##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 2006
 or
 o
    
    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 000-52013
 TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware(State or other Jurisdiction of
Incorporation or Organization)
    
    20-0640002(I.R.S. Employer
Identification Number)
 888 Seventh Avenue (25th Floor)
New York, New York 10106
Telephone: (212) 246-6700
 (Address, zip code, and telephone number, including
area code, of registrants principal executive office.)
 þ o
  o o þ
 o þ




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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended September 30, 2006
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)a) Condensed Consolidated Balance Sheets as of December 31, 2005 and September 30, 2006
    
    3b) Condensed Consolidated Statements of Operations and Statements of Comprehensive Income (Loss) for the three and nine months ended September, 2005 and 2006
    
    4c) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2006
    
    5d) Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    29Item 4.
    
    Controls and Procedures
    
    30PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    30Item 1A.
    
    Risk Factors
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    30Item 3.
    
    Defaults upon Senior Securities
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 5.
    
    Other Information
    
    31Item 6.
    
    Exhibits
    
    31SIGNATURESSection 302 certification
    
    33Section 302 certification
    
    34Section 906 certification
    
    35Section 906 certification
    
    36EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
 2




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2005 and September 30, 2006
(All figures in $000s, except share data)
(Unaudited)
 December 31,
    
    
    September 30,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    51,304
    
    
    $
    14,531Accounts receivable (less allowance for doubtful accounts of $1,984 and
$2,074 as of December 31, 2005 and September 30, 2006, respectively)
    
    
    7,103
    
    
    
    9,094Inventory
    
    
    421
    
    
    
    492Prepaid corporate income taxes
    
    
    4,518
    
    
    
    Prepaid expenses and other current assets
    
    
    13,907
    
    
    
    13,603Total current assets
    
    
    77,253
    
    
    
    37,720Fixed assets, net
    
    
    253,131
    
    
    
    269,360Goodwill
    
    
    49,974
    
    
    
    50,064Intangible assets, net
    
    
    741
    
    
    
    1,047Deferred tax asset, net
    
    
    24,378
    
    
    
    30,265Deferred membership costs
    
    
    11,522
    
    
    
    15,274Other assets
    
    
    16,772
    
    
    
    13,171Total assets
    
    $
    433,771
    
    
    $
    416,901LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    1,267
    
    
    $
    252Accounts payable
    
    
    8,333
    
    
    
    7,354Accrued expenses
    
    
    31,620
    
    
    
    37,675Accrued interest
    
    
    5,267
    
    
    
    7,800Deferred revenue
    
    
    33,028
    
    
    
    39,248Total current liabilities
    
    
    79,515
    
    
    
    92,329Long-term debt
    
    
    409,895
    
    
    
    278,012Deferred lease liabilities
    
    
    48,898
    
    
    
    52,549Deferred revenue
    
    
    2,905
    
    
    
    8,139Other liabilities
    
    
    8,241
    
    
    
    11,039Total liabilities
    
    
    549,454
    
    
    
    442,068Commitments and contingencies (Note 8)
    
    
    
    
    
    
    Stockholders deficit:Class A voting common stock, $.001 par value; issued and outstanding
18,327,722 and 25,936,148 shares at December 31, 2005 and September 30,
2006, respectively. (See Note 2)
    
    
    1
    
    
    
    26Paid-in capital
    
    
    (113,588
    )
    
    
    (21,719
    )Unearned compensation
    
    
    (509
    )
    
    
    Accumulated other comprehensive income (currency translation adjustment)
    
    
    386
    
    
    
    501Accumulated deficit
    
    
    (1,973
    )
    
    
    (3,975
    )Total stockholders deficit
    
    
    (115,683
    )
    
    
    (25,167
    )Total liabilities and stockholders deficit
    
    $
    433,771
    
    
    $
    416,901
  3




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2005 and 2006
(All figures in $000s except share and per share data)
(Unaudited)
 Three Months Ended September 30,

    
    

    Nine Months Ended September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Revenues:Club operations

    

    $
    97,212

    
    

    $
    108,173

    
    

    $
    287,121

    
    

    $
    318,755Fees and other
    
    
    988
    
    
    
    1,245
    
    
    
    2,921
    
    
    
    4,15898,200
    
    
    
    109,418
    
    
    
    290,042
    
    
    
    322,913Operating Expenses:Payroll and related
    
    
    38,388
    
    
    
    39,724
    
    
    
    113,952
    
    
    
    121,211Club operating
    
    
    34,146
    
    
    
    37,677
    
    
    
    97,314
    
    
    
    108,928General and administrative
    
    
    6,653
    
    
    
    6,668
    
    
    
    19,796
    
    
    
    22,635Depreciation and amortization
    
    
    9,850
    
    
    
    10,125
    
    
    
    29,673
    
    
    
    30,91189,037
    
    
    
    94,194
    
    
    
    260,735
    
    
    
    283,685Operating Income
    
    
    9,163
    
    
    
    15,224
    
    
    
    29,307
    
    
    
    39,228Loss on extinguishment of debt
    
    
    
    
    
    
    7,446
    
    
    
    
    
    
    
    16,113Interest expense
    
    
    10,485
    
    
    
    7,388
    
    
    
    31,113
    
    
    
    28,471Interest income
    
    
    (618
    )
    
    
    (475
    )
    
    
    (1,452
    )
    
    
    (1,862
    )Equity in the earnings of investees and rental income
    
    
    (446
    )
    
    
    (463
    )
    
    
    (1,321
    )
    
    
    (1,371
    )Income (loss) before provision (benefit) for
corporate income taxes
    
    
    (258
    )
    
    
    1,328
    
    
    
    967
    
    
    
    (2,123
    )Provision (benefit) for corporate income taxes
    
    
    (135
    )
    
    
    543
    
    
    
    420
    
    
    
    (121
    )Net income (loss)
    
    $
    (123
    )
    
    $
    785
    
    
    $
    547
    
    
    $
    (2,002
    )Earnings (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    (0.09
    )Diluted
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    (0.09
    )Weighted average number of shares used in
calculating earnings (loss) per share:Basic
    
    
    18,327,722
    
    
    
    25,933,506
    
    
    
    18,336,812
    
    
    
    21,669,090Diluted
    
    
    18,327,722
    
    
    
    26,345,601
    
    
    
    18,350,365
    
    
    
    21,669,090Statements of Comprehensive Income (Loss)Net income (loss)
    
    $
    (123
    )
    
    $
    785
    
    
    $
    547
    
    
    $
    (2,002
    )Foreign currency translation adjustments
    
    
    21
    
    
    
    (53
    )
    
    
    494
    
    
    
    115Comprehensive income (loss)
    
    $
    (102
    )
    
