). Unused personaltraining sessions expire after a set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. As of December 31,2017 and 2016, the Company had approximately $12,456 of unused and expired personal training sessions that had not been recognized as revenue and wasrecorded as deferred revenue. The Company does not believe this amount is subject to the escheatment or abandoned property laws of any of the jurisdictionsin which we conduct our business, including the State of New York. It is possible however, that one or more of these jurisdictions may not agree with theCompany's position and may claim that the Company must remit all or a portion of these amounts to such jurisdiction. This could have a material adverseeffect on the Company's cash flows. The State of New York has informed the Company that it is considering whether the Company is required to remit theamount received by the Company for unused, expired personal training sessions to the State of New York as unclaimed property. For a total of sixjurisdictions, the Company has concluded, based on opinions from outside counsel, that money held by a company for unused and expired personal trainingsessions are not escheatable. In 2010, for three jurisdictions, the Company concluded, based on opinions from outside counsel, that monies held by acompany for unused and expired personal training sessions are not escheatable. As a result, the Company recorded approximately $2,697 as personal trainingrevenue in the fourth quarter of 2010. This amount was previously recorded in deferred revenue. In 2017, for another three jurisdictions, the Companyconcluded, based on opinions from outside counsel, that monies held by a company for unused and expired personal training sessions are not escheatable. Asa result, the Company recorded approximately $3,557 as personal training revenue in the fourth quarter of 2017. This amount was previously recorded indeferred revenue, which was primarily related to sessions purchased prior to the year ended December 31, 2015.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, which include four managed sites as of December 31,2017. Management fees earned for services rendered are recognized at the time the related services are performed. Revenue generated from managed sites was$922, $1,892 and $1,802 for the years ended December 31, 2017, 2016 and 2015, respectively.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 $2,658 and $3,112 as of December 31, 2017and 2016, respectively, pursuant to various state consumer protection laws.Advertising CostsAdvertising costs are charged to operations during the period in which they are incurred, except for production costs related to television and radioadvertisements, which are expensed when the related commercials are first aired. Total advertising costs incurred by the Company for the years endedDecember 31, 2017, 2016 and 2015 totaled $2,827, $6,384 and $11,057, respectively, and are included in Club operating expenses in the accompanyingstatements of operations for each respective year.F-10Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 is included in cash and cash equivalents at both December 31, 2017 and 2016,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 $2,884, $3,190 and $2,920 as of December 31,2017, 2016 and 2015, 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. Contingent rent expense was $131, $467 and $693 for the years ended December 31, 2017, 2016 and2015, respectively, and is included in Club operating expenses in the accompanying consolidated statements of operations for each respective year.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. In the years ended December 31, 2017, 2016 and 2015, the Company recorded $201, $329 and $1,550 oflease termination losses, respectively, which were included in Club operating expenses in the accompanying consolidated statements of operations for eachrespective year.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 related to the termination of a lease for a planned club opening that was not yet effective. 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 $6,453 and $4,133 at December 31, 2017 and 2016,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.F-11Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Following are the changes in the allowance for doubtful accounts for the years December 31, 2017, 2016 and 2015: Balance Beginningof the Year Additions Write-offs Net ofRecoveries Balance atEnd of YearDecember 31, 2017$2,912 $9,712 $(8,387) $4,237December 31, 2016$3,133 $6,704 $(6,925) $2,912December 31, 2015$2,511 $11,237 $(10,615) $3,133InventoryAs of December 31, 2016, inventory consisted primarily of equipment parts and cleaning and locker room supplies. Inventory was valued at the lowerof cost or net realizable value by the first-in, first-out method. In 2017, the Company began to pre-pay for some of these items and store them at a third-partyvendor location. These prepaid assets are included in prepaid and other current assets on the accompanying consolidated balance sheet as of December 31,2017.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 locations are capitalized with leasehold improvements. Expenditures for maintenance and repairs are charged tooperations as incurred. The cost and related accumulated depreciation of assets retired or sold is removed from the respective accounts and any gain or loss isrecognized in operations. Third-party costs related to developing web applications, developing web pages and installing or enhancing developedapplications on the web servers are capitalized and classified as computer software. Website 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, favorable lease commitments, management contracts, trade names and non-compete agreements. Membership lists are amortized over theestimated average membership life, currently at 26 months, favorable lease commitments are amortized over the remaining life of the lease, trade names areamortized over their estimated useful lives of between five and 15 years, and non-compete agreements are amortized over five years. For the years endedDecember 31, 2017, 2016 and 2015, management contracts were amortized over their contractual lives of between nine and 11 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 $601, $644 and $778, for the years ended December 31, 2017, 2016 and 2015,respectively. For the year ended December 31, 2015, building financing costs were classified within other assets and were being amortized as additionalinterest expense over the life of the underlying financing arrangement, 25 years, using the interest method. Amortization of building financing costs was$124 for the year ended December 31, 2015. There was no amortization of building financing costs in the years ended December 31, 2017 and 2016. Thebalance 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 inGain on sale of building in the accompanying statements of operations.Business CombinationsIn connection with an acquisition of a business, the Company records all assets acquired and liabilities assumed, if any, of the acquired business at theiracquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair value determinations requirejudgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discountrates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in making these fair valuedeterminations.F-12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 periodically whenever events or changes in circumstancesindicate that their carrying amounts may not be recoverable from undiscounted cash flows. Estimated undiscounted expected future cash flows are used todetermine if an asset group is impaired, in which case the asset carrying value would be reduced to its fair value, calculated considering a combination ofmarket approach and a cost approach. In determining the recoverability of fixed assets Level 3 inputs were used in determining undiscounted cash flows,which are based on internal budgets and forecasts through the end of the life of the primary asset in the asset group which is normally the life of leaseholdimprovements. The most significant assumptions in those budgets and forecasts relate to estimated membership and ancillary revenue, attrition rates,discount rates, income tax rates, estimated results related to new program launches and maintenance capital expenditures, which are generally estimated atapproximately 2% of total revenues depending upon the conditions and needs 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.The Company early adopted Accounting Standards Update (“ASU”) No. 2017-04, “Simplifying the Test for Goodwill Impairment” in the first quarter of2017. This standard eliminated the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of areporting unit was needed to measure the goodwill impairment. As a result of the updated guidance, the Company’s annual goodwill impairment test as ofFebruary 28, 2017 was performed by comparing the fair value of the Company’s reporting unit with its carrying amount and then recognizing an impairmentcharge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwillallocated to that reporting unit.Prior to the adoption of ASU 2017-04, the impairment test required a two-step quantitative evaluation. Step 1 involved comparing the estimated fairvalue of the Company’s reporting units to their carrying amounts. If the estimated fair value of the reporting unit was greater than its carrying amount, therewas no requirement to perform Step 2 of the impairment test, and there was no impairment. If the reporting unit’s carrying amount was greater than theestimated fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculated the implied fair value of goodwill bydeducting the estimated fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the estimated fair value of thereporting unit as determined in Step 1. The implied fair value of goodwill determined in this step was compared to the carrying value of goodwill. If theimplied fair value of goodwill was less than the carrying value of goodwill, an impairment charge was recognized equal to the difference.F-13Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)For the years ended December 31, 2017 and 2016, the estimated fair value was determined using an income approach. For the year ended December 31,2015, the estimated fair value was determined using a combined income and market approach with equal weighting on each approach. The income approachwas based on discounted future cash flows and required significant assumptions, including estimates regarding revenue growth rates, operating margins,weighted average cost of capital, and future economic and market conditions. Under the market approach, the Company utilized information regarding theCompany, 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.