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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
    FORM 10-Q  R
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2005 or  £
    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 333-114210 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
New York, New York 10106
Telephone: (212) 246-6700
(Address, zip code, and telephone number, including
area code, of registrants principal executive office.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. R Yes £ No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). £ Yes R No As of May 3, 2005 there were 1,309,123 shares of Class A Common Stock of the Registrant
outstanding.




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED March 31, 2005 INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)a) Condensed Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005
    
    
    3b) Condensed Consolidated Statements of Operations and Statements of Comprehensive Loss for the three
months ended March 31, 2004 and 2005
    
    
    4c) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2005
    
    
    5d) Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURESSection 302 certification
    
    
    26Section 302 certification
    
    
    27Section 302 certification
    
    
    28Section 906 certification
    
    
    29Section 906 certification
    
    
    30Section 906 certification
    
    
    31EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-31.3: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATIONEX-32.3: CERTIFICATION
  2




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2004 and March 31, 2005
(All figures $000s, except share and per share data) December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    57,506
    
    
    $
    71,778Accounts receivable (less allowance for doubtful accounts of $2,647 and
$2,492 as of December 31, 2004 and March 31, 2005, respectively)
    
    
    1,955
    
    
    
    3,092Inventory
    
    
    655
    
    
    
    574Prepaid corporate income taxes
    
    
    5,645
    
    
    
    2,887Prepaid expenses and other current assets
    
    
    6,871
    
    
    
    8,655Total current assets
    
    
    72,632
    
    
    
    86,986Fixed assets, net
    
    
    226,253
    
    
    
    223,083Goodwill
    
    
    47,494
    
    
    
    47,455Intangible assets, net
    
    
    931
    
    
    
    814Deferred tax asset, net
    
    
    12,735
    
    
    
    16,235Deferred membership costs
    
    
    12,017
    
    
    
    12,717Other assets
    
    
    12,709
    
    
    
    12,306Total assets
    
    $
    384,771
    
    
    $
    399,596Liabilities and Stockholders DeficitCurrent liabilities:Current portion of long-term debt and capital lease obligations
    
    $
    1,225
    
    
    $
    1,237Accounts payable
    
    
    10,555
    
    
    
    4,252Accrued expenses
    
    
    20,082
    
    
    
    23,022Accrued interest
    
    
    5,217
    
    
    
    11,231Deferred revenue
    
    
    28,294
    
    
    
    35,095Total current liabilities
    
    
    65,373
    
    
    
    74,837Long-term debt and capital lease obligations
    
    
    395,236
    
    
    
    398,726Deferred lease liabilities
    
    
    27,098
    
    
    
    27,482Deferred revenue
    
    
    3,298
    
    
    
    3,421Other liabilities
    
    
    10,783
    
    
    
    12,322Total liabilities
    
    
    501,788
    
    
    
    516,788Commitments and contingencies (Note 6)Stockholders deficit:Class A voting common stock, $.001 par value; issued and outstanding
1,312,289 and 1,309,123 shares at December 31, 2004 and March 31, 2005,
respectively
    
    
    1
    
    
    
    1Paid-in capital
    
    
    (113,900
    )
    
    
    (114,087
    )Unearned compensation
    
    
    (292
    )
    
    
    (274
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    916
    
    
    
    731Retained earnings (accumulated deficit)
    
    
    (3,742
    )
    
    
    (3,563
    )Total stockholders deficit
    
    
    (117,017
    )
    
    
    (117,192
    )Total liabilities and stockholders deficit
    
    $
    384,771
    
    
    $
    399,596
 See notes to the condensed consolidated financial statements. 3




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2004 and 2005
(All figures $000s)
(Unaudited) Three months endedMarch 31,2004
    
    
    2005Revenues:Club operations
    
    $
    85,363
    
    
    $
    93,149Fees and other
    
    
    765
    
    
    
    69786,128
    
    
    
    93,846Operating expenses:Payroll and related
    
    
    36,258
    
    
    
    36,396Club operating
    
    
    27,898
    
    
    
    31,449General and administrative
    
    
    6,226
    
    
    
    6,677Depreciation and amortization
    
    
    9,117
    
    
    
    9,739Goodwill impairment
    
    
    2,002
    
    
    
    81,501
    
    
    
    84,261Operating income
    
    
    4,627
    
    
    
    9,585Interest expense
    
    
    8,812
    
    
    
    10,119Interest income
    
    
    (174
    )
    
    
    (369
    )Equity in the earnings of investees and rental income
    
    
    (336
    )
    
    
    (470
    )Income (loss) before provision (benefit) for corporate income taxes
    
    
    (3,675
    )
    
    
    305Provision (benefit) for corporate income taxes
    
    
    (1,617
    )
    
    
    126Net income (loss)
    
    
    (2,058
    )
    
    
    179Accreted dividends on preferred stock
    
    
    (783
    )
    
    
    Net income (loss) attributable to common stockholders
    
    $
    (2,841
    )
    
    $
    179STATEMENT OF COMPREHENSIVE LOSSNet income (loss)
    
    $
    (2,058
    )
    
    $
    179Foreign currency translation adjustments
    
    
    (71
    )
    
    
    (185
    )Comprehensive loss
    
    $
    (2,129
    )
    
    $
    (6
    )
 See notes to the condensed consolidated financial statements. 4




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2004 and 2005
(All figures $000s)
(Unaudited) Three months endedMarch 31,2004
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (2,058
    )
    
    $
    179Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    9,117
    
    
    
    9,739Noncash interest expense
    
    
    2,137
    
    
    
    3,707Amortization of debt issuance costs
    
    
    400
    
    
    
    408Goodwill impairment write-off
    
    
    2,002
    
    
    
    Compensation expense in connection with stock options
    
    
    10
    
    
    
    15Noncash rental expense, net of noncash rental income
    
    
    322
    
    
    
    190Net changes in operating assets and liabilities
    
    
    8,271
    
    
    