    $
    732
    
    
    $
    1,041
    
    
    $
    (1,887
    )
  4




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2005 and 2006
(All figures in $000s)
(Unaudited)
 Nine MonthsEnded September 30,2005
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    547
    
    
    $
    (2,002
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    29,673
    
    
    
    30,911Interest expense on Senior Discount Notes
    
    
    11,495
    
    
    
    11,480Loss on extinguishment of debt
    
    
    
    
    
    
    16,113Payment of interest on Payment-in-Kind Notes
    
    
    
    
    
    
    (12,961
    )Amortization of debt issuance costs
    
    
    1,227
    
    
    
    1,117Noncash rental expense, net of noncash rental income
    
    
    1,079
    
    
    
    65Compensation expense incurred in connection with stock options
    
    
    35
    
    
    
    961Net changes in certain operating assets and liabilities
    
    
    16,391
    
    
    
    15,228Increase in deferred tax asset
    
    
    (10,300
    )
    
    
    (5,887
    )Landlord contributions to tenant improvements
    
    
    6,389
    
    
    
    6,413Increase in reserve for self-insured liability claims
    
    
    1,496
    
    
    
    2,025Decrease (increase) in deferred membership costs
    
    
    303
    
    
    
    (3,752
    )Other
    
    
    (513
    )
    
    
    (76
    )Total adjustments
    
    
    57,275
    
    
    
    61,637Net cash provided by operating activities
    
    
    57,822
    
    
    
    59,635Cash flows from investing activities:Capital expenditures, net of effect of acquired businesses
    
    
    (40,773
    )
    
    
    (41,354
    )Acquisition of businesses
    
    
    (3,861
    )
    
    
    (819
    )Net cash used in investing activities
    
    
    (44,634
    )
    
    
    (42,173
    )Cash flows from financing activities:Proceeds from initial public equity offering, net of underwriting discounts and offering costs
    
    
    
    
    
    
    91,750Repayment of Senior Notes
    
    
    
    
    
    
    (128,684
    )Premium paid on extinguishment of debt and related costs
    
    
    
    
    
    
    (13,273
    )Repayment of long term borrowings
    
    
    (959
    )
    
    
    (2,733
    )Costs related to a planned equity offering
    
    
    (685
    )
    
    
    Change in book overdraft
    
    
    
    
    
    
    (986
    )Repurchase of common stock
    
    
    (184
    )
    
    
    (433
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    124Net cash used in financing activities
    
    
    (1,828
    )
    
    
    (54,235
    )Net increase (decrease) in cash and cash equivalents
    
    
    11,360
    
    
    
    (36,773
    )Cash and cash equivalents at beginning of period
    
    
    57,506
    
    
    
    51,304Cash and cash equivalents at end of period
    
    $
    68,866
    
    
    $
    14,531Summary of change in certain operating assets and liabilities; net of effects of acquired businesses:Increase in accounts receivable
    
    $
    (2,803
    )
    
    $
    (4,870
    )Decrease (increase) in inventory
    
    
    109
    
    
    
    (70
    )Decrease in prepaid expenses, prepaid income taxes, and other current assets
    
    
    155
    
    
    
    3,533Increase in accounts payable, accrued expenses and accrued interest
    
    
    11,532
    
    
    
    5,358Increase in deferred revenue
    
    
    7,398
    
    
    
    11,277Net changes in certain operating assets and liabilities
    
    $
    16,391
    
    
    $
    15,228Supplemental
Disclosures of Cash Flow Information:Cash payments for interest1
    
    $
    13,318
    
    
    $
    27,194Cash payments for income taxes
    
    $
    8,104
    
    
    $
    2,758
 
 1
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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All figures $000s except share and per share data)
(Unaudited)
 1. Basis of Presentation
    2. Initial Public Offering
  6




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3. Recent Accounting Changes
 Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
 Fair Value Measurements
 4. Long-Term Debt
 December 31,
    
    
    September 30,2005
    
    
    2006($000s)
    
    
    ($000s)Senior Notes 9 5/8%, due 2011
    
    $
    255,000
    
    
    $
    169,999Senior Discount Notes 11.0%, due 2014 (Payment-in-Kind Notes)
    
    
    153,077
    
    
    
    107,913Notes payable for acquired businesses
    
    
    3,085
    
    
    
    352411,162
    
    
    
    278,264Less, current portion to be paid within one year
    
    
    1,267
    
    
    
    252Long-term portion
    
    $
    409,895
    
    
    $
    278,012
   7




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5. Earnings (Loss) Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Unaudited)
    
    
    (Unaudited)2005
    
    
    2006
    
    
    2005
    
    
    2006Weighted average number of common share outstanding  basic
    
    
    18,327,722
    
    
    
    25,933,506
    
    
    
    18,336,812
    
    
    
    21,669,090Effect of diluted stock options
    
    
    
    
    
    
    412,095
    
    
    
    13,553
    
    
    
    Weighted average number of common shares outstanding  diluted
    
    
    18,327,722
    
    
    
    26,345,601
    
    
    
    18,350,365
    
    
    
    21,669,090
 6. Stock-Based Compensation
 Share-Based Payments Accounting for Stock-Based Compensation Accounting for Stock Issued
to Employees
  8




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Three Months Ended,
    
    
    Nine Months Ended,September 30, 2005
    
    

September
30, 2005($000s)
    
    
    ($000s)Net income (loss), as reported
    
    $
    (123
    )
    
    $
    547Add: Stock-based compensation included in reported net earnings, net of related tax effects
    
    
    6
    
    
    
    21Less: Stock-based compensation expense determined under the fair-value-based method for
all awards, net of related tax effects
    
    
    (29
    )
    
    
    (86
    )Pro forma net earnings (loss)
    
    $
    (146
    )
    
    $
    482Basic earnings (loss) per share:As reported
    
    $
    (0.01
    )
    
    $
    0.03Pro forma
    
    $
    (0.01
    )
    
    $
    0.03Diluted earnings (loss) per share:As reported
    
    $
    (0.01
    )
    
    $
    0.03Pro forma
    
    $
    (0.01
    )
    
    $
    0.03
     9




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##### Table of Contents



Weighted-AverageWeighted-
    
    Remaining
    
    AggregateAverage
    
    Contractual
    
    IntrinsicShares
    
    Exercise
    
    Term (in
    
    Value(in thousands)
    
    Price
    
    years)
    
    ($000s)Outstanding at September 30, 2006
    
    
    1,479,060
    
    
    $
    8.27
    
    
    
    7.3
    
    
    $
    7,171Vested at September 30, 2006
    
    
    237,328
    
    
    $
    7.95
    
    
    
    5.7
    
    
    $
    1,228Exercisable at September 30, 2006
    
    
    237,328
    
    
    $
    7.95
    
    
    
    5.7
    
    
    $
    1,228
   10




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7. Goodwill and Other Intangibles
   Balance as of December 31, 2005
    