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.The Company has historically performed goodwill impairment test annually as of the last day of February and in the interim if a triggering eventoccurs. During the fourth quarter of 2017, the Company established the date of its annual goodwill impairment test for the New York region from the last dayof February to August 1. The Company believes that performing the test annually on August 1 will alleviate the information and resource constraints thathistorically existed during the first quarter and will more closely align with the timing of related forecasts, reports and analysis. The Company will perform agoodwill impairment test on the Switzerland region as of February 28, 2018.The goodwill in the New York region was acquired in connection with the Lucille Roberts and TMPL acquisitions in the third and fourth quarters of2017, respectively. As such, these intangible assets were recorded at fair value at the time of the acquisitions. The next goodwill impairment test for the NewYork region will be August 1, 2018 which is within 12 months of the acquisitions. The Company believes that the resulting change in accounting principlerelated to the annual testing date will not delay, accelerate or avoid an impairment charge. The Company has also determined that it is impracticable toobjectively determine projected cash flows and related valuation estimates that would have been used as of August 1 for periods prior to August 1, 2018without the use of hindsight. As such, the Company will prospectively apply the change in the annual goodwill impairment assessment date beginningAugust 1, 2018.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 $415 and $615 as of December 31, 2017 and 2016, respectively.The Company maintains a self-insured health benefits plan, which provides medical benefits to employees electing coverage under the plan. TheCompany maintains a reserve for incurred but not reported medical claims and claim development. The reserve is an estimate based on historical experience,actuarial estimates and other assumptions, some of which are subjective. The Company will adjust its self-insured medical benefits reserve as the Company’sloss experience changes due to medical inflation, changes in the number of plan participants and an aging employee base.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.F-14Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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. As of December 31, 2017, the Company maintained a full valuation allowance of $38,769 against outstanding net deferred tax assets asthe company had a three year 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.Statements of Cash FlowsSupplemental disclosure of cash flow information: Year Ended December 31, 2017 20162015Cash paid: Interest paid (net of amounts capitalized) (a)$11,165 $12,289 $16,749Income taxes paid$3,891 $11,286 $105Cash received: Income taxes refund$1,600 $6,985 $7,768Noncash investing and financing activities: Acquisition of fixed assets included in accounts payable and accrued expenses$455 $2,058 $2,031(a) Interest includes cash payments under the Initial Lease (as defined below) resulting from the sale of the East 86th Street property in the year endedDecember 31, 2015. See Notes 9 for additional noncash financing activities.Other Comprehensive (Loss) IncomeOther comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events andcircumstances from non-owner sources, including changes in the fair value of the Company’s derivative financial instrument and foreign currency translationadjustments. The Company presents 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 stockholders’ 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 10 - Derivative Financial Instruments for more information on the Company’s risk management program andderivatives.F-15Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)At December 31, 2017, 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 $42, net oftax of $0; $(176), net of tax of $0 and $(165), net of tax of $0, for the years ended December 31, 2017, 2016 and 2015, 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, 2017, $19,932 of the cash balance of $30,321was 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 to basic EPS, except that the denominator is increased for theassumed exercise of dilutive stock options and unvested restricted stock calculated using the treasury stock method.The following table summarizes the weighted average common shares for basic and diluted EPS computations. For The Year Ended December 31, 2017 2016 2015Net income$4,369 $8,043 $21,158Weighted average number of common share outstanding — basic26,703,577 25,568,371 24,630,898Effect of dilutive share-based awards719,256 506,364 483,159Weighted average number of common shares outstanding — diluted27,422,833 26,074,735 25,114,057Earnings per share: Basic$0.16 $0.31 $0.86Diluted$0.16 $0.31 $0.84For the years ended December 31, 2017, 2016 and 2015, the Company did not include options to purchase 28,681, 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.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.F-16Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)3. Recent Accounting PronouncementsIn August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for HedgingActivities. The updated standard expands the range of transactions that qualify for hedge accounting. It also amends the presentation and disclosurerequirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk managementstrategies, simplify the application of hedge accounting, and increase the transparency as to the scope and results of hedging programs. This standard iseffective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The adoption of thisguidance is not expected to have a material impact on the Company’s financial statements.In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard eliminates the second step of thegoodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwillimpairment. As a result of ASU No. 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with itscarrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value,not to exceed the total amount of goodwill allocated to that reporting unit. This standard is effective prospectively for annual and interim periods beginningon or after December 15, 2019, and early adoption is permitted on testing dates after January 1, 2017. The Company early adopted the updated guidance forthe fiscal year beginning January 1, 2017 with no impact on the Company’s financial statements.In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This ASU clarifies thedefinition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions(or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, withearly adoption permitted. The Company early adopted the updated guidance for the fiscal year beginning September 1, 2017 with no impact on theCompany’s financial statements.In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(A Consensus of the FASB Emerging Issues Task Force).” This ASU provides specific guidance over eight identified cash flow issues. This standard iseffective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance will not have amaterial 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 was effective for interim and annual reporting periodsbeginning after December 15, 2016, with early adoption permitted. The Company adopted the updated guidance for the fiscal year beginning January 1,2017 with no material impact on the Company’s financial statements. The Company elected to account for forfeitures of share-based payments byrecognizing forfeitures of awards as they occur. Refer to Note 13 - Stockholders’ (Deficit) Equity for further detail.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. Refer to Note 12 - Leases for further detail.F-17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 is 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 No. 2016-08, ASUNo. 