    13,734Increase in deferred tax asset
    
    
    (1,854
    )
    
    
    (3,500
    )(Increase) decrease in deferred membership costs
    
    
    506
    
    
    
    (700
    )Increase in reserve for self-insured liability claims
    
    
    
    
    
    
    466Landlord contributions
    
    
    762
    
    
    
    786Other
    
    
    77
    
    
    
    (173
    )Total adjustments
    
    
    21,750
    
    
    
    24,672Net cash provided by operating activities
    
    
    19,692
    
    
    
    24,851Cash flows from investing activities:Capital expenditures
    
    
    (8,241
    )
    
    
    (10,190
    )Net cash used in investing activities
    
    
    (8,241
    )
    
    
    (10,190
    )Cash flows from financing activities:Repayments of borrowings
    
    
    (980
    )
    
    
    (205
    )Repurchase of common stock
    
    
    
    
    
    
    (184
    )Issuance of Senior notes, net of fees and expenses
    
    
    121,429
    
    
    
    Redemptions of Series A and B preferred stock
    
    
    (50,635
    )
    
    
    Exercise of stock options
    
    
    539
    
    
    
    Common stock distribution
    
    
    (68,943
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    1,410
    
    
    
    (389
    )Net increase in cash and cash equivalents
    
    
    12,861
    
    
    
    14,272Cash and cash equivalents at beginning of period
    
    
    40,802
    
    
    
    57,506Cash and cash equivalents at end of period
    
    $
    53,663
    
    
    $
    71,778Summary of change in certain operating assets and liabilities:Increase in accounts receivable
    
    $
    (1,209
    )
    
    $
    (1,542
    )Decrease in inventory
    
    
    39
    
    
    
    81Decrease in prepaid expenses, prepaid income taxes, and other current assets
    
    
    1,216
    
    
    
    975Increase in accounts payable, accrued expenses and accrued interest
    
    
    3,783
    
    
    
    7,296Increase in deferred revenue
    
    
    4,442
    
    
    
    6,924Net changes in certain operating assets and liabilities
    
    $
    8,271
    
    
    $
    13,734
 See notes to the condensed consolidated financial statements. 5




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All figures $'000s)
(Unaudited) 1. Basis of Presentation Town Sports International Holdings, Inc. (TSI Holdings) was incorporated in January 2004,
principally for the purpose of issuing debt that is structurally subordinated to the debt of its
wholly owned subsidiary, Town Sports International, Inc, (TSI). References to the Company,
we, us and our refer to TSI Holdings and its consolidated subsidiaries, including TSI. The condensed consolidated financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
The condensed consolidated financial statements should be read in conjunction with TSI Holdings
December 31, 2004 consolidated financial statements and notes thereto, included on Form 10-K. The
year-end condensed balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in the United States
of America (GAAP). Certain information and footnote disclosures that are normally included in
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to
SEC rules and regulations. The information reflects all adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial position and results of
operations for the interim periods set forth herein. All such adjustments are of a normal and
recurring nature. Certain revisions were made to the reported amounts for the three months
ended March 31, 2004. For the three month period ended March 31, 2004 landlord contributions to tenant improvements totaling
$762 have been revised from cash flows from investing activities to cash flows from
operations. Also, for the three months ended March 31, 2004, $336 of equity in the earnings of
investees and rental income has been revised from revenue to other income. The results for
the three months ended March 31, 2005 are not necessarily indicative of the results for the entire
year ending December 31, 2005. 2. Long-Term Debt and Capital Lease Obligations December 31,
    
    
    March 31,2004
    
    
    2005($ 000s)
    
    
    ($ 000s)Senior Notes 9 5/8%, due 2011
    
    $
    255,000
    
    
    $
    255,000Senior Discount Notes 11.0%, due 2014
    
    
    137,572
    
    
    
    141,280Notes payable for acquired businesses
    
    
    3,874
    
    
    
    3,683Capital lease obligations
    
    
    15
    
    
    
    396,461
    
    
    
    399,963Less, Current portion due within one year
    
    
    1,225
    
    
    
    1,237Long-term portion
    
    $
    395,236
    
    
    $
    398,726
 On February 4, 2004, TSI Holdings successfully completed an offering of 11.0% Senior Discount
Notes (the Discount Notes) that mature in February 2014. TSI Holdings received a total of
$124,807 in connection with this issuance. Fees and expenses related to this transaction totaled
approximately $4,378. No cash interest is required to be paid prior to February 2009. The accreted
value of each Discount Note will increase from the date of issuance until February 1, 2009, at a
rate of 11.0% per annum compounded semi-annually such that on February 1, 2009 the accreted value
will equal $213,000, the aggregate principal amount due at maturity. Subsequent to February 1, 2009
cash interest on the Discount Notes will accrue and be payable semi-annually in arrears on February
1 and August 1 of each year, commencing August 1, 2009. The Discount Notes are structurally
subordinated and effectively rank junior to all indebtedness of TSI. TSI Holdings debt is not
guaranteed or secured by the assets of TSI, and TSI Holdings relies on the cash flows of TSI to
service its debt. The indenture governing the Senior Notes described below contains certain
restrictions on payments by TSI to TSI Holdings. In April 2003, TSI successfully completed a refinancing of its debt. This refinancing included
an offering of $255,000 of 9 5/8% Senior Notes (Senior Notes) that will mature April 15, 2011,
and the establishment of a new $50,000 senior secured revolving credit facility (the Senior Credit
Facility) that will expire April 15, 2008. In September 2004, TSI Holdings unconditionally
guaranteed the Senior Notes. 6