    $
    49,974Goodwill related to an acquisition
    
    
    51Changes due to foreign currency exchange rate fluctuations
    
    
    39Balance as of September 30, 2006
    
    $
    50,064
 As of December 31, 2005($000s)Gross Carrying
    
    
    AccumulatedAcquired Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    11,450
    
    
    $
    (10,939
    )
    
    $
    511Covenants-not-to-compete
    
    
    1,151
    
    
    
    (949
    )
    
    
    202Beneficial lease
    
    
    223
    
    
    
    (195
    )
    
    
    28$
    12,824
    
    
    $
    (12,083
    )
    
    $
    741
 As of September 30, 2006($000s)Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    12,260
    
    
    $
    (11,393
    )
    
    $
    867Covenants-not-to-compete
    
    
    1,151
    
    
    
    (991
    )
    
    
    160Beneficial lease
    
    
    223
    
    
    
    (203
    )
    
    
    20$
    13,634
    
    
    $
    (12,587
    )
    
    $
    1,047
  Aggregate Amortization Expense for the twelve months ending September 30, ($000s)2007
    
    $
    5002008
    
    
    3892009
    
    
    158$
    1,047
  11




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8. Commitments and Contingencies
 Sarah Cruz, et ano v. Town Sports International, Inc.
 Carlos Urbina et ano v. 26 Court Street Associates, LLC et al.
 9. Investments in Affiliated Companies
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,($000s)
    
    ($000s)2005
    
    2006
    
    2005
    
    2006Revenue
    
    $
    868
    
    
    $
    881
    
    
    $
    2,630
    
    
    $
    2,667Income from operations
    
    
    298
    
    
    
    391
    
    
    
    1,035
    
    
    
    1,186Net income
    
    
    267
    
    
    
    334
    
    
    
    941
    
    
    
    1,093
 10. Guarantors
   12




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Condensed Consolidating Balance Sheet
December 31, 2005
(All figures in $000s)
(Unaudited)
 Non-TSI
    
    
    
    
    
    
    Subsidiary
    
    
    GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    1
    
    
    
    1,359
    
    
    $
    48,682
    
    
    $
    1,262
    
    
    $
    
    
    
    $
    51,304Accounts receivable, net
    
    
    
    
    
    
    3,664
    
    
    
    6,144
    
    
    
    133
    
    
    
    (2,838
    )
    
    
    7,103Inventory
    
    
    
    
    
    
    
    
    
    
    395
    
    
    
    26
    
    
    
    
    
    
    
    421Prepaid corporate income taxes
    
    
    
    
    
    
    4,550
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    4,518Inter-company receivable (payable)
    
    
    1,137
    
    
    
    (1,137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    
    
    
    
    5,425
    
    
    
    10,195
    
    
    
    (1,713
    )
    
    
    
    
    
    
    13,907Total current assets
    
    
    1,138
    
    
    
    13,861
    
    
    
    65,384
    
    
    
    (292
    )
    
    
    (2,838
    )
    
    
    77,253Investment in subsidiaries
    
    
    18,941
    
    
    
    253,702
    
    
    
    
    
    
    
    
    
    
    
    (272,643
    )
    
    
    Fixed assets, net
    
    
    
    
    
    
    10,114
    
    
    
    242,149
    
    
    
    868
    
    
    
    
    
    
    
    253,131Goodwill
    
    
    
    
    
    
    
    
    
    
    49,215
    
    
    
    759
    
    
    
    
    
    
    
    49,974Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    741
    
    
    
    
    
    
    
    
    
    
    
    741Deferred tax assets, net
    
    
    13,560
    
    
    
    11,354
    
    
    
    (492
    )
    
    
    (44
    )
    
    
    
    
    
    
    24,378Deferred membership costs
    
    
    
    
    
    
    94
    
    
    
    11,428
    
    
    
    
    
    
    
    
    
    
    
    11,522Other assets
    
    
    3,755
    
    
    
    11,833
    
    
    
    1,184
    
    
    
    
    
    
    
    
    
    
    
    16,772Total assets
    
    $
    37,394
    
    
    $
    300,958
    
    
    $
    369,609
    
    
    $
    1,291
    
    
    $
    (275,481
    )
    
    $
    433,771LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    1,267
    
    
    $
    
    
    
    $
    
    
    
    $
    1,267Accounts payable
    
    
    
    
    
    
    (82
    )
    
    
    8,415
    
    
    
    
    
    
    
    
    
    
    
    8,333Accrued expenses
    
    
    
    
    
    
    13,364
    
    
    
    17,864
    
    
    
    392
    
    
    
    
    
    
    
    31,620Accrued interest
    
    
    
    
    
    
    5,264
    
    
    
    2,841
    
    
    
    
    
    
    
    (2,838
    )
    
    
    5,267Deferred revenue
    
    
    
    
    
    
    
    
    
    
    32,940
    
    
    
    88
    
    
    
    
    
    
    
    33,028Total current liabilities
    
    
    
    
    
    
    18,546
    
    
    
    63,327
    
    
    
    480
    
    
    
    (2,838
    )
    
    
    79,515Long-term debt
    
    
    153,077
    
    
    
    255,000
    
    
    
    1,818
    
    
    
    
    
    
    
    
    
    
    
    409,895Deferred lease liabilities
    
    
    
    
    
    
    452
    
    
    
    48,446
    
    
    
    
    
    
    
    
    
    
    
    48,898Deferred revenue
    
    
    
    
    
    
    
    
    
    
    2,905
    
    
    
    
    
    
    
    
    
    
    
    2,905Other liabilities
    
    
    
    
    
    
    8,019
    
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    8,241Total liabilities
    
    
    153,077
    
    
    
    282,017
    
    
    
    116,718
    
    
    
    480
    
    
    
    (2,838
    )
    
    
    549,454Stockholders deficit:Common stockholders deficit
    
    
    (116,069
    )
    
    
    18,941
    
    
    
    252,881
    
    
    
    435
    
    
    
    (272,257
    )
    
    
    (116,069
    )Accumulated other comprehensive income
    
    
    386
    
    
    
    
    
    
    
    10
    
    
    
    376
    
    
    
    (386
    )
    
    
    386Total stockholders deficit
    
    
    (115,683
    )
    
    
    18,941
    
    
    
    252,891
    
    
    
    811
    
    
    
    (272,643
    )
    
    
    (115,683
    )Total liabilities and stockholders deficit:
    
    $
    37,394
    
    
    $
    300,958
    
    
    $
    369,609
    
    
    $
    1,291
    
    
    $
    (275,481
    )
    
    $
    433,771
 13




---



##### Table of Contents



Condensed Consolidating Balance Sheet
September 30, 2006
(All figures in $000s)
(Unaudited)
 Non-TSI
    
    
    
    
    