2016-10, and ASU No. 2016-12 in March 2016, April 2016, and May 2016, respectively, to help provide interpretive clarifications on the new guidancein FASB ASC Topic 606. The Company will adopt this guidance on January 1, 2018 using the modified retrospective method. The Company expects torecord an impact to opening retained earnings as of January 1, 2018 due to the cumulative impact of adopting FASB ASC Topic 606, with the impactprimarily related to how costs associated with contracts for customers are deferred and recognized. The Company is in the process of finalizing the additionaldisclosures that may be acquired.4. Fixed AssetsFixed assets as of December 31, 2017 and 2016 are shown at cost, less accumulated depreciation and amortization and are summarized below: December 31, 2017 2016Leasehold improvements$489,738 $495,515Club equipment (a)103,998 107,905Furniture, fixtures and computer equipment56,203 71,222Computer software19,048 25,813Construction in progress1,237 3,617Building and improvements9,575 —Land2,675 — 682,474 704,072Less: Accumulated depreciation and amortization(530,976) (533,492) $151,498 $170,580(a) Included $505 of club equipment under capital lease for the year ending December 31, 2017.Depreciation and leasehold amortization expense for the years ended December 31, 2017, 2016 and 2015, was $40,299, $43,691 and $47,664,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 the FASB guidance. The Company’s long-lived assets and liabilities are grouped at theindividual club level which is the lowest level for which there are identifiable cash flows. To the extent that estimated future undiscounted net cash flowsattributable to the assets are less than the carrying amount, an impairment charge equal to the difference between the carrying value of such asset and theirfair values is recognized.In the year ended December 31, 2017, the Company tested its underperforming clubs and recorded impairment charges of $6,497 on leaseholdimprovements and furniture and fixtures at clubs that experienced decreased profitability and sales levels below expectations during this period. In the yearsended December 31, 2016 and December 31, 2015, the Company recorded impairment charges of $742 and $14,571, respectively, related to underperformingclubs.The fair value of long-lived assets is determined using the level 3 valuation technique established by the FASB. Level 3 valuation is based uponunobservable inputs that are significant to the fair value measurement.F-18Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)5. Goodwill and Intangible AssetsGoodwill was allocated to reporting units that closely reflect the regions served by the Company: New York, Boston, Washington, D.C., Philadelphiaand Switzerland, with certain more remote clubs that do not benefit from a regional cluster being considered single reporting units (“Outlier Clubs”). In thesecond half of 2017, the Company acquired the Lucille Roberts Health Club business (“Lucille Roberts”) and a single existing club under the TMPL tradename. In connection with these acquisitions, $5,158 of goodwill was added to the Company’s goodwill balance in the New York region. For moreinformation on the Lucille Roberts and the TMPL Gym acquisitions, refer to Note 6 - Acquisitions. As of December 31, 2017, only the New York andSwitzerland regions had a goodwill balance.The Company early adopted ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” in the first quarter of 2017. This standard eliminatedthe second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed tomeasure the goodwill impairment. As a result of the updated guidance, the Company’s annual goodwill impairment test as of February 28, 2017 wasperformed by comparing the fair value of the Company’s reporting unit with its carrying amount and then recognizing an impairment charge, as necessary, forthe amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.Prior to the adoption of ASU 2017-04, the impairment test required a two-step quantitative evaluation. Step 1 involved comparing the estimated fairvalue of the Company’s reporting units to their carrying amounts. If the estimated fair value of the reporting unit was greater than its carrying amount, therewas no requirement to perform Step 2 of the impairment test, and there was no impairment. If the reporting unit’s carrying amount was greater than theestimated fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculated the implied fair value of goodwill bydeducting the estimated fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the estimated fair value of thereporting unit as determined in Step 1. The implied fair value of goodwill determined in this step was compared to the carrying value of goodwill. If theimplied fair value of goodwill was less than the carrying value of goodwill, an impairment charge was recognized equal to the difference.For the years ended December 31, 2017 and 2016, the estimated fair value was determined using an income approach. For the year ended December 31,2015, the estimated fair value was determined using a combined income and market approach with equal weighting on each approach. The income approachwas based on discounted future cash flows and required significant assumptions, including estimates regarding revenue growth rates, operating margins,weighted average cost of capital, and future economic and market conditions. Under the market approach, the Company utilized information regarding theCompany, 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.The annual impairment tests as of the last day of February in 2017, 2016 and 2015 supported the goodwill balance and as such no impairment ofgoodwill was required. As a result of the significant decrease in market capitalization and a decline in our performance primarily due to existing membersdowngrading their memberships to those with lower monthly dues and new members enrolling at lower rates between February 28, 2015 and May 31, 2015,the Company performed an interim impairment test as of May 31, 2015. The Company concluded that there would be no remaining implied fair value ofgoodwill attributable to the New York and Boston regions. Accordingly, as of May 31, 2015, the Company wrote off $31,558 of goodwill associated withthese reporting units. The Company did not have a goodwill impairment charge in the Switzerland region as a result of the interim test given the profitabilityof this unit.The Company has historically performed goodwill impairment test annually as of the last day of February and in the interim if a triggering eventoccurs. During the fourth quarter of 2017, the Company established the date of its annual goodwill impairment test for the New York region from the last dayof February to August 1. The Company believes that performing the test annually on August 1 will alleviate the information and resource constraints thathistorically existed during the first quarter and will more closely align with the timing of related forecasts, reports and analysis. The Company will perform agoodwill impairment test on the Switzerland region as of February 28, 2018.F-19Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The goodwill in the New York region was acquired in connection with the Lucille Roberts and TMPL acquisitions in the third and fourth quarters of2017, respectively. As such, these intangible assets were recorded at fair value at the time of acquisitions. The next goodwill impairment test for the NewYork region will be August 1, 2018 which is within 12 months of the acquisitions. The Company believes that the resulting change in accounting principlerelated to the annual testing date will not delay, accelerate or avoid an impairment charge. The Company has also determined that it is impracticable toobjectively determine projected cash flows and related valuation estimates that would have been used as of August 1 for periods prior to August 1, 2018without the use of hindsight. As such, the Company will prospectively apply the change in the annual goodwill impairment assessment date beginningAugust 1, 2018.The changes in the carrying amount of goodwill from December 31, 2016 through December 31, 2017 are detailed in the charts below. New York Boston Switzerland Outlier Clubs TotalGoodwill, net of accumulated amortization$31,549 $15,775 $1,175 $3,982 $52,481Changes due to foreign currency exchange rate fluctuations— — (167) — (167)Less: accumulated impairment of goodwill(31,549) (15,775) — (3,982) (51,306)Balance as of December 31, 2016— — 1,008 — 1,008Acquired goodwill5,158 — — — 5,158Changes due to foreign currency exchange rate fluctuations— — 51 — 51Balance as of December 31, 2017$5,158 $— $1,059 $— $6,217Intangible assets were acquired in connection with the Lucille Roberts and TMPL acquisitions in 2017. Amortization expense of intangible assets for theyears ended December 31, 2017, 2016 and 2015 was $550, $36 and $223 respectively. Intangible assets are as follows: As of December 31, 2017 As of December 31, 2016 Gross CarryingAmount AccumulatedAmortization NetIntangibles Gross CarryingAmount AccumulatedAmortization NetIntangiblesMembership lists$12,744 $(11,577) $1,167 $11,344 $(11,344) $—Favorable lease commitments2,350 (136) 2,214 — — —Trade names900 (47) 853 40 (9) 31Non-compete agreement900 — 900 — — —Management contracts— — — 250 (146) 104 $16,894 $(11,760) $5,134 $11,634 $(11,499) $135The aggregate amortization expense for the next five years and thereafter of the acquired intangible assets is as follows:Year Ending December 31, 2018$1,37720191,2512020731202173120225062023 and thereafter538 $5,134F-20Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)6. AcquisitionsAcquisitions of businesses are accounted for in accordance with ASC 805, Business Combinations and ASU 2017-01. According to ASC 805,transactions that represent business combinations should be accounted for under the acquisition method. In addition, the ASC 805 includes a subtopic whichprovides guidance on transactions sometimes associated with business combinations but that do not meet the requirements to be accounted for as businesscombinations under the acquisition method. Under the acquisition method, the purchase price is allocated to the assets acquired and the liabilities assumedbased on their respective estimated fair values as of the acquisition date. Any excess of the purchase price over