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The Senior Credit Facility contains various covenants including limits on capital
expenditures, the maintenance of a consolidated interest coverage ratio of not less than 2.70:1.00
during 2005, and a maximum permitted total leverage ratio of 3.75:1.00 through December 30, 2005
and 3.5 to 1.00 from December 31, 2005 through December 30, 2006. TSIs interest coverage and
leverage ratios were 3.25 to 1.00 and 3.32 to 1.00 respectively as of March 31, 2005. As of March
31, 2005 the company is in compliance with its debt covenants and given the Companys operating
plans and expected performance for 2005, the Company expects it will continue to be in compliance
with its covenants. These covenants limit TSIs ability to incur additional debt, and as of March
31, 2005 TSIs permitted borrowing capacity under the line of credit totaled $34,616. Loans under
the Senior Credit Facility at TSIs option, bear interest at either the banks prime rate plus 3.0%
or the Eurodollar rate plus 4.0%, as defined. There were no borrowings outstanding at March 31,
2005 and outstanding letters of credit issued totaled $5,497. TSI is required to pay a commitment
fee of 0.75% per annum on the daily unutilized amount. The unutilized portion of the Senior Credit
Facility as of March 31, 2005 was $44,503. 3. Recent Accounting Pronouncements and Tax Incentives In December 2004, the FASB issued SFAS No. 123R, Shared-Based Payments.SFAS No. 123R is a
revision of SFAS No. 123, Accounting for Stock Based Compensation,and supersedes APB 25. Among
other things, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee services received in exchange for awards
of equity instruments, based on the grant date fair value of those awards, in the financial
statements. The effective date of SFAS 123R is the first reporting period beginning after
December 15, 2005, which is the first quarter 2006 for calendar year companies, although early
adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a
modified prospective method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for all shared-based
payments granted after that date, and based on the requirements of SFAS 123R for all unvested
awards granted prior to the effective date of SFAS 123R. Under the modification retrospective
method, requirements are the same as disclosures made in accordance with SFAS 123. SFAS 123R also requires that the benefits associated with the tax deduction in excess of
recognized compensation cost be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net operating cash flows
and increase net financing cash flows in periods after the effective date. These future amounts
cannot be estimated, because they depend on, among other things, when employees exercise stock
options. We currently utilize a standard option pricing model (i.e. Block-Scholes) to measure the fair
value of stock options granted to employees. While SFAS 123R permits entities to continue to use
such a model, the standard also permits the use of a lattice model. We have not yet determined
which model we will use to measure the fair value of employee stock options upon the adoption of
SFAS 123R. We will adopt SFAS 123R effective January 1, 2006; however, we have not yet determined which
the aforementioned adoption methods we will use. In October 2004 the American Jobs Creation Act of 2004 (the Act) was signed into law. The
new law provides for phased eliminations of the Foreign Sales Corporation/Extraterritorial Income
tax deduction over 2005 and 2006, and also created a new deduction for qualified domestic
production activities that is phased in from 2006 through 2010. The Act also created a temporary
incentive for multinational corporations to repatriate earnings of foreign subsidiaries. The
company is currently assessing the potential impact of this complex legislation and additional
interpretations are expected from the Department of Treasury. 4. Goodwill and Other Intangibles Goodwill has been allocated to reporting units that closely reflect the regions served by our
four trade names; New York Sports Club, Boston Sports Club, Washington Sports Club and Philadelphia
Sports Club, with certain more remote clubs that do not benefit from a regional cluster being
considered single reporting units. In each of the quarters ended March 31, 2004 and 2005, the Company performed its annual
impairment test. Goodwill impairment testing requires a comparison between the carrying value and
fair value of reportable goodwill. If the carrying value exceeds the fair value, goodwill is
considered impaired. The amount of the impairment loss is measured as the difference between the
carrying value and the implied fair value of goodwill, which is determined using discounted cash
flows. The 2005 impairment test did not indicate goodwill was impaired. As a result of the 2004 test, the Company determined that the goodwill at one of its remote
clubs was not recoverable. The goodwill impairment associated with this underperforming club
recorded in the three-month period ended March 31, 2004 amounted to $2,002. A deferred tax benefit
of $881 has been recorded in connection with this impairment. Since this club is remote from one of
the Companys clusters, it does not benefit from the competitive advantage that our clustered clubs
have, and as a result it is more 7




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susceptible to competition. We have reduced our projections of future cash flows of this club
to take into account the impact of a recent opening of a competitor. While this club is expected to
generate cash flow in the future, we no longer expect it to operate at the levels that were
projected at the time the club was acquired. The change in the carrying amount of goodwill from December 31, 2004 through March 31, 2005 is
as follows: Balance as of December 31, 2004
    
    $
    47,494Changes due to foreign currency exchange rate fluctuations
    
    
    (39
    )Balance as of March 31, 2005
    
    $
    47,455
 As of December 31, 2004($000s)Gross Carrying
    
    
    AccumulatedAcquired Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    11,008
    
    
    $
    (10,372
    )
    
    $
    636Covenants-not-to-compete
    
    
    1,150
    
    
    
    (894
    )
    
    
    256Beneficial lease
    
    
    223
    
    
    
    (184
    )
    
    
    39$
    12,381
    
    
    $
    (11,450
    )
    
    $
    931
 As of March 31, 2005($000s)Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    11,008
    
    
    $
    (10,472
    )
    
    $
    536Covenants-not-to-compete
    
    
    1,150
    
    
    
    (908
    )
    
    
    242Beneficial lease
    
    
    223
    
    
    
    (187
    )
    
    
    36$
    12,381
    
    
    $
    (11,567
    )
    
    $
    814
 The amortization expense of the above-acquired intangible assets for each of the five years
ended December 31, 2009 is as follows: Aggregate Amortization Expenses for the year ended December 31, ($000s)2005 (a)
    
    $
    4672006
    
    
    3002007
    
    
    652008
    
    
    622009
    
    
    37$
    931
   (a)
    
    Amortization expense for the three months ended March 31, 2004 and 2005 amounted to
$176 and $116, respectively. 5. Stock-Based Employee Compensation For financial reporting purposes, the Company accounts for stock-based compensation in
accordance with the intrinsic value method (APB No. 25). In accordance with this method, no
compensation expense is recognized in the accompanying financial statements in connection with the
awarding of stock option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Companys stock is not greater than
the amount an employee must pay to acquire the stock however, to the extent that stock options are
granted to employees with variable terms or if the fair value of the Companys stock as of the
measurement date is greater than the amount an employee must pay to acquire the stock, then the
Company will recognize compensation expense. 8