    
    Subsidiary
    
    
    GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    245
    
    
    $
    1,925
    
    
    $
    10,424
    
    
    $
    1,937
    
    
    $
    
    
    
    $
    14,531Accounts receivable
    
    
    
    
    
    
    7,368
    
    
    
    1,542
    
    
    
    184
    
    
    
    
    
    
    
    9,094Inventory
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    28
    
    
    
    
    
    
    
    492Prepaid corporate income taxes
    
    
    5,813
    
    
    
    (5,813
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Intercompany receivable (payable)
    
    
    (856
    )
    
    
    856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    
    
    
    
    9,443
    
    
    
    4,160
    
    
    
    
    
    
    
    
    
    
    
    13,603Total current assets
    
    
    5,202
    
    
    
    13,779
    
    
    
    16,590
    
    
    
    2,149
    
    
    
    
    
    
    
    37,720Investment in subsidiaries
    
    
    59,146
    
    
    
    211,099
    
    
    
    
    
    
    
    
    
    
    
    (270,245
    )
    
    
    Fixed assets, net
    
    
    
    
    
    
    9,288
    
    
    
    259,392
    
    
    
    680
    
    
    
    
    
    
    
    269,360Goodwill
    
    
    
    
    
    
    
    
    
    
    49,266
    
    
    
    798
    
    
    
    
    
    
    
    50,064Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    1,047
    
    
    
    
    
    
    
    
    
    
    
    1,047Deferred tax assets, net
    
    
    14,858
    
    
    
    15,948
    
    
    
    (491
    )
    
    
    (50
    )
    
    
    
    
    
    
    30,265Deferred membership costs
    
    
    
    
    
    
    158
    
    
    
    15,116
    
    
    
    
    
    
    
    
    
    
    
    15,274Other assets
    
    
    3,540
    
    
    
    9,629
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    13,171Total assets
    
    $
    82,746
    
    
    $
    259,901
    
    
    $
    340,922
    
    
    $
    3,577
    
    
    $
    (270,245
    )
    
    $
    416,901LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    252
    
    
    $
    
    
    
    $
    
    
    
    $
    252Accounts payable
    
    
    
    
    
    
    (2,491
    )
    
    
    9,845
    
    
    
    
    
    
    
    
    
    
    
    7,354Accrued expenses and corporate income taxes payable
    
    
    
    
    
    
    11,164
    
    
    
    26,151
    
    
    
    360
    
    
    
    
    
    
    
    37,675Accrued interest
    
    
    
    
    
    
    10,811
    
    
    
    (3,011
    )
    
    
    
    
    
    
    
    
    
    
    7,800Deferred revenue
    
    
    
    
    
    
    146
    
    
    
    39,010
    
    
    
    92
    
    
    
    
    
    
    
    39,248Total current liabilities
    
    
    
    
    
    
    19,630
    
    
    
    72,247
    
    
    
    452
    
    
    
    
    
    
    
    92,329Long-term debt
    
    
    107,913
    
    
    
    169,999
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    278,012Deferred lease liabilities
    
    
    
    
    
    
    331
    
    
    
    52,218
    
    
    
    
    
    
    
    
    
    
    
    52,549Deferred revenue
    
    
    
    
    
    
    
    
    
    
    8,139
    
    
    
    
    
    
    
    
    
    
    
    8,139Other Liabilities
    
    
    
    
    
    
    10,795
    
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    11,039Total liabilities
    
    
    107,913
    
    
    
    200,755
    
    
    
    132,948
    
    
    
    452
    
    
    
    
    
    
    
    442,068Stockholders Deficit:Common Stockholders deficit
    
    
    (25,668
    )
    
    
    59,146
    
    
    
    207,960
    
    
    
    3,139
    
    
    
    (270,245
    )
    
    
    (25,668
    )Accumulated other comprehensive income
    
    
    501
    
    
    
    
    
    
    
    14
    
    
    
    (14
    )
    
    
    
    
    
    
    501Total stockholders deficit
    
    
    (25,167
    )
    
    
    59,146
    
    
    
    207,974
    
    
    
    3,125
    
    
    
    (270,245
    )
    
    
    (25,167
    )Total liabilities and stockholders deficit
    
    $
    82,746
    
    
    $
    259,901
    
    
    $
    340,922
    
    
    $
    3,577
    
    
    $
    (270,245
    )
    
    $
    416,901
 14




---



##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended September 30, 2005
(All figures in $000s)
(Unaudited)
 Non-TSI
    
    
    
    
    
    
    Subsidiary
    
    
    GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Club operations
    
    $
    
    
    
    $
    201
    
    
    $
    95,959
    
    
    $
    1,052
    
    
    $
    
    
    
    $
    97,212Fees and other
    
    
    
    
    
    
    182
    
    
    
    1,903
    
    
    
    
    
    
    
    (1,097
    )
    
    
    988
    
    
    
    383
    
    
    
    97,862
    
    
    
    1,052
    
    
    
    (1,097
    )
    
    
    98,200Operating expenses:Payroll and related
    
    
    
    
    
    
    5,631
    
    
    
    32,318
    
    
    
    439
    
    
    
    
    
    
    
    38,388Club operating
    
    
    
    
    
    
    254
    
    
    
    34,580
    
    
    
    269
    
    
    
    (957
    )
    
    
    34,146General and administrative
    
    
    1
    
    
    
    212
    
    
    
    6,507
    
    
    
    73
    
    
    
    (140
    )
    
    
    6,653Depreciation and amortization
    
    
    
    
    
    
    1,033
    
    
    
    8,728
    
    
    
    89
    
    
    
    
    
    
    
    9,8501
    
    
    
    7,130
    
    
    
    82,133
    
    
    
    870
    
    
    
    (1,097
    )
    
    
    89,037Operating income (loss)
    
    
    (1
    )
    
    
    (6,747
    )
    
    
    15,729
    
    
    
    182
    
    
    
    
    
    
    
    9,163Interest expense
    
    
    4,031
    
    
    
    6,418
    
    
    
    97
    
    
    
    (1
    )
    
    
    (60
    )
    
    
    10,485Interest income
    
    
    (1
    )
    
    
    (676
    )
    
    
    (1
    )
    
    
    
    
    
    
    60
    
    
    
    (618
    )Equity in the income of investees and rental income
    
    
    
    
    
    
    (267
    )
    
    
    (179
    )
    
    
    
    
    
    
    
    
    
    
    (446
    )Income (loss) before provision (benefit) for
corporate income taxes
    
    
    (4,031
    )
    
    
    (12,222
    )
    
    
    15,812
    
    
    
    183
    
    
    
    
    
    
    
    (258
    )Provision (benefit) for corporate income taxes
    
    
    (1,752
    )
    
    
    (6,395
    )
    
    
    7,968
    
    
    
    44
    
    
    
    
    
    
    