the fair values of the assets acquired andliabilities assumed was allocated to goodwill. These acquisitions were not material to the financial position, results of operations or cash flows of theCompany; therefore, the respective pro forma financial information has not been presented. The results of operations of the clubs acquired have beenincluded in the Company’s consolidated financial statements pro rata from the date of acquisition.Acquisition of Lucille Roberts Health Club BusinessIn September 2017, the Company acquired Lucille Roberts for a net cash purchase price of $9,450. The acquisition added 16 clubs to the Company'sportfolio in the New York metropolitan region and was accounted for as a business combination. These 16 clubs continue to operate under the LucilleRoberts trade name. Acquisition costs incurred in connection with this transaction during the year ended December 31, 2017, were approximately $285 andare included in general and administrative expenses in the accompanying condensed consolidated statements of income. The following table summarizes theallocation of the purchase price to the fair value of the assets and liabilities acquired. September 2017Allocation of purchase price: Fixed assets$1,024Goodwill4,793Definite lived intangible assets: Membership lists1,400Trade names700Favorable lease commitments2,350Deferred revenue(817)Total allocation of purchase price$9,450The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives with the membership lists amortized over theestimated average membership life of 26 months, the trade name amortized over its estimated useful life of five years and the favorable lease commitmentsamortized over the remaining life of each respective lease, or a weighted average life of 6.3 years.From the acquisition on September 11, 2017 through December 31, 2017, the Lucille Roberts clubs generated revenue of $3,937 and net loss of ($778).It is impractical to disclose proforma information due to the unavailability of historical audited financial statements for Lucille Roberts.Acquisition of AssetsIn November 2017, the Company acquired a building and the land it occupies in the New York metropolitan region, as well as a single health clublocated on the premises for a purchase price of $12,600. Of the total purchase price, $2,675 was attributed to land, $9,675 was attributed to building, and theremainder of the purchase price was primarily equipment and deferred revenue. This transaction was accounted for as an asset acquisition.Acquisition of TMPL GymIn December 2017, the Company acquired an existing club in the New York metropolitan region under the TMPL trade name for a net cash purchaseprice of $5,925. TMPL is a luxury gym that features a wide variety of fitness programs and group exercises. The club continues to operate under the TMPLtrade name and was accounted for as a business combination.F-21Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Acquisition costs incurred in connection with this transaction during the year ended December 31, 2017, were approximately $61 and are included ingeneral and administrative expenses in the accompanying condensed consolidated statements of income. The following table summarizes the allocation ofthe purchase price to the fair value of the assets and liabilities acquired. The purchase price allocation presented below has been prepared on a preliminarybasis and changes to the preliminary purchase price allocations may occur as additional information concerning asset and liability valuations are finalized. December 2017Allocation of purchase price: Fixed assets$5,195Goodwill365Definite lived intangible assets: Non-compete agreement900Trade name200Deferred revenue(500)Capital lease liability(160)Other liabilities(75)Total allocation of purchase price$5,925The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives with the non-compete amortized over five yearsand the trade name amortized over 15 years. It is impractical to disclose proforma information due to the unavailability of historical audited financialstatements for TMPL.Subsequent AcquisitionsIn December 2017, the Company entered into an agreement to acquire an existing club in the Boston metropolitan region. In connection with thisagreement, the Company deposited $250 and into an escrow account in November 2017. The remaining purchase price of $2,500 was deposited into anescrow account in December 2017. These amounts were recorded in prepaid expenses and other current assets on the balance sheet as of December 31, 2017.The fair value of the net assets acquired on the acquisition date primarily comprises property, plant and equipment, and intangible assets. This acquisitionwas effective in January 2018. The acquisition will be accounted for as a business combination and the purchase price allocation is pending.In December 2017, the Company entered into an agreement to acquire an existing club in the Florida region, as well as the land and building the cluboccupied. In connection with this agreement, the Company deposited $50 into an escrow account in November 2017. The remaining purchase price of$3,969 was made in January 2018 and the acquisition was effective at that time. The fair value of the net assets acquired on the acquisition date primarilycomprises land, building, and equipment. This transaction will be accounted for as an asset acquisition in the first quarter of 2018.The above transactions were completed in January 2018 with no material impact on the Company's financial statements. The purchase price allocationsare in the process of being finalized.7. Accrued ExpensesAccrued expenses as of December 31, 2017 and 2016 consisted of the following: December 31, 2017 2016Accrued payroll and related$5,888 $6,817Accrued occupancy costs10,009 8,594Accrued insurance claims2,282 2,786Accrued other6,490 7,710 $24,669 $25,907F-22Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)8. Long-Term DebtLong-term debt as of December 31, 2017 and 2016 consisted of the following: December 31, 2017 20162013 Term Loan Facility$199,918 $202,000Less: Unamortized discount(2,912) (3,851)Less: Deferred financing costs(977) (1,324)Less: Current portion due within one year(2,082) (2,082)Long-term portion$193,947 $194,743The aggregate long-term debt obligations maturing in the next five years and thereafter are as follows: Amount DueYear Ending December 31, 2018$2,08220192,0822020195,7542021—2022—2023 and thereafter— $199,918The table above does not reflect potential commitments in connection with our outstanding letters of credit under the 2013 Revolving Loan Facility(defined below) which matures on November 15, 2018.2013 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, and to pay related fees and expenses. None of the revolving loan facility was drawn upon as of theclosing date on November 15, 2013, but loans under the 2013 Revolving Loan Facility may be drawn from time to time pursuant to the terms of the 2013Senior Credit Facility. The borrowings under the 2013 Senior Credit Facility are guaranteed and secured by assets and pledges of capital stock by HoldingsII, TSI, LLC, and, subject to certain customary exceptions, the wholly-owned domestic subsidiaries of TSI, LLC.Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI, LLC’s option, bear interest at either the 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, 2017, TSI LLC has made a total of $24,101 in principal payments on the 2013 Term Loan Facility.F-23Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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, 2017, TSI Holdings had a cash balance ofapproximately $17,556.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 total net 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 ina tax provision 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.In May 2017, TSI, LLC loaned $5,000 to TSI Group, a newly-formed wholly-owned subsidiary of TSI Holdings, at a rate of LIBOR plus 9.55% perannum. In addition to the interest payments, TSI Group is required to repay 1.0% of the principal amount of the loan, $50 per annum, on a quarterly basiscommencing September 30, 2017. The loan is secured by certain collateral. This transaction has no impact on the Company's consolidated financialstatements as it is eliminated in consolidation. In October 2017, TSI, LLC made a dividend distribution of $35,000 to TSI Holdings, Inc.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, 2017,TSI, LLC had outstanding letters of credit of $7,007 and a total leverage ratio that was below 4.50:1.00. Other than these outstanding letters of credit, TSI,LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. The terms of the 2013 Senior Credit Facility include a financial covenantunder which the Company is not able to utilize more than 25% or $11,250 in accordance with terms of the 2013 Revolving Loan Facility if the total leverageratio exceeds 4.50:1:00 (calculated on a proforma basis to give effect to any borrowing). The 2013 Senior Credit Facility also contains certain affirmative andnegative covenants, including covenants that may limit or restrict TSI, LLC and Holdings II’s ability to, among other things, incur indebtedness and otherliabilities; create liens; merge or consolidate; dispose of assets; make investments; pay dividends and make payments to stockholders; make payments oncertain indebtedness; and enter into sale leaseback transactions, in each case, subject to certain qualifications and exceptions. In addition, at any time whenthe total leverage ratio is greater than 4.50:1.00, there are additional limitations on the ability of TSI, LLC and Holdings II to, among other things, makecertain distributions of cash to TSI Holdings. The 2013 Senior Credit Facility also includes customary events of default (including non-compliance with thecovenants or other terms of the 2013 Senior Credit Facility) which may allow the lenders to terminate the commitments under the 2013 Revolving LoanFacility 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 $30,000 from sales of assets in any fiscalyear towards mandatory prepayments of outstanding borrowings.F-24Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined therein, to be applied againstoutstanding 2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days afterthe fiscal year end. 