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The following table illustrates the effect on net income (loss) attributed to common
stockholders if the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board issued Statement No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, to stock-based employee compensation. Three Months Ended March 31($000s)2004
    
    
    2005Net income (loss) attributed to common stockholders, as reported
    
    $
    (2,841
    )
    
    $
    179Add:Stock-based employee compensation expense included in reported net
income (loss) attributed to common stockholders, net of related tax
effects
    
    
    7
    
    
    
    9Deduct:Total stock-based employee compensation expense determined under
fair value based method for all stock option awards net of related
tax effects
    
    
    (10
    )
    
    
    (28
    )Pro forma net income (loss) attributed to common stockholders
    
    $
    (2,844
    )
    
    $
    160
 6. Commitments and Contingencies On February 13, 2003, in an action styled Joseph Anaya vs. Town Sports International, Inc. et
al., an individual filed suit against TSI in the Supreme Court, New York County, alleging that on
January 14, 2003, he sustained serious bodily injury at one of our club locations. He filed an
amended complaint on September 17, 2003 seeking two billion dollars in damages for personal
injuries. His cause of action seeking punitive damages, in the amount of two hundred and fifty
million dollars, was dismissed on January 26, 2004. While the Company is unable to determine the
ultimate outcome of the above action, it intends to contest the matter vigorously. We have in force $51 million dollars of insurance to cover claims of this nature. To the
extent that the judgment exceeds the amount we are covered by insurance by $2.5 million we would be
in default under the credit agreement governing TSIs senior secured revolving credit facility.
Also, if any uninsured judgment, when aggregated with any other judgment not covered by insurance
equals $5.0 million or more, the judgment would constitute an event of default under the indentures
governing the Senior Notes and Discount Notes. It is possible that a final settlement or award
related to these matters may exceed our insurance coverage. Depending upon the outcome, this matter may have a material effect on the Companys
consolidated financial position, results of operations or cash flows. The Company is a party to various other lawsuits arising in the normal course of business.
Management believes that the ultimate outcome of these matters will not have a material effect on
the Companys consolidated financial position, results of operations or cash flows. 7. Investments in Affiliated Companies The Company has investments in Capitol Hill Squash Club Associates (CHSCA) and Kalorama
Sports Managements Associates (KSMA) (collectively referred to as the Affiliates). The Company
has a limited partnership interest in CHSCA, which provides the Company with approximately 20% of
the CHSCA profits, as defined. The Company has a co-general partnership and limited partnership
interests in KSMA, which entitles it to receive approximately 45% of KSMAs profits, as defined.
The Affiliates have operations, that are similar, and related to, those of the Company. The
Company accounts for these Affiliates in accordance with the equity method. The assets,
liabilities, equity and operating results of CHSCA and the Companys pro rata share of CHSCAs net
assets and operating results were not material for all periods presented. KSMAs balance sheets
for the periods presented are not material to the Companys balance sheets for these respective
periods. Total revenue, income from operations and net income of KSMA for the three months ending
March 31, 2004 and 2005 are as follows: Three months endedMarch 31,($000s)2004
    
    
    2005Revenue
    
    $
    928
    
    
    $
    889Income from operations
    
    
    418
    
    
    
    412Net income
    
    
    380
    
    
    
    391
 9




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##### Table of Contents



8. Subsequent Events On April 1, 2005, the Company granted 20,000 common stock options to employees at an exercise
price of $91.50. Based on an independent valuation, the exercise price exceeds the fair market
value of the common on the grant date. These options vest in full on April 1, 2015 and vest on an
accelerated basis in the event that certain defined events occur, including the achievement of
equity targets or the sale of the Company. On April 14, 2005 we acquired a health club in our New York Sports Club trade area. The
purchase price totaled $3,000 of which $2,700 was paid at closing and $300 is due April 14, 2006. 9. Guarantors In January 2004, TSI Holdings was incorporated solely for the purpose of issuing the Discount
Notes. TSI Holdings and all of TSIs domestic subsidiaries have unconditionally guaranteed the
$255,000 9 5/8% Senior Notes discussed in Note 2. However, TSIs foreign subsidiaries have not
provided guarantees for these Notes. Except for TSI Holdings (TSIs parent), each guarantor of the Senior Notes is a wholly owned
subsidiary of TSI. The guarantees are full and unconditional and joint and severable. The
following schedules set fourth condensed consolidating financial information as required by Rule
3-10d of Securities and Exchange Commission Regulation S-X at December 31, 2004, and March 31, 2005
and for the three months ending March 31, 2004 and 2005. The financial information illustrates the
companies of the combined guarantors. 10




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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidating Balance Sheet
December 31, 2004
(All figures in $000s)
(Unaudited) Non-Subsidiary
    
    
    GuarantorTSI Holdings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    274
    
    
    
    3,425
    
    
    $
    51,327
    
    
    $
    2,480
    
    
    $
    
    
    
    $
    57,506Accounts receivable, net
    
    
    
    
    
    
    3,199
    
    
    
    1,121
    
    
    
    114
    
    
    
    (2,479
    )
    
    
    1,955Inventory
    
    
    
    
    
    
    
    
    
    
    623
    
    
    
    32
    
    
    
    
    
    
    
    655Prepaid corporate income taxes
    
    
    
    
    
    
    5,645
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,645Inter-company receivable (payable)
    
    
    1,075
    
    
    
    8,636
    
    
    
    (8,083
    )
    
    
    (1,628
    )
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    
    
    
    
    7,740
    
    
    
    2,631
    
    
    
    
    
    
    
    (3,500
    )
    
    
    6,871Total current assets
    
    
    1,349
    
    
    
    28,645
    
    
    