    (135
    )Income (loss) before equity earnings
    
    
    (2,279
    )
    
    
    (5,827
    )
    
    
    7,844
    
    
    
    139
    
    
    
    
    
    
    
    (123
    )Equity earnings from subsidiaries
    
    
    2,156
    
    
    
    7,983
    
    
    
    
    
    
    
    
    
    
    
    (10,139
    )
    
    
    Net income (loss)
    
    $
    (123
    )
    
    $
    2,156
    
    
    $
    7,844
    
    
    $
    139
    
    
    $
    (10,139
    )
    
    $
    (123
    )
 15




---



##### Table of Contents



Condensed Consolidating Statements of Operations
For the three months ended September 30, 2006
(All figures in $000s)
(Unaudited)
 TSI
    
    
    
    
    
    
    Subsidiary
    
    
    Non-GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Club operations
    
    $
    
    
    
    $
    12
    
    
    $
    107,211
    
    
    $
    950
    
    
    $
    
    
    
    $
    108,173Fees and other
    
    
    
    
    
    
    189
    
    
    
    1,056
    
    
    
    
    
    
    
    
    
    
    
    1,245
    
    
    
    201
    
    
    
    108,267
    
    
    
    950
    
    
    
    
    
    
    
    109,418Operating expenses:Payroll and related
    
    
    
    
    
    
    6,166
    
    
    
    33,141
    
    
    
    417
    
    
    
    
    
    
    
    39,724Club operating
    
    
    
    
    
    
    (291
    )
    
    
    37,743
    
    
    
    225
    
    
    
    
    
    
    
    37,677General and administrative
    
    
    
    
    
    
    76
    
    
    
    6,539
    
    
    
    53
    
    
    
    
    
    
    
    6,668Depreciation and amortization
    
    
    
    
    
    
    948
    
    
    
    9,092
    
    
    
    85
    
    
    
    
    
    
    
    10,125
    
    
    
    6,899
    
    
    
    86,515
    
    
    
    780
    
    
    
    
    
    
    
    94,194Operating income (loss)
    
    
    
    
    
    
    (6,698
    )
    
    
    21,752
    
    
    
    170
    
    
    
    
    
    
    
    15,224Loss on extinguishment of debt
    
    
    7,470
    
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,446Interest expense
    
    
    3,118
    
    
    
    2,921
    
    
    
    1,355
    
    
    
    (6
    )
    
    
    
    
    
    
    7,388Interest income
    
    
    
    
    
    
    (473
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (475
    )Equity in the income of investees and rental income
    
    
    
    
    
    
    (260
    )
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    (463
    )Income (loss) before provision (benefit) for
corporate income taxes
    
    
    (10,588
    )
    
    
    (8,862
    )
    
    
    20,602
    
    
    
    176
    
    
    
    
    
    
    
    1,328Provision (benefit) for corporate income taxes
    
    
    (3,334
    )
    
    
    (3,769
    )
    
    
    7,622
    
    
    
    24
    
    
    
    
    
    
    
    543Income (loss) before equity earnings
    
    
    (7,254
    )
    
    
    (5,093
    )
    
    
    12,980
    
    
    
    152
    
    
    
    
    
    
    
    785Equity earnings from subsidiaries
    
    
    8,039
    
    
    
    13,132
    
    
    
    
    
    
    
    
    
    
    
    (21,171
    )
    
    
    Net income (loss)
    
    $
    785
    
    
    $
    8,039
    
    
    $
    12,980
    
    
    $
    152
    
    
    $
    (21,171
    )
    
    $
    785
 16




---



##### Table of Contents



Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2005
(All figures in $000s)
(Unaudited)
 Non-TSI
    
    
    
    
    
    
    Subsidiary
    
    
    GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Club operations
    
    $
    
    
    
    $
    237
    
    
    $
    283,400
    
    
    $
    3,484
    
    
    $
    
    
    
    $
    287,121Fees and other
    
    
    
    
    
    
    470
    
    
    
    5,717
    
    
    
    
    
    
    
    (3,266
    )
    
    
    2,921
    
    
    
    707
    
    
    
    289,117
    
    
    
    3,484
    
    
    
    (3,266
    )
    
    
    290,042Operating expenses:Payroll and related
    
    
    
    
    
    
    16,899
    
    
    
    95,693
    
    
    
    1,360
    
    
    
    
    
    
    
    113,952Club operating
    
    
    
    
    
    
    1,472
    
    
    
    97,777
    
    
    
    911
    
    
    
    (2,846
    )
    
    
    97,314General and administrative
    
    
    19
    
    
    
    826
    
    
    
    19,113
    
    
    
    258
    
    
    
    (420
    )
    
    
    19,796Depreciation and amortization
    
    
    
    
    
    
    3,198
    
    
    
    26,191
    
    
    
    284
    
    
    
    
    
    
    
    29,67319
    
    
    
    22,395
    
    
    
    238,774
    
    
    
    2,813
    
    
    
    (3,266
    )
    
    
    260,735Operating income (loss)
    
    
    (19
    )
    
    
    (21,688
    )
    
    
    50,343
    
    
    
    671
    
    
    
    
    
    
    
    29,307Interest expense
    
    
    11,737
    
    
    
    19,338
    
    
    
    281
    
    
    
    (4
    )
    
    
    (239
    )
    
    
    31,113Interest income
    
    
    (3
    )
    
    
    (1,683
    )
    
    
    (5
    )
    
    
    
    
    
    
    239
    
    
    
    (1,452
    )Equity in the earnings of investees and rental income
    
    
    
    
    
    
    (802
    )
    
    
    (519
    )
    
    
    
    
    
    
    
    
    
    
    (1,321
    )Income (loss) before provision (benefit) for
corporate income taxes
    
    
    (11,753
    )
    
    
    (38,541
    )
    
    
    50,586
    
    
    
    675
    
    
    
    
    
    
    
    967Provision (benefit) for corporate income taxes
    
    
    (5,172
    )
    
    
    (17,846
    )
    
    
    23,252
    
    
    
    186
    
    
    
    
    
    
    
    420Income (loss) before equity earnings
    
    
    (6,581
    )
    
    
    (20,695
    )
    
    
    27,334
    
    
    
    489
    
    
    
    
    
    
    
    547Equity earnings from subsidiaries
    
    
    7,128
    
    
    
    27,823
    
    
    
    
    
    
    
    
    
    
    
    (34,951
    )
    
    
    Net income (loss)
    
    $
    547
    
    
    $
    7,128
    
    
    $
    27,334
    
    
    $
    489
    
    
    $
    (34,951
    )
    
    $
    547
 17




---



##### Table of Contents



Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2006
(All figures in $000s)
(Unaudited)
 Non-TSI
    
    
    
    
    
    
    Subsidiary
    
    
    GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Club operations
    
    $
    
    
    