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 flowrepayment percentage is 50% when the total leverage ratio, as defined in the 2013 Senior Credit Facility, exceeds or is equal to 2.50:1.00; 25% when thetotal leverage ratio 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 cashflow calculation performed as of December 31, 2017 did not result in any required payments.As of December 31, 2017, the 2013 Term Loan Facility has a gross principal balance of $199,918 and a balance of $196,029 net of unamortized debtdiscount of $2,912 and unamortized debt issuance costs of $977. As of December 31, 2017, 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, 2017, there were no outstanding 2013 Revolving Loan Facility borrowings and outstanding letters of credit issued totaled $7,007.The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2017 was $37,993, 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. The 2013 Revolving Loan Facility expires on November 15, 2018. Given that the 2013 Senior Credit Facility contains a restrictivecovenant on obtaining secured debt, if the Company is unable to extend, restructure or refinance the 2013 Revolving Loan Facility prior to maturity, allletters of credit that remain outstanding under the 2013 Revolving Loan Facility will become immediately due and payable upon maturity. The Company isconsidering alternative means to satisfy these obligations, including cash collateralization.Fair Market ValueBased on quoted market prices, the 2013 Term Loan Facility had a fair value of approximately $188,173 and $163,115 at December 31, 2017 andDecember 31, 2016, respectively, and is classified within level 2 of the fair value hierarchy. Level 2 is based on quoted prices for similar instruments in activemarkets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets. The fair value for the Company’s 2013 Term Loan Facility is determined using observable currentmarket information such as the prevailing Eurodollar interest rate and Eurodollar yield curve rates and includes consideration of counterparty credit risk.For the fair market value of the Company’s interest rate swap instrument refer to Note 10 - 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, 2017, 2016 and 2015 were as follows: Year Ended December 31, 2017 2016 2015Interest costs expensed$12,657 $13,904 $17,914Interest costs capitalized— 28 72Total interest expense and amounts capitalized$12,657 $13,932 $17,986The table above does not include $2,666 of interest expense related to the building financing arrangement in the year ended December 31, 2015.F-25Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)9. 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, 2015.10. 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 Company’s previous 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 0.884% plus the 3.5% applicable margin and the Eurodollarrate, which has a floor of 1%. As permitted by ASC 815, Derivatives and Hedging, the Company has designated this swap as a cash flow hedge, the effects ofwhich have been reflected in the Company’s consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015. Theobjective of this hedge is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as beinghedged.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, 2017, 2016 and 2015, hedge ineffectiveness was evaluatedusing the hypothetical derivative method. There was no hedge ineffectiveness in the years ended December 31, 2017, 2016 and 2015.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, 2017$184 $— $184 $—Interest rate swap liability as of December 31, 2016$1,511 $— $1,511 $—F-26Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The swap contract liability of $184 and $1,511 was recorded as a component of accrued expenses as of December 31, 2017 and 2016, respectively, withthe offset to accumulated other comprehensive income ($104 and $854, net of taxes, as of December 31, 2017 and 2016, respectively) on the accompanyingconsolidated balance sheets.There were no significant reclassifications out of accumulated other comprehensive income in 2017, 2016 and 2015 and the Company does not expectthat significant derivative losses included in accumulated other comprehensive income at December 31, 2017 will be reclassified into earnings within thenext 12 months.11. Related PartyOn April 25, 2017, the Company approved the appointment of Stuart M. Steinberg as General Counsel of the Company, effective as of May 1, 2017.Furthermore, the Company and Mr. Steinberg's law firm (the “Firm”) previously entered into an engagement letter agreement (the “Agreement”) dated as ofFebruary 4, 2016, and as amended and restated effective as of May 1, 2017, pursuant to which the Company engaged the Firm to provide general legalservices requested by the Company. Mr. Steinberg continues to provide services for the Firm while employed by the Company. The Agreement provides for amonthly retainer fee payable to the Firm in the amount of $21, excluding litigation services. The Company will also reimburse the Firm for any expensesincurred in connection with the Firm’s services to the Company. In connection with this arrangement, the Company incurred legal expenses payable to theFirm in the amount of $183 in the year ended December 31, 2017. These amounts were classified within general and administrative expenses on thecondensed consolidated statements of operations for the year ended December 31, 2017.12. 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 $5,492 as of December 31, 2017.The leases expire at various times through May 31, 2038 and certain leases may be extended at the Company’s option. Escalation terms on these leasesgenerally include fixed rent escalations, escalations based on an inflation index such as the consumer price index, and fair market value adjustments. In thenext five years, or the period from January 1, 2018 through December 31, 2022, the Company has leases for 25 club locations that are due to expire withoutany renewal options, eight of which are due to expire in 2018, and 61 club locations that are due to expire with renewal options.Future minimum rental payments under non-cancelable leases are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2018 (a)$96,5182019 (a) 91,2082020 85,1292021 75,0162022 62,9332023 and thereafter 247,911(a) For the years ending December 31, 2018 and 2019, future minimum rental payments include capital lease payments of $129 and $31, respectively.Rent expense for the years ended December 31, 2017, 2016 and 2015 was $126,318, $124,952 and $124,920, respectively. Such amounts include non-base rent items of $24,881, $25,384 and $24,767, respectively. Including the effect of deferred lease liabilities, rent expense was $124,997, $124,333 and$123,872 for the years ended December 31, 2017, 2016 and 2015.F-27Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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, 2018$1,36720191,021202076120215372022992023 and thereafter—Rental income, including non-cash rental income, for the years ended December 31, 2017, 2016 and 2015 was $2,558, $2,338 and $4,669, respectively.For the years ended December 31, 2017, 2016 and 2015, such amounts included no additional rental charges above the base rent. The Company previouslyowned the building at the 86th Street club location which housed a rental tenant that generated rental income of approximately $1,926 for the year endedDecember 31, 2015. Refer to Note 9 - Sale of Building for further details.13. Stockholders’ (Deficit) EquityThe Company’s certificate of incorporation adopted in connection with the IPO provides for 105,000,000 shares of capital stock, consisting 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. The Company amended the 2006 Plan to increase the aggregate number of shares ofcommon stock issuable under the 2006 Plan by 1,000,000 shares to a total of 4,500,000 in May 2016, and by 2,000,000 shares to a total of 6,500,000 in May2017. As of December 31, 2017, there were 2,072,967 shares available to be issued under the 2006 Plan.In September 2016, the Chief Operating Officer’s employment with the Company was terminated. As a result of the termination, the Company partiallyaccelerated certain share awards previously granted to the Chief Operating Officer. The Company incurred non-cash severance expense of $250 related to thisacceleration.Beginning January 1, 2017, the Company adopted ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” As a result ofthis updated guidance, the Company elected to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur. In the yearended December 31, 2017, the Company adjusted the forfeiture estimates to reflect actual forfeitures. The forfeiture adjustment reduced stock-basedcompensation expense by $234 in the year ended December 31, 2017.a. Common Stock OptionsThe outstanding Common Stock options as of December 31, 2017 were all fully vested. Stock options generally vest over a three to four year serviceperiod and expire five to ten years from the date of grant.As of December 31, 2017, 2016 and 2015, a total of 61,013, 150,207 and 544,869 Common Stock options were exercisable, respectively.At December 