    47,619
    
    
    
    998
    
    
    
    (5,979
    )
    
    
    72,632Investment in subsidiary
    
    
    8,862
    
    
    
    267,350
    
    
    
    
    
    
    
    
    
    
    
    (276,212
    )
    
    
    3⁄4Fixed assets, net
    
    
    
    
    
    
    11,478
    
    
    
    213,464
    
    
    
    1,311
    
    
    
    
    
    
    
    226,253Goodwill
    
    
    
    
    
    
    
    
    
    
    46,619
    
    
    
    875
    
    
    
    
    
    
    
    47,494Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    931
    
    
    
    
    
    
    
    
    
    
    
    931Deferred tax assets, net
    
    
    6,266
    
    
    
    7,108
    
    
    
    (491
    )
    
    
    (148
    )
    
    
    
    
    
    
    12,735Deferred membership costs
    
    
    
    
    
    
    
    
    
    
    12,017
    
    
    
    
    
    
    
    
    
    
    
    12,017Other assets
    
    
    4,106
    
    
    
    7,519
    
    
    
    1,084
    
    
    
    
    
    
    
    
    
    
    
    12,709Total assets
    
    $
    20,583
    
    
    $
    322,100
    
    
    $
    321,243
    
    
    $
    3,036
    
    
    ($
    282,191
    )
    
    $
    384,771LIABILITIES and STOCKHOLDERS DEFICITCurrent liabilitiesCurrent portion of long-term debt and capital lease obligations
    
    $
    
    
    
    $
    
    
    
    $
    1,225
    
    
    $
    
    
    
    $
    
    
    
    
    1,225Accounts payable
    
    
    
    
    
    
    3,732
    
    
    
    6,823
    
    
    
    
    
    
    
    
    
    
    
    10,555Accrued expenses
    
    
    28
    
    
    
    6,353
    
    
    
    13,189
    
    
    
    512
    
    
    
    
    
    
    
    20,082Accrued interest
    
    
    
    
    
    
    5,215
    
    
    
    2,481
    
    
    
    
    
    
    
    (2,479
    )
    
    
    5,217Deferred revenue
    
    
    
    
    
    
    
    
    
    
    28,294
    
    
    
    
    
    
    
    
    
    
    
    28,294Total current liabilities
    
    
    28
    
    
    
    15,300
    
    
    
    52,012
    
    
    
    512
    
    
    
    (2,479
    )
    
    
    65,373Long-term debt and capital lease obligations
    
    
    137,572
    
    
    
    295,865
    
    
    
    (34,701
    )
    
    
    
    
    
    
    (3,500
    )
    
    
    395,236Deferred lease liabilities
    
    
    
    
    
    
    485
    
    
    
    26,613
    
    
    
    
    
    
    
    
    
    
    
    27,098Deferred revenue
    
    
    
    
    
    
    60
    
    
    
    3,137
    
    
    
    101
    
    
    
    
    
    
    
    3,298Other liabilities
    
    
    
    
    
    
    1,528
    
    
    
    9,255
    
    
    
    
    
    
    
    
    
    
    
    10,783Total liabilities
    
    
    137,600
    
    
    
    313,238
    
    
    
    56,316
    
    
    
    613
    
    
    
    (5,979
    )
    
    
    501,788Stockholders deficit
    
    
    (117,933
    )
    
    
    7,946
    
    
    
    264,919
    
    
    
    1,515
    
    
    
    (274,380
    )
    
    
    (117,933
    )Accumulated other comprehensive income
    
    
    916
    
    
    
    916
    
    
    
    8
    
    
    
    908
    
    
    
    (1,832
    )
    
    
    916Total stockholders deficit
    
    
    (117,017
    )
    
    
    8,862
    
    
    
    264,927
    
    
    
    2,423
    
    
    
    (276,212
    )
    
    
    (117,017
    )Total liabilities, redeemable preferred stock and
Stockholders deficit:
    
    $
    20,583
    
    
    $
    322,100
    
    
    $
    321,243
    
    
    $
    3,036
    
    
    ($
    282,191
    )
    
    $
    384,771
 11




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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidated Balance Sheet
March 31, 2005
(All figures in $000)
(Unaudited) Non-Subsidiary
    
    
    GuarantorTSI Holdings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assetsCash and cash equivalents
    
    $
    239
    
    
    $
    329
    
    
    $
    68,859
    
    
    $
    2,351
    
    
    $
    
    
    
    $
    71,778Accounts receivable, net
    
    
    
    
    
    
    3,723
    
    
    
    1,682
    
    
    
    257
    
    
    
    (2,570
    )
    
    
    3,092Inventory
    
    
    
    
    
    
    
    
    
    
    543
    
    
    
    31
    
    
    
    
    
    
    
    574Prepaid corporate income taxes
    
    
    
    
    
    
    2,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,887Inter-company receivable (payable)
    
    
    915
    
    
    
    14,865
    
    
    
    (14,155
    )
    
    
    (1,625
    )
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    
    
    
    
    5,350
    
    
    
    6,805
    
    
    
    
    
    
    
    (3,500
    )
    
    
    8,655Total current assets
    
    
    1,154
    
    
    
    27,154
    
    
    
    63,734
    
    
    
    1,014
    
    
    
    (6,070
    )
    
    
    86,986Investment in subsidiaries
    
    
    11,572
    
    
    
    275,804
    
    
    
    
    
    
    
    
    
    
    
    (287,376
    )
    
    
    Fixed assets, net
    
    
    
    
    
    
    10,809
    
    
    
    211,118
    
    
    
    1,156
    
    
    
    
    
    
    
    223,083Goodwill
    
    
    
    
    
    
    
    
    
    
    46,620
    
    
    
    835
    
    
    
    
    
    
    
    47,455Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    
    
    
    
    814Deferred tax assets, net
    
    
    7,367
    
    
    
    9,501
    
    
    
    (491
    )
    
    
    (142
    )
    
    
    
    
    