    $
    12
    
    
    $
    315,410
    
    
    $
    3,333
    
    
    $
    
    
    
    $
    318,755Fees and other
    
    
    
    
    
    
    649
    
    
    
    3,509
    
    
    
    
    
    
    
    
    
    
    
    4,158
    
    
    
    661
    
    
    
    318,919
    
    
    
    3,333
    
    
    
    
    
    
    
    322,913Operating expenses:Payroll and related
    
    
    
    
    
    
    20,278
    
    
    
    99,572
    
    
    
    1,361
    
    
    
    
    
    
    
    121,211Club operating
    
    
    
    
    
    
    1,489
    
    
    
    106,591
    
    
    
    848
    
    
    
    
    
    
    
    108,928General and administrative
    
    
    
    
    
    
    3,231
    
    
    
    19,096
    
    
    
    308
    
    
    
    
    
    
    
    22,635Depreciation and amortization
    
    
    
    
    
    
    3,072
    
    
    
    27,568
    
    
    
    271
    
    
    
    
    
    
    
    30,911
    
    
    
    28,070
    
    
    
    252,827
    
    
    
    2,788
    
    
    
    
    
    
    
    283,685Operating income (loss)
    
    
    
    
    
    
    (27,409
    )
    
    
    66,092
    
    
    
    545
    
    
    
    
    
    
    
    39,228Loss on extinguishment of debt
    
    
    7,470
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,113Interest expense
    
    
    11,705
    
    
    
    12,699
    
    
    
    4,078
    
    
    
    (11
    )
    
    
    
    
    
    
    28,471Interest income
    
    
    
    
    
    
    (1,854
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (1,862
    )Equity in the income of investees and rental income
    
    
    
    
    
    
    (781
    )
    
    
    (590
    )
    
    
    
    
    
    
    
    
    
    
    (1,371
    )Income before provision (benefit) for corporate
income taxes
    
    
    (19,175
    )
    
    
    (46,116
    )
    
    
    62,612
    
    
    
    556
    
    
    
    
    
    
    
    (2,123
    )Provision (benefit) for corporate income taxes
    
    
    (7,112
    )
    
    
    (16,310
    )
    
    
    23,166
    
    
    
    135
    
    
    
    
    
    
    
    (121
    )Income (loss) before equity earnings
    
    
    (12,063
    )
    
    
    (29,806
    )
    
    
    39,446
    
    
    
    421
    
    
    
    
    
    
    
    (2,002
    )Equity earnings from subsidiaries
    
    
    10,061
    
    
    
    39,867
    
    
    
    
    
    
    
    
    
    
    
    (49,928
    )
    
    
    Net income (loss)
    
    $
    (2,002
    )
    
    $
    10,061
    
    
    $
    39,446
    
    
    $
    421
    
    
    $
    (49,928
    )
    
    $
    (2,002
    )
 18




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2005
(All figures in $000s)
(Unaudited)
 Non-TSI
    
    
    
    
    
    
    Subsidiary
    
    
    GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    547
    
    
    $
    7,128
    
    
    $
    27,334
    
    
    $
    489
    
    
    $
    (34,951
    )
    
    $
    547Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    3,198
    
    
    
    26,191
    
    
    
    284
    
    
    
    
    
    
    
    29,673Compensation expense in connection with stock options
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Noncash rental expense, net of noncash rental income
    
    
    
    
    
    
    8
    
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    1,079Interest expense on Senior Discount Notes
    
    
    11,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,495Amortization of debt issuance costs
    
    
    243
    
    
    
    984
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,227Changes in operating assets and liabilities
    
    
    (5,232
    )
    
    
    1,315
    
    
    
    18,257
    
    
    
    (281
    )
    
    
    
    
    
    
    14,059Other
    
    
    (7,111
    )
    
    
    (26,926
    )
    
    
    (683
    )
    
    
    (524
    )
    
    
    34,951
    
    
    
    (293
    )Total adjustments
    
    
    (605
    )
    
    
    (21,386
    )
    
    
    44,836
    
    
    
    (521
    )
    
    
    34,951
    
    
    
    57,275Net cash (used in) provided by operating activities
    
    
    (58
    )
    
    
    (14,258
    )
    
    
    72,170
    
    
    
    (32
    )
    
    
    
    
    
    
    57,822Net cash used in investing activities
    
    
    
    
    
    
    (208
    )
    
    
    (44,614
    )
    
    
    188
    
    
    
    
    
    
    
    (44,634
    )Net cash (used in) provided by financing activities
    
    
    (36
    )
    
    
    12,235
    
    
    
    (14,089
    )
    
    
    62
    
    
    
    
    
    
    
    (1,828
    )Net (decrease) increase in cash and cash equivalents
    
    
    (94
    )
    
    
    (2,231
    )
    
    
    13,467
    
    
    
    218
    
    
    
    
    
    
    
    11,360Cash and cash equivalents at beginning of period
    
    
    274
    
    
    
    3,425
    
    
    
    51,327
    
    
    
    2,480
    
    
    
    
    
    
    
    57,506Cash and cash equivalents at end of period
    
    $
    180
    
    
    $
    1,194
    
    
    $
    64,794
    
    
    $
    2,698
    
    
    $
    
    
    
    $
    68,866
 19




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2006
(All figures in $000s)
(Unaudited)
 TSI
    
    
    
    
    
    
    Subsidiary
    
    
    Non-GuarantorHoldings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedCash flows from Operating Activities:Net income (loss)
    
    $
    (2,002
    )
    
    $
    10,061
    
    
    $
    39,446
    
    
    $
    421
    
    
    $
    (49,928
    )
    
    $
    (2,002
    )Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization
    
    
    
    
    
    
    3,072
    
    
    
    27,568
    
    
    
    271
    
    
    
    
    
    
    
    30,911Compensation expense in connection with stock options
    
    
    
    
    
    
    961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    961Noncash rental expense, net of noncash rental income
    
    
    
    
    
    
    (121
    )
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    65Interest expense on Senior Discount Notes
    
    
    11,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,480Payment of interest on Payment-in-Kind Notes
    
    
    
    
    
    
    (12,961
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,961
    )Loss on extinguishment of debt
    
    
    7,470
    
    
    
    8,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,113Amortization of debt issuance costs
    
    
    215
    
    
    
    902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,117Increase in reserve for self-insured liability claims
    
    
    
    
    
    
    2,025
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,025Landlord contributions to tenant improvements
    
    
    
    
    
    
    
    
    
    
    6,413
    
    
    
    
    
    
    
    
    
    
    
    6,413Changes in operating assets and liabilities
    
    
    (3,820
    )
    
    
    19,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,228Other
    
    
    (12,733
    )
    
    
    16,954
    
    
    
    (63,970
    )
    
    
    106
    
    
    
    49,928
    
    
    
    (9,715
    )Total adjustments
    
    
    2,612
    
    
    
    38,523
    
    
    
    (29,803
    )
    
    
    377
    
    
    
    49,928
    
    
    
    61,637Net cash provided by operating activities
    
    
    610
    
    
    
    48,584
    
    
    
    9,643
    
    
    
    798
    
    
    
    
    
    
    
    59,635Net cash used in investing activities
    
    
    
    
    
    
    3,118
    
    
    
    (45,168
    )
    
    
    (123
    )
    
    
    
    
    
    
    (42,173
    )Net cash used in financing activities
    
    
    (366
    )
    
    
    (51,136
    )
    
    
    (2,733
    )
    
    
    
    
    
    
    
    
    
    
    (54,235
    )Net increase (decrease) in cash and cash equivalents
    
    
    244
    
    
    
    566
    
    
    
    (38,258
    )
    
    
    675
    
    
    
    
    
    
    
    (36,773
    )Cash and cash equivalents at beginning of period
    
    
    1
    
    
    
    1,359
    
    
    
    48,682
    
    
    
    1,262
    
    
    
    
    
    
    
    51,304Cash and cash equivalents at end of period
    
    $
    245
    
    
    $
    1,925
    
    
    $
    10,424
    
    
    $
    1,937
    
    
    $
    
    
    
    $
    14,531
 20




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
      
    
    Our largest sources of revenue are dues and initiation fees paid by our members. This
comprises 81.7% of our total revenue for the nine months ended September 30, 2006. We
recognize revenue from membership dues in the month when the services are rendered.
Approximately 93% of our members pay their monthly dues by Electronic Funds Transfer, or
EFT, while the balance is paid annually in advance. We recognize revenue from initiation
fees over the expected average life of the membership. Prior to January 1, 2006 the expected
average life of a membership was 24 months. Effective January 1, 2006 we have revised this
estimate to 30 months based on more favorable membership attrition trends.
    
    For the nine months ended September 30, 2006, we generated 11.5% of our revenue from
personal training and 5.5% of our revenue from other ancillary programs and services
consisting of programming for children, group fitness training and other member activities,
as well as sales of miscellaneous sports products.
  21




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Membership dues
    
    $
    78,133
    
    
    
    79.6
    %
    
    $
    87,257
    
    
    
    79.7
    %
    
    $
    230,203
    
    
    
    79.4
    %
    
    $
    257,160
    
    
    
    79.6
    %Initiation fees
    
    
    2,896
    
    
    
    2.9
    %
    
    
    2,586
    
    
    
    2.4
    %
    
    
    9,018
    
    
    
    3.1
    %
    
    
    6,839
    
    
    
    2.1
    %Membership revenue
    
    
    81,029
    
    
    
    82.5
    %
    
    
    89,843
    
    
    
    82.1
    %
    
    
    239,221
    
    
    
    82.5
    %
    
    
    263,999
    
    
    
    81.7
    %Personal training revenue
    
    
    10,003
    
    
    
    10.2
    %
    
    
    11,564
    
    
    
    10.6
    %
    
    
    31,976
    
    
    
    11.0
    %
    
    
    36,915
    
    
    
    11.5
    %Other ancillary club revenue
    
    
    6,180
    
    
    
    6.3
    %
    
    
    6,766
    
    
    
    6.2
    %
    
    
    15,924
    
    
    
    5.5
    %
    
    
    17,841
    
    
    
    5.5
    %Ancillary club revenue
    
    
    16,183
    
    
    
    16.5
    %
    
    
    18,330
    
    
    
    16.8
    %
    
    
    47,900
    
    
    
    16.5
    %
    
    
    54,756
    
    
    
    17.0
    %Fees and Other revenue
    
    
    988
    
    
    
    1.0
    %
    
    
    1,245
    
    
    
    1.1
    %
    
    
    2,921
    
    
    
    1.0
    %
    
    
    4,158
    
    
    
    1.3
    %Total revenue
    
    $
    98,200
    
    
    
    100.0
    %
    
    $
    109,418
    
    
    
    100.0
    %
    
    $
    290,042
    
    
    
    100.0
    %
    
    $
    322,913
    
    
    
    100.0
    %
     Historical Club Growth
  2005
    
    2006Q1
    
    Q2
    
    Q3
    
    Q4
    
    Total
    
    Q1
    
    Q2
    
    Q3Wholly owned clubs operated at beginning of period
    
    
    135
    
    
    
    138
    
    
    
    138
    
    
    
    138
    
    
    
    135
    
    
    
    139
    
    
    
    143
    
    
    
    142New clubs opened
    
    
    3
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    2Clubs acquired
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1Clubs closed, relocated or sold (1)
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    Wholly owned clubs at end of period
    
    
    138
    
    
    
    138
    
    
    
    138
    
    
    
    139
    
    
    
    139
    
    
    
    143
    
    
    
    142
    
    
    
    145Total clubs operated at end of period (2)
    
    
    140
    
    
    
    140
    
    
    
    140
    
    
    
    141
    
    
    
    141
    
    
    
    145
    
    
    
    144
    
    
    
    147
 
 (1)
    
    In 2005, we temporarily closed a club for a renovation and expansion. This club reopened in February 2006.(2)
    
    Includes wholly owned and partly owned clubs. In addition, as of December 31, 2005 and September 30,
2006, we managed five university fitness clubs in which we did not have an equity interest. 22




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##### Table of Contents



Existing Club Revenue
    Results of Operations
  Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302005
    
    
    2006
    
    
    2005
    
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    39.1
    
    
    
    36.3
    
    
    
    39.3
    
    
    
    37.5Club operating
    
    
    34.8
    
    
    
    34.4
    
    
    
    33.6
    
    
    
    33.7General and administrative
    
    
    6.8
    
    
    
    6.1
    
    
    
    6.8
    
    
    
    7.0Depreciation and amortization
    
    
    10.0
    
    
    
    9.3
    
    
    
    10.2
    
    
    
    9.690.7
    
    
    
    86.1
    
    
    
    89.9
    
    
    
    87.8Operating income
    
    
    9.3
    
    
    
    13.9
    
    
    
    10.1
    
    
    
    12.2Loss on extinguishment of debt
    
    
    
    
    
    
    6.8
    
    
    
    
    
    
    
    5.0Interest expense
    
    
    10.7
    
    
    
    6.7
    
    
    
    10.7
    
    
    
    8.8Interest income
    
    
    (0.6
    )
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (0.6
    )Equity in the earnings of investees and rental income
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (0.4
    )Income (loss) before provision (benefit) for corporate income taxes
    
    
    (0.3
    )
    
    
    1.2
    
    
    
    0.4
    
    
    
    (0.6
    )Provision (benefit) for corporate income taxes
    
    
    (0.1
    )
    
    
    0.5
    
    
    
    0.1
    
    
    
    (0.0
    )Net income (loss)
    
    
    (0.2
    )%
    
    
    0.7
    %
    
    
    0.3
    %
    
    
    (0.6
    )%
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Revenues.
  23




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##### Table of Contents



Operating Expenses.
  
    
    Payroll costs directly related to our personal training, Group Exclusive, and Sports Club
for Kids programs increased $742,000 or 9.2%, due to an increase in demand for these
programs.
    
    Share-based compensation costs related to outstanding stock options increased $377,000 to
$387,000 from $10,000 in the quarter ended September 30, 2005. These 2006 charges
principally relate to common stock options that were issued to a departing executive.
    
    Offsetting these aforementioned increases in the quarter ended September 30, 2006 was a
$844,000 decrease in sales salary and commission and deferred sales related payroll costs.
The increase in the estimated average-life of our memberships from 24 months to 30 months
resulted in a reduction in amortization of deferred sales related payroll costs in the third
quarter of 2006 compared to the third quarter of 2005.
  
    
    Rent and occupancy expenses increased $2.4 million. Rent and occupancy costs at clubs
that have opened since October 1, 2005, or that are currently under construction, increased
$1.9 million. The remaining $564,000 increase in rent and occupancy expenses relates to our
clubs that were open prior to October 1, 2005.
    
    Utility costs increased $1.1 million. We saw a $570,000 increase at our clubs that we
opened or acquired in 2005 and 2006. The balance of the increase is due to an increase in
utility rates throughout the remainder of our club base.
   Loss on Extinguishment of Debt.
 Interest Expense.
 Interest Income.
 Provision for Corporate Income Taxes.
 24




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##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Revenues.
  Operating Expenses.
  
    
    During the first quarter of 2006 our former Chairman and certain executives entered into
severance packages totaling an estimated $1.6 million. The total cost of these severance
packages were recorded in the nine month period ended September 30, 2006 while no such costs
were incurred in the same period of the prior year.
    
    Payroll costs directly related to our personal training, Group Exclusive, and Sports Club
for Kids programs increased $2.9 million or 12.0%, due to an increase in demand for these
programs.
    
    Share-based compensation costs related to outstanding stock options increased $926,000 to
$961,000 from $35,000 during the nine months ended September 30, 2005. These 2006 charges
principally relate to common stock options that were issued to departing executives.
    
    Offsetting these aforementioned increases during the nine months ended September 30, 2006
was a $3.1 million decrease in sales salary and commissions and deferred sales related
payroll costs. The increase in the estimated average-life of our memberships from 24 months
to 30 months resulted in a reduction in amortization of deferred sales related payroll costs
in the nine month period ended September 30, 2006 compared to the same period of 2005.
  
    
    Rent and occupancy expenses increased $5.7 million. Rent and occupancy costs at clubs
that have opened since October 1, 2005, or that are currently under construction, increased
$4.5 million. Also, during the nine months ended September 30, 2006 we closed a club, and
merged the membership base at this club into one of our newly opened nearby clubs. This
resulted in a $225,000 lease termination expense. The remaining $1.0 million increase in
rent and occupancy expenses relates to our clubs that were open prior to October 1, 2005.
    
    Utility costs increased $4.3 million. We saw a $1.6 million increase at our clubs that we
opened or acquired in 2005 and 2006. The balance of the increase is due to an increase in
utility rates throughout the remainder of our club base.
  
    
    In the nine months ended September 30, 2006 we incurred $1.7 million in costs related to
the examination of strategic and financing alternatives while no such costs were recorded in
the nine months ended September 30, 2005.
 25




---



##### Table of Contents




    
    Liability and related insurance increased $1.0 million during the nine months ended
September 30, 2006 when compared to the same period in 2005. The increase is related to an
increase in premiums associated with the Companys growth as well as an increase in general
liability reserves. General liability reserves are based on an actuarial analysis of claims
processed.
  Loss on Extinguishment of Debt.
 Interest Expense.
 Interest Income.
 Provision for Corporate Income Taxes.
 Liquidity and Capital Resources
  Operating Activities.
  Investing Activities.
 26




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##### Table of Contents



Financing Activities.
     
    
    Making it more difficult to satisfy our obligations;
    
    Increasing our vulnerability to general adverse economic conditions;
    
    Limiting our ability to obtain additional financing to fund future working capital,
capital expenditures, acquisitions of new clubs and other general corporate requirements;
    
    Requiring cash flow from operations for the annual payment of $16.4 million interest on
our Senior Notes and reducing our ability to use our cash flow to fund working capital,
capital expenditures, acquisitions of new clubs and general corporate requirements; and
    
    Limiting our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate.
     27




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##### Table of Contents



Payments Due by Period (in $000s)Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    5 YearsLong-Term Debt(1)
    
    $
    459,260
    
    
    $
    16,615
    
    
    $
    42,977
    
    
    $
    226,952
    
    
    $
    172,716Operating Lease Obligations(2)
    
    
    763,489
    
    
    
    65,091
    
    
    
    132,937
    
    
    
    124,957
    
    
    
    440,504Total Contractual Cash Obligations
    
    $
    1,222,749
    
    
    $
    81,706
    
    
    $
    175,914
    
    
    $
    351,909
    
    
    $
    613,220
 
  (1)
    
    The long-term debt contractual cash obligations include principal and interest payment
requirements. Interest on our 9 5/8% Senior Notes amounts to $16.4 million annually.(2)
    
    Operating lease obligations include base rent only. Certain leases provide for additional
rent based on in real estate taxes, common area maintenance and defined amounts based on the
operating results of the lessee.
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Recent Changes in or Recently Issued Accounting Standards
 Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
 Fair Value Measurements
 Forward-Looking Statements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
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##### Table of Contents



ITEM 4. Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
 Sarah Cruz, et ano v. Town Sports International, Inc.
 Carlos Urbina et ano v. 26 Court Street Associates, LLC et al.,
 
 Item 1A. Risk Factors
   
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities.
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##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders.
  
 ITEM 5. Other Information.
  
 ITEM 6. Exhibits.
 Exhibits
 Exhibit 10.27
    
    Third Amendment, dated as of July 7, 2006, to the Credit Agreement dated April 16, 2003
incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed with the
SEC on July 11, 2006Exhibit 31.1
    
    Certification by Robert Giardina pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification by Richard Pyle pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification by Robert Giardina pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification by Richard Pyle pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
  TOWN SPORTS INTERNATIONALHOLDINGS, INC.DATE: November 3, 2006By:
    
    /s/ Richard PyleRichard PyleChief Financial Officer(principal financial, accounting officer)DATE: November 3, 2006By:
    
    /s/ Robert GiardinaRobert GiardinaChief Executive Officer(principal executive officer)
 32