31, 2017, the Company had 61,013 stock options outstanding under the 2006 Plan.F-28Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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. The total compensation expense related to options, classified within Payroll and related on the consolidatedstatements of operations was $15, $156, and $99 for the years ended December 31, 2017, 2016 and 2015, respectively, and the related tax benefit was $5, $67and $38 for the years ended December 31, 2017, 2016 and 2015, respectively. Each of these 2017, 2016 and 2015 tax benefits were prior to the recognitionof the valuation allowance.The following table summarizes the stock option activity for the years ended December 31, 2017, 2016 and 2015: Common Weighted AverageExercise PriceBalance at January 1, 20151,030,521 $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 5.78Exercised(44,114) 2.50Canceled(57,580) 13.32Forfeited(25,000) 2.95Balance at December 31, 201761,013 $2.19The following table summarizes information about stock options outstanding and exercisable as of December 31, 2017: Options Outstanding Options Exercisable Number of Options Weighted-AverageRemainingContractual Life Weighted-AverageExercise Price Number of Options Weighted-AverageExercise PriceCommon 2008 grants26,208 11 months $2.70 26,208 $2.702009 grants23,490 23 months $1.74 23,490 $1.742010 grants11,315 30 months $1.91 11,315 $1.91Total Grants61,013 19 months $2.19 61,013 $2.19At December 31, 2017, stock options outstanding have a weighted average remaining contractual life of 1.6 years and the total intrinsic value for “in-the-money” options, based on the Company’s closing stock price of $5.55, was $209. At December 31, 2017, stock options exercisable have a weightedaverage remaining contractual life of 1.6 years and the total intrinsic value for “in-the-money” exercisable options was $209. The total intrinsic value ofoptions exercised was $111 for the year ended December 31, 2017.The aggregated intrinsic value represents the pre-tax intrinsic value (the difference between the fair value of the Company’s common stock atDecember 31, 2017 of $5.55 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, 2017. 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, 2017 and 2016. In the yearended December 31, 2015, the Company granted 850,000 stock options, with an aggregate grant date fair value of $2,279.F-29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, 2017, there was no unrecognized compensation cost related to stock options.b. Common Stock GrantsRestricted Stock GrantsThe following restricted stock grants were issued to employees of the Company during the year ended December 31, 2017. Numberof Shares SharePrice Grant DateFair ValueMarch 8, 201726,000 $4.00 $104December 4, 2017480,200 $5.85 2,809Total506,200 $2,913The following table summarizes the restricted stock activity for the years ended December 31, 2017, 2016 and 2015: Numberof Shares Weighted AverageGrant Date Fair ValueBalance as of January 1, 2015401,534 $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 2.80Granted506,200 5.75Vested(534,968) 2.93Forfeited(70,666) 3.06Balance as of December 31, 20171,511,941 $3.73F-30Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The 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. The total compensationexpense, classified within Payroll and related on the consolidated statements of operations, related to restricted stock grants was $1,478, $1,155 and $842 forthe years ended December 31, 2017, 2016 and 2015, respectively, and the related tax benefit was $452, $496 and $321 for the years ended December 31,2017, 2016 and 2015, respectively. Each of these 2017, 2016 and 2015 tax benefit were prior to the recognition of the valuation allowance. The restrictedshares contain vesting restrictions and vest in equal installments over either three or four years on the anniversary date of the grants. In the year endedDecember 31, 2017, the Company granted 506,200 restricted shares with an aggregate grant date fair value of $2,913. In the years ended December 31, 2016and 2015, the Company granted 1,711,000 and 507,000 restricted shares, respectively, with an aggregate grant date fair value of $4,245 and $2,166,respectively.As of December 31, 2017, $5,128 of unrecognized compensation cost related to restricted stock was expected to be recognized over a weighted-averageperiod of 2.4 years.Non-Restricted Stock GrantsThe Company issued 56,940 and 52,000 shares of Common Stock to members of the Company’s Board of Directors with respect to their annual retaineron February 1, 2017 and March 8, 2017. The fair value of the shares issued on February 1, 2017 and March 8, 2017 was $2.81 and $4.00 per share,respectively, and was expensed upon the date of grant. The total compensation expense, classified within general and administrative expenses, related toBoard of Director Common Stock grants was $368 in the year ended December 31, 2017. In the years ended December 31, 2016 and 2015, the Companyissued 206,750 and 67,609 shares of Common Stock, respectively, with an aggregate grant date fair value of $246 and $445, respectively.14. RevenuesRevenues for the years ended December 31, 2017, 2016 and 2015 are summarized below: Years Ended December 31, 2017 2016 2015Membership dues$307,966 $296,795 $309,096Initiation and processing fees2,268 7,636 13,644Personal training revenue69,735 66,487 73,191Other ancillary club revenue(1)17,197 19,642 22,138Total club revenue397,166 390,560 418,069Fees and other revenue(2)5,876 6,361 6,254Total revenue$403,042 $396,921 $424,323(1)Other ancillary club revenue primarily consists of Sports Clubs for Kids, Small Group Training and racquet sports.(2)Fees and other revenue primarily consist of rental income, laundry revenue, marketing revenue and management fees.15. Corporate Income TaxesOn December 22, 2017, the U.S. President signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”). The TaxLegislation significantly revises the U.S. tax code by, (i) lowering the U.S federal statutory income tax rate from 35% to 21%, (ii) implementing a territorialtax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”), (iv) requiring a currentinclusion of global intangible low taxed income (“GILTI”) of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creatingthe base erosion anti-abuse tax (“BEAT”) regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property, and (vii)limiting deductibility of interest and executive compensation expense, among other changes. The Company has computed its current tax benefit using theU.S. federal statutory rate of 35% while it has computed its deferred tax expense using the new statutory rate effective on January 1, 2018 of 21%.F-31Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company recorded the applicable impact of the Tax Legislation within its provision for income taxes in the year ended December 31, 2017. TheCompany has recorded the required income tax effects under the Tax Legislation and provided disclosure pursuant to ASC 740, Income Taxes, and the SECStaff Accounting Bulletin (“SAB”) 118, using its best estimates based on reasonable and supportable assumptions and available inputs and underlyinginformation as of the reporting date. The three provisions that most significantly impact the Company for the year ended December 31, 2017 are (i) theimpact of the U.S. federal statutory rate reduction, from 35% to 21%, on the deferred tax provision and related valuation allowance (ii) the full expensing ofqualified property and (iii) the calculation of the Transition Tax. These amounts were recorded as provisional pursuant to SAB 118 since they require moredetailed information before these amounts can be finalized. All amounts recorded were based on current available guidance on interpretation of the TaxLegislation, and reasonable approaches to estimating their impact. The amounts recorded in the year ended December 31, 2017, are subject to adjustment asfuture guidance becomes available, additional facts become known or estimation approaches are refined.Other provisions of the new legislation that are not applicable to the Company until the year ended December 31, 2018 include, but are not limited to,limiting deductibility of interest and executive compensation expense. Based on current facts and circumstances, we do not anticipate the impact of theseprovisions to be material to the overall financial statements.The (benefit) provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following: Year Ended December 31, 2017 Federal Foreign State andLocal TotalCurrent$(9,599) $(63) $(56) $(9,718)Deferred12 — 20 32 $(9,587) $(63) $(36) $(9,686) 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) $(14,351)F-32Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of deferred tax liabilities, net consist of the following items: December 31, 2017 2016Deferred tax assets Basis differences in depreciation and amortization$— $10,073Deferred lease liabilities15,638 23,527Deferred revenue4,590 8,247Deferred compensation expense incurred in connection with stock options912 994Federal and state net operating loss carry-forwards15,645 8,473Accruals, reserves and other4,942 7,297 $41,727 $58,611Deferred tax liabilities Deferred costs$1,740 $803Basis differences in depreciation and amortization1,311 —Change in accounting method— 3,147Undistributed foreign earnings and other— 529 $3,051 $4,479Gross deferred tax assets38,676 54,132Valuation allowance(38,769) (54,193)Deferred tax liabilities, net$(93) $(61) As of December 31, 2017 and 2016, the Company had a net deferred tax liability of $93 and $61, respectively.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$38,769 and $54,193 at December 31, 2017 and 2016, respectively. Due to the change in the U.S. federal statutory income tax rate from the Tax Legislation,the deferred tax assets and liabilities of the Company were re-measured from using a 35% tax rate to a 21% tax rate. As the Company maintains a fullvaluation allowance against its outstanding net deferred tax assets, the change in net deferred tax assets due to the rate change was offset by a correspondingchange in the valuation allowance.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 remaining after full valuation allowance at December 31, 2017 relates to the tax effect of differencesbetween book and tax basis of intangible assets not expected to reverse during the Company’s net operating loss carry forward period.As of December 31, 2017, state tax net operating loss carry-forwards were $133,840. Such amounts expire between December 31, 2018 and December31, 2037.F-33Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company’s foreign pre-tax earnings (loss) related to the Swiss clubs were $(262), $(264) and $277 for the years ended December 31, 2017, 2016and 2015, respectively. The related current tax provisions (benefit) were $(63) for both the years ended December 31, 2017 and 2016, and $67 for the yearended December 31, 2015. In 2011, the Company repatriated Swiss earnings through 2010. In accordance with ASC 740-30, the Company had recognized adeferred tax liability of $529 for the incremental U.S. tax cost on the total cumulative undistributed earnings of the Swiss clubs for the period throughDecember 31, 2016. Due to the Transition Tax, the Company expects a deemed repatriation of its foreign earnings and profits related to the Swiss clubstherefore reversing its deferred tax liability on those unrepatriated foreign earnings and profits. As the Company has a taxable loss for the current year, itexpects to not pay any Transition Tax but rather it will have a corresponding reduction to its net operating loss carryforward.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, 2017, 2016 and 2015: Years Ended December 31, 2017 2016 2015Federal statutory tax rate35 % 35% 35 %State and local income taxes (net of federal tax benefit)1 2 11Change in state effective income tax rate— — 3State tax (benefit) provision related to insurance premiums— — (14)Tax reserves— — 1Permanent differences in fines and penalties(3) — 2Permanent difference in compensation(2) — — 31 37 38Valuation allowance151 18 (249) 182 % 55% (211)%The effective tax rate on the Company’s pre-tax income or loss was 182% for 2017, 55% for 2016, and (211)% for 2015, which was primarily impactedby 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 and$1,187 as of December 31, 2017 and 2016, respectively. Interest expense on unrecognized tax benefits was $81 for the years ended both December 31, 2017and 2016. The Company recognizes both interest accrued related to unrecognized tax benefits and penalties in income tax expenses. The Company had totalaccruals for interest as of December 31, 2017 and 2016 of $865 and $785, respectively.A reconciliation of unrecognized tax benefits, excluding interest and penalties, is as follows: 2017 2016 2015 Balance on January 1$1,187 $1,187 $1,187Gross decreases for tax positions taken in prior years— — —Gross increases for tax positions taken in prior years— — —Decreases relating to settlements with taxing authorities— — —Reductions due to a lapse of applicable statute of limitations(32) — —Balance on December 31$1,155 $1,187 $1,187As of December 31, 2017, the Company had $1,155 of unrecognized tax benefits and it is reasonably possible that the entire amount could be realizedby the Company in 2018 since the income tax returns may no longer be subject to audit in 2018.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 2013 and prior. U.S. net operating losses generated in closed years and utilized inopen years are subject to adjustment by tax authorities. The Company is under examination by the Internal Revenue Service regarding federal income taxreturns for years 2014 and 2015.F-34Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 2014).In particular, the Company disagrees with the proposed assessment dated December 12, 2016 from the State of New York and attended a conciliationconference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached at the conference and theproposed assessment was sustained. As such, in a revised letter dated November 30, 2017, the Company received from the State of New York a revisedassessment related to tax years 2006-2009 for approximately $5,097, inclusive of approximately $2,419 of interest. The Company is currently in the processof appealing the assessment with the New York State Division of Tax Appeals. The Company has not recorded a tax reserve related to the proposedassessment. It is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of thereasonably possible change to unrecognized tax benefits within the next 12 months cannot be made. On November 17, 2017, the Company was notified thatthe State of New York proposed an adjustment in the amount of approximately $3,906 for the years 2010 to 2014, inclusive of approximately $757 ininterest. The Company is also under examination in New York City (2006 through 2014), which the Company has consented to extend the assessment periodthrough December 31, 2018.16. Commitments and ContingenciesOn February 7, 2007, in an action styled White Plains Plaza Realty, LLC v. TSI, LLC et al., the landlord of one of TSI, LLC’s former health and fitnessclubs filed a lawsuit in 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.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, 2017.17. Employee Benefit PlanThe Company maintains a 401(k) defined contribution plan and is subject to the provisions of the Employee Retirement Income Security Act of 1974(“ERISA”). The plan provides for the Company to make discretionary contributions. The plan was amended, effective January 1, 2001, to provide for 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 was amended to eliminate the nondiscretionary matching contribution and to provide for a discretionary matchingcontribution as determined by the participating employer. Employer matching contributions totaling $204 were made in March 2016 for the plan year endedDecember 31, 2015.F-35Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)18. Selected Quarterly Financial Data (Unaudited) 2017 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (b) (c)Net revenue$99,080 $99,993 $98,641 $105,328Operating (loss) income(118) 3,518 (6,269) 9,806Net (loss) income(2,935) (410) (13,276) 20,990(Loss) earnings per share (a) Basic$(0.11) $(0.02) $(0.50) $0.78Diluted$(0.11) $(0.02) $(0.50) $0.76 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (d) (e) Net revenue$101,345 $100,935 $98,534 $96,107Operating (loss) income(3,722) (1,462) (2,624) 1,425Net (loss) earnings(6,925) 20,733 (5,506) (259)(Loss) earnings per share (a) Basic$(0.28) $0.81 $(0.21) $(0.01)Diluted$(0.28) $0.79 $(0.21) $(0.01)(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.(b)In the third quarter of 2017, the Company recorded a pre-tax non-cash fixed asset impairment charge of $6,497 related to underperforming clubs.(c)In the fourth quarter of 2017, the Company recognized $3,557 of pre-tax personal training revenue related to unused and expired sessions in three of thestates it operates clubs.(d)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.(e)In the third quarter of 2016, the Company recorded a pre-tax non-cash fixed asset impairment charge of $742 related to underperforming clubs.19. Subsequent EventsIn January 2018, the Company acquired an existing club in the Boston metropolitan region. The Company also acquired an existing club in the Floridaregion, as well as the land and building the club occupied. Refer to Note 6 - Acquisitions for further details.In January 2018, the Company adopted a management stock purchase plan known as the Town Sports International Holdings, Inc. 2018 ManagementStock Purchase Plan. There were no stock purchases under this plan as of February 28, 2018.On February 21, 2018, the Company entered into an agreement to acquire substantially all of the assets of the Total Woman Gym and Spa business(“Total Woman”). Once consummated, this acquisition will add another women-focused fitness brand to the Company’s growing fitness portfolio. TheCompany expects this transaction to be completed in the second quarter of 2018.F-36Table of ContentsExhibit IndexThe following is a list of all exhibits filed or incorporated by reference as part of this Report: ExhibitNo. Description of Exhibit 3.1 Amended and Restated Certificate of Incorporation of Town Sports International Holdings, Inc. (the “Registrant”) (incorporated byreference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 3.2 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, 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 filed on 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 filed onNovember 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 filed on November 15, 2013). 10.8 Security Agreement, dated as of November 15, 2013, among the Borrower, Holdings II, each of the Assignors party thereto, andDeutsche Bank AG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Reporton Form 8-K filed on November 15, 2013).Table of Contents ExhibitNo. Description of Exhibit 10.9 Amended and Restated Interest Rate Swap Confirmation, dated as of November 15, 2013, between Town Sports International, LLC andDeutsche Bank AG New York (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the yearended December 31, 2013). 10.10 Agreement of Sale, dated as of December 23, 2013, 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 as of March 26, 2014, between Town Sports International, LLC and Monte Two East 86thStreet 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 as of 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 as of July 7, 2014, between Town Sports International, LLC and Monte Two East 86thStreet Associates, LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterended June 30, 2014). *10.14 Agreement Regarding Termination of Nomination and Standstill Agreement, dated as of February 17, 2016, among Town SportsInternational Holdings, Inc., 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 10.44 of the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2015). *10.15 Town Sports International Holdings, Inc. 2006 Stock Incentive Plan, as amended and restated effective April 2, 2015 (incorporated byreference to Appendix B of the Registrant’s definitive Proxy Statement on Schedule 14A filed on March 28, 2017). *10.16 Amendment No. 2 to the Town Sports International Holdings, Inc. 2006 Stock Incentive Plan, effective March 22, 2017 (incorporatedby reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed on March 28, 2017). *10.17 Form of Incentive Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K filed on August 8, 2006). *10.18 Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K filed on August 8, 2006). *10.19 Form of the Non-Qualified Stock Option Agreement for Non-Employee Directors pursuant to the 2006 Incentive Plan (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 2, 2007). *10.20 Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.3 of theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007). *10.21 Form of Restricted Stock Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2008). *10.22 Amended and Restated Town Sports International Holdings, Inc. 2006 Annual Performance Bonus Plan (incorporated by reference toAppendix B of the Registrant’s definitive Proxy Statement on Schedule 14A filed on April 27, 2015).Table of Contents ExhibitNo. Description of Exhibit *10.23 Amended and Restated Non-Employee Director Compensation Plan Summary, effective January 1, 2015 (incorporated by reference toExhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014). *10.24 Letter Agreement, dated as of April 16, 2014, between Town Sports International, LLC and Carolyn Spatafora (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 25, 2014). *10.25 Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.25 of the S-1/A RegistrationStatement). *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 on 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 on 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 on 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 filed onMarch 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 on March 25, 2015). *10.31 Amended and Restated Non-Employee Director Compensation Plan, effective as of February 25, 2015 (incorporated by reference toExhibit 10.3 of the Registrant’s Current Report on Form 8-K filed on March 25, 2015). *10.32 Separation Letter, dated as of June 17, 2015, between Town Sports International Holdings, Inc. and Daniel Gallagher (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on June 18, 2015). *10.33 Letter Agreement, dated as of August 17, 2015, between Town Sports International Holdings, Inc. and Gregory Bartoli (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on 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 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). *10.39 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). *10.40 Letter Agreement, dated as of September 20, 2016, between Town Sports International, LLC and Patrick Walsh (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 21, 2016). *10.41 Separation Agreement, dated as of September 16, 2016, between Town Sports International LLC and Gregory Bartoli (incorporated byreference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on September 21, 2016). *10.42 Amendment to Amended and Restated Executive Severance Agreement, dated as of February 16, 2017, between Town SportsInternational Holdings, Inc. and Nitin Ajmera (incorporated by reference to Exhibit 10.44 of the Registrant’s Annual Report on Form10-K for the year ended December 31, 2016). *10.43 Letter Agreement, effective as of May 1, 2017, between Town Sports International, LLC and Stuart M. Steinberg (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 28, 2017). *10.44 Amended and Restated Engagement Letter Agreement, effective as of May 1, 2017, between Town Sports International Holdings, Inc.and Stuart M. Steinberg P.C. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on April28, 2017). *10.45 Town Sports International Holdings, Inc. 2018 Management Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K filed on January 3, 2018). 21 Subsidiaries of the Registrant (Filed herewith). 23.1 Consent of PricewaterhouseCoopers LLP (Filed herewith).Table of Contents ExhibitNo. Description of Exhibit 31.1 Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended(Provided herewith). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (Providedherewith). 32.1 Section 1350 Certification of Chairman and Chief Executive Officer (Provided herewith). 32.2 Section 1350 Certification of Chief Financial Officer (Provided herewith). 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 21TSI Holdings II, LLC and SubsidiariesCompany State of Incorporation Doing Business AsParent Companies TSI Holdings II, LLC DE n/aTown Sports International, LLC NY n/aSubsidiaries Town Sports AG Swiss n/aTSI - Lucille 38th Avenue, LLC DE Lucille RobertsTSI - Lucille 42nd Street, LLC DE Lucille RobertsTSI - Lucille 89th Street, LLC DE Lucille RobertsTSI - Lucille Astoria, LLC DE Lucille RobertsTSI - Lucille Austin Street, LLC DE Lucille RobertsTSI - Lucille Bayshore, LLC DE Lucille RobertsTSI - Lucille Bronx, LLC DE Lucille RobertsTSI - Lucille Clifton, LLC DE Lucille RobertsTSI - Lucille Commack, LLC DE Lucille RobertsTSI - Lucille Holbrook, LLC DE Lucille RobertsTSI - Lucille Jersey City, LLC DE Lucille RobertsTSI - Lucille Kings Highway, LLC DE Lucille RobertsTSI - Lucille Ralph Avenue, LLC DE Lucille RobertsTSI - Lucille Rockville Centre, LLC DE Lucille RobertsTSI - Lucille St. Nicholas Avenue, LLC DE Lucille RobertsTSI - Lucille Valley Stream, LLC DE Lucille RobertsTSI 30 Broad Street, LLC DE NYSCTSI 217 Broadway, LLC DE NYSCTSI 555 6th Avenue, LLC DE NYSCTSI 1231 Third Avenue, LLC DE NYSCTSI Allston, LLC DE BSCTSI Astor Place, LLC DE NYSCTSI 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 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 NYSCCompany State of Incorporation Doing Business AsTSI Colonia, LLC DE NYSCTSI Columbia Heights, LLC DE n/aTSI Commack, LLC DE NYSCTSI Connecticut Avenue, LLC DE n/aTSI 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 36, LLC DE NYSCTSI East 41, LLC DE NYSCTSI East 48, LLC DE NYSCTSI East 51, LLC DE NYSCTSI East 59, LLC DE NYSCTSI East 76, LLC DE NYSCTSI East 86, LLC DE NYSCTSI East 91, LLC DE NYSCTSI East Brunswick, LLC DE NYSCTSI East Meadow, LLC DE NYSCTSI Elite Back Bay, LLC DE BSCTSI Englewood, LLC DE NYSCTSI F Street, LLC DE n/aTSI Fairfax, LLC DE WSCTSI Fenway, LLC DE BSCTSI First Avenue, LLC DE NYSCTSI Forest Hills, LLC DE NYSCTSI Gallery Place, LLC DE n/aTSI Garden City, LLC DE NYSCTSI Garnerville, LLC DE NYSCTSI Georgetown, LLC DE n/aTSI Giftco, LLC PA n/aTSI Glendale, LLC DE NYSCTSI Glover, LLC DE n/aTSI 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 NYSCCompany State of Incorporation Doing Business AsTSI 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 NYSCTSI Lynnfield, LLC DE BSCTSI Mahwah, LLC DE NYSCTSI Mamaroneck, LLC DE NYSCTSI Market Street, LLC DE PSCTSI Marlboro, LLC DE NYSCTSI Massapequa, LLC DE n/aTSI 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 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 PSCCompany State of Incorporation Doing Business AsTSI 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 Waltham, LLC DE BSCTSI Washington, Inc. DE n/aTSI Watertown, LLC DE BSCTSI Wayland, LLC DE BSCTSI Wellesley, LLC DE BSCTSI Wellington Circle, LLC DE BSCTSI West 14, LLC DE NYSCTSI West 16, LLC DE NYSCTSI West 23, LLC DE NYSCTSI West 38, LLC DE NYSCTSI West 41, LLC DE NYSCTSI West 44, LLC DE NYSCTSI West 48, LLC DE NYSCTSI West 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 Westboro Tennis, LLC DE n/aTSI Westborough, LLC DE BSCTSI 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Town Sports Group, LLC and SubsidiariesCompany State of Incorporation Doing Business AsParent Companies Town Sports Group, LLC DE n/aSubsidiaries Palm Beach Sports Club, LLC FL n/aDixie Highway Realty, LLC FL n/aTown Sports Investment Group, LLC DE Town Sports InvestmentTSI - Lucille Real Estate, LLC DE n/aTSI Hell’s Kitchen, LLC DE TMPL FitmessElmsford Elite Laundry, LLC DE Elite Laundry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, 333-212726, and 333-219517) and Form S-3 (No. 333-167377) of Town Sports International Holdings, Inc. of our report datedFebruary 28, 2018 relating 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 28, 2018Exhibit 31.1CERTIFICATIONSI, Patrick Walsh, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 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 28, 2018Exhibit 31.2CERTIFICATIONSI, Carolyn Spatafora, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 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 28, 2018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 31,2017 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 28, 2018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 31,2017 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 28, 2018

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