    
    16,235Deferred membership costs
    
    
    
    
    
    
    
    
    
    
    12,717
    
    
    
    
    
    
    
    
    
    
    
    12,717Other assets
    
    
    4,035
    
    
    
    7,190
    
    
    
    1,081
    
    
    
    
    
    
    
    
    
    
    
    12,306Total assets
    
    $
    24,128
    
    
    $
    330,458
    
    
    $
    335,593
    
    
    $
    2,863
    
    
    $
    (293,446
    )
    
    $
    399,596LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilitiesCurrent portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    1,237
    
    
    $
    
    
    
    $
    
    
    
    $
    1,237Accounts payable
    
    
    
    
    
    
    70
    
    
    
    4,182
    
    
    
    
    
    
    
    
    
    
    
    4,252Accrued expenses
    
    
    41
    
    
    
    3,713
    
    
    
    18,947
    
    
    
    321
    
    
    
    
    
    
    
    23,022Accrued interest
    
    
    
    
    
    
    11,228
    
    
    
    2,573
    
    
    
    
    
    
    
    (2,570
    )
    
    
    11,231Deferred revenue
    
    
    
    
    
    
    
    
    
    
    35,095
    
    
    
    
    
    
    
    
    
    
    
    35,095Total current liabilities
    
    
    41
    
    
    
    15,011
    
    
    
    62,034
    
    
    
    321
    
    
    
    (2,570
    )
    
    
    74,837Long-term debt
    
    
    141,279
    
    
    
    300,526
    
    
    
    (39,579
    )
    
    
    
    
    
    
    (3,500
    )
    
    
    398,726Deferred lease liabilities
    
    
    
    
    
    
    450
    
    
    
    27,032
    
    
    
    
    
    
    
    
    
    
    
    27,482Deferred revenue
    
    
    
    
    
    
    910
    
    
    
    2,415
    
    
    
    96
    
    
    
    
    
    
    
    3,421Other liabilities
    
    
    
    
    
    
    1,989
    
    
    
    10,333
    
    
    
    
    
    
    
    
    
    
    
    12,322Total liabilities
    
    
    141,320
    
    
    
    318,886
    
    
    
    62,235
    
    
    
    417
    
    
    
    (6,070
    )
    
    
    516,788Stockholders deficitCommon stockholders deficit
    
    
    (117,926
    )
    
    
    10,838
    
    
    
    273,352
    
    
    
    1,721
    
    
    
    (285,908
    )
    
    
    (117,923
    )Accumulated other comprehensive income
    
    
    734
    
    
    
    734
    
    
    
    6
    
    
    
    725
    
    
    
    (1,468
    )
    
    
    731Total stockholders deficit
    
    
    (117,192
    )
    
    
    11,572
    
    
    
    273,358
    
    
    
    2,446
    
    
    
    (287,376
    )
    
    
    (117,192
    )Total liabilities, redeemable
preferred stock and stockholders
deficit
    
    $
    24,128
    
    
    $
    330,458
    
    
    $
    335,593
    
    
    $
    2,863
    
    
    $
    (293,446
    )
    
    $
    399,596
 12




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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidating Statement of Operations
For three months ended March 31, 2004
(All figures in $000s)
(Unaudited) Non-Subsidiary
    
    
    GuarantorTSI Holdings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Club operations
    
    $
    
    
    
    $
    91
    
    
    $
    83,986
    
    
    $
    1,286
    
    
    $
    
    
    
    $
    85,363Fees and other
    
    
    
    
    
    
    326
    
    
    
    1,281
    
    
    
    
    
    
    
    (842
    )
    
    
    765
    
    
    
    417
    
    
    
    85,267
    
    
    
    1,286
    
    
    
    (842
    )
    
    
    86,128Operating expenses:Payroll and related
    
    
    
    
    
    
    6,112
    
    
    
    29,678
    
    
    
    468
    
    
    
    
    
    
    
    36,258Club operating
    
    
    
    
    
    
    175
    
    
    
    28,124
    
    
    
    301
    
    
    
    (702
    )
    
    
    27,898General and administrative
    
    
    
    
    
    
    144
    
    
    
    6,108
    
    
    
    114
    
    
    
    (140
    )
    
    
    6,226Depreciation and amortization
    
    
    
    
    
    
    1,019
    
    
    
    8,000
    
    
    
    98
    
    
    
    
    
    
    
    9,117Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    2,002
    
    
    
    
    
    
    
    
    
    
    
    2,002
    
    
    
    7,450
    
    
    
    73,912
    
    
    
    981
    
    
    
    (842
    )
    
    
    81,501Operating income (loss)
    
    
    
    
    
    
    (7,033
    )
    
    
    11,355
    
    
    
    305
    
    
    
    
    
    
    
    4,627Interest expense
    
    
    2,209
    
    
    
    6,663
    
    
    
    28
    
    
    
    
    
    
    
    (88
    )
    
    
    8,812Interest income
    
    
    (57
    )
    
    
    (205
    )
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    (174
    )Equity in the earnings on investees and rental income
    
    
    
    
    
    
    (154
    )
    
    
    (182
    )
    
    
    
    
    
    
    
    
    
    
    (336
    )(Loss) income from operations before benefit for
corporate income taxes
    
    
    (2,152
    )
    
    
    (13,337
    )
    
    
    11,509
    
    
    
    305
    
    
    
    
    
    
    
    (3,675
    )Benefit for corporate income taxes
    
    
    (947
    )
    
    
    (5,868
    )
    
    
    5,132
    
    
    
    66
    
    
    
    
    
    
    
    (1,617
    )Equity earnings from subsidiaries
    
    
    (853
    )
    
    
    6,616
    
    
    
    
    
    
    
    
    
    
    
    (5,763
    )
    
    
    Net (loss) income
    
    $
    (2,058
    )
    
    $
    (853
    )
    
    $
    6,377
    
    
    $
    239
    
    
    $
    (5,763
    )
    
    $
    (2,058
    )
 13




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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidating Statement of Operations
For three months ended March 31, 2005
(All figures in $000s)
(Unaudited) Non-Subsidiary
    
    
    GuarantorTSI Holdings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Club operations
    
    $
    
    
    
    $
    12
    
    
    $
    91,861
    
    
    $
    1,276
    
    
    $
    
    
    
    $
    93,149Fees and other
    
    
    
    
    
    
    146
    
    
    
    1,699
    
    
    
    
    
    
    
    (1,148
    )
    
    
    697
    
    
    
    158
    
    
    
    93,560
    
    
    
    1,276
    
    
    
    (1,148
    )
    
    
    93,846Operating expenses:Payroll and related
    
    
    
    
    
    
    5,442
    
    
    
    30,479
    
    
    
    475
    
    
    
    
    
    
    
    36,396Club operating
    
    
    
    
    
    
    346
    
    
    
    31,810
    
    
    
    301
    
    
    
    (1,008
    )
    
    
    31,449General and administrative
    
    
    13
    
    
    
    431
    
    
    
    6,264
    
    
    
    109
    
    
    
    (140
    )
    
    
    6,677Depreciation and amortization
    
    
    
    
    
    
    1,137
    
    
    
    8,498
    
    
    
    104
    
    
    
    
    
    
    
    9,73913
    
    
    
    7,356
    
    
    
    77,051
    
    
    
    989
    
    
    
    (1,148
    )
    
    
    84,261Operating income (loss)
    
    
    (13
    )
    
    
    (7,198
    )
    
    
    16,509
    
    
    
    287
    
    
    
    
    
    
    
    9,585Interest expense
    
    
    3,787
    
    
    
    6,333
    
    
    
    89
    
    
    
    
    
    
    
    (90
    )
    
    
    10,119Interest income
    
    
    (1
    )
    
    
    (457
    )
    
    
    (1
    )
    
    
    
    
    
    
    90
    
    
    
    (369
    )Equity in the earnings of investees and rental income
    
    
    
    
    
    
    (268
    )
    
    
    (202
    )
    
    
    
    
    
    
    
    
    
    
    (470
    )Income (loss) from operations before provisions
For corporate income taxes
    
    
    (3,799
    )
    
    
    (12,806
    )
    
    
    16,623
    
    
    
    287
    
    
    
    
    
    
    
    305Provision for corporate income taxes
    
    
    (1,637
    )
    
    
    (5,224
    )
    
    
    6,906
    
    
    
    81
    
    
    
    
    
    
    
    126Equity earnings from subsidiaries
    
    
    2,341
    
    
    
    9,923
    
    
    
    
    
    
    
    
    
    
    
    (12,264
    )
    
    
    Net income
    
    $
    179
    
    
    $
    2,341
    
    
    $
    9,717
    
    
    $
    206
    
    
    $
    (12,264
    )
    
    $
    179
 14




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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidating Statement of Cash Flows
For three months ended March 31, 2004
(All figures in $000s)
(Unaudited) Non-Subsidiary
    
    
    GuarantorTSI Holdings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (2,058
    )
    
    $
    (853
    )
    
    $
    6,377
    
    
    $
    239
    
    
    $
    (5,763
    )
    
    $
    (2,058
    )Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    1,019
    
    
    
    8,000
    
    
    
    98
    
    
    
    
    
    
    
    9,117Goodwill impairment write-off and club closure costs
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,002
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,002Compensation expense in connection with stock
options
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Noncash rental expense, net of noncash rental income
    
    
    
    
    
    
    (23
    )
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    322Noncash interest expense
    
    
    2,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,137Amoritzation of debt issuance costs
    
    
    72
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400Changes in operating assets and liabilities
    
    
    (2,112
    )
    
    
    (4,847
    )
    
    
    14,713
    
    
    
    (69
    )
    
    
    
    
    
    
    7,685Other
    
    
    853
    
    
    
    (6,484
    )
    
    
    2
    
    
    
    (57
    )
    
    
    5,763
    
    
    
    77Total adjustments
    
    
    950
    
    
    
    (9,997
    )
    
    
    25,062
    
    
    
    (28
    )
    
    
    5,763
    
    
    
    21,750Net cash provided by operating activities
    
    
    (1,108
    )
    
    
    (10,850
    )
    
    
    31,439
    
    
    
    211
    
    
    
    
    
    
    
    19,692Net cash used in investing activities
    
    
    
    
    
    
    (454
    )
    
    
    (7,712
    )
    
    
    (75
    )
    
    
    
    
    
    
    (8,241
    )Net cash provided by financing activities
    
    
    2,390
    
    
    
    11,379
    
    
    
    (12,359
    )
    
    
    
    
    
    
    
    
    
    
    1,410Net increase (decrease) in cash and cash equivalents
    
    
    1,282
    
    
    
    75
    
    
    
    11,368
    
    
    
    136
    
    
    
    
    
    
    
    12,861Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    420
    
    
    
    39,006
    
    
    
    1,376
    
    
    
    
    
    
    
    40,802Cash and cash equivalents at end of period
    
    $
    1,282
    
    
    $
    495
    
    
    $
    50,374
    
    
    $
    1,512
    
    
    $
    
    
    
    $
    53,663
 15




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##### Table of Contents



TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Condensed Consolidating State of Cash Flows
For three months ended March 31, 2005
(All figures in $000s)
(Unaudited) Non-Subsidiary
    
    
    GuarantorTSI Holdings
    
    
    TSI
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    179
    
    
    $
    2,341
    
    
    $
    9,717
    
    
    $
    206
    
    
    $
    (12,264
    )
    
    $
    179Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    1,137
    
    
    
    8,498
    
    
    
    104
    
    
    
    
    
    
    
    9,739Compensation expense in connection with stock
options
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Noncash rental expense, net of noncash rental
income
    
    
    
    
    
    
    (40
    )
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    190Noncash interest expense
    
    
    3,707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,707Amortization of debt issuance costs
    
    
    80
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408Changes in operating assets and liabilities
    
    
    (1,624
    )
    
    
    3,336
    
    
    
    8,979
    
    
    
    (370
    )
    
    
    (1
    )
    
    
    10,320Other
    
    
    (2,350
    )
    
    
    (9,465
    )
    
    
    22
    
    
    
    (179
    )
    
    
    12,265
    
    
    
    293Total adjustments
    
    
    (187
    )
    
    
    (4,689
    )
    
    
    17,729
    
    
    
    (445
    )
    
    
    12,264
    
    
    
    24,672Net cash provided by (used in) operating activities
    
    
    (8
    )
    
    
    (2,348
    )
    
    
    27,446
    
    
    
    (239
    )
    
    
    
    
    
    
    24,851Net cash (used in) provided by investing
activities
    
    
    
    
    
    
    (468
    )
    
    
    (9,832
    )
    
    
    110
    
    
    
    
    
    
    
    (10,190
    )Net cash provided by (used in) financing activities
    
    
    (27
    )
    
    
    (280
    )
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    (389
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (35
    )
    
    
    (3,096
    )
    
    
    17,532
    
    
    
    (129
    )
    
    
    
    
    
    
    14,272Cash and cash equivalents at beginning of period
    
    
    274
    
    
    
    3,425
    
    
    
    51,327
    
    
    
    2,480
    
    
    
    
    
    
    
    57,506Cash and cash equivalents at end of period
    
    $
    239
    
    
    $
    329
    
    
    $
    68,859
    
    
    $
    2,351
    
    
    $
    
    
    
    $
    71,778
 16




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations Introduction We are one of the two leading owners and operators of fitness clubs in the Northeast and
Mid-Atlantic regions of the United States. As of March 31, 2005, we operated 140 clubs that
collectively served approximately 398,000 members. We develop clusters of clubs to serve densely
populated major metropolitan regions in which a high percentage of the population commutes to work.
We service such populations by clustering clubs near the highest concentrations of our target
customers areas of both employment and residence. Our target customer is college-educated,
typically between the ages of 21 and 50 and earns an annual income of between $50,000 and $150,000. Each club facility is subject to a long-term facility lease with a third-party landlord, with
the exception of East 86th Street, New York City location, where we own the underlying real estate.
Our principal capital investment is thus in the facility improvements and equipment and furnishings
of each facility. Our clubs are located for maximum convenience to our members in urban or suburban
areas, close to transportation hubs, or office or retail centers. Our goal is to develop the premier health club network in each of the major metropolitan
regions we enter. We believe that clustering clubs allows us to achieve strategic operating
advantages that enhance our ability to achieve this goal. In entering new regions, we develop these
clusters by initially opening or acquiring clubs located in the more central urban markets of the
region and then branching out from these urban centers to suburban commuter communities.
Capitalizing on this clustering of clubs, as of March 31, 2005, approximately 50% of our members
participated in a membership plan that allows unlimited access to all of our clubs for a higher
membership fee. Clustering of clubs also affords us significant additional benefits, including:  1.
    Providing our members access to an extensive network of locations;2.
    Lower capital investment overall, by locating special facilities, such as pools,
racquet sports, etc. at selected clubs only;3.
    More cost-effective regional management and control;4.
    Allocating certain costs, such as advertising, in a focused region over multiple
locations; and5.
    Strengthening brand awareness. We have executed this strategy successfully in the New York region through the network of
clubs we operate under our New York Sports Club (NYSC) brand name. We are the largest fitness
club operator in Manhattan with 37 locations and operate a total of 94 clubs under the NYSC name
within a 50 mile radius of New York City. We operate 19 clubs in the Boston region and 18 clubs in
the Washington, DC region under our Boston Sports Club (BSC) and Washington Sports Club (WSC)
brand names, respectively, and have begun establishing a similar cluster in the Philadelphia region
with six clubs under our Philadelphia Sports Club (PSC) brand name. In addition, we operate three
clubs in Switzerland. We employ localized brand names for our clubs to create an image and
atmosphere consistent with the local community, and to foster the recognition as a local network of
quality fitness clubs rather than a national chain. We consider that we have three principal sources of revenue: 1. Our largest sources of revenue are dues and initiation fees paid by our members. This
comprises 82.8% of our total revenue for the three months ended March 31, 2005. We recognize
revenue from membership dues in the month when the services are rendered. Approximately 90% of our
members pay their monthly dues by Electronic Funds Transfer, while the balance is paid annually in
advance. We recognize revenue from initiation fees over the expected average life of the
membership, which is approximately 24 months. 2. For the three months ended March 31, 2005, we generated 11.0% 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. Revenue from sales of in-club advertising and sponsorships is also
included. This revenue stream has increased recently as a percentage of total revenue more as we
have focused on increasing revenue per member from our maturing club base. 17




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##### Table of Contents



3. The balance of our revenue (approximately 0.7% for the three months ended March 31, 2005)
principally relates to rental of space in our facilities to operators who offer wellness-related
offerings such as physical therapy. In addition, we generate management fees from certain club
facilities that we do not wholly own. We refer to this as Fees and Other revenue. Revenue (in $000s) is comprised of the following: Three MonthsEndedMarch 31,2004
    
    
    2005Membership dues
    
    $
    68,981
    
    
    $
    74,577Initiation fees
    
    
    3,217
    
    
    
    3,078Personal training revenue
    
    
    8,489
    
    
    
    10,380Other ancillary club revenue
    
    
    4,676
    
    
    
    5,114Total club revenue
    
    
    85,363
    
    
    
    93,149Fees and other
    
    
    765
    
    
    
    697Total revenue
    
    $
    86,128
    
    
    $
    93,846
 Our operating and selling expenses are comprised of both fixed and variable costs. Fixed costs
include club and supervisory salary and related expenses, occupancy costs including certain
elements of rent, housekeeping, contracted maintenance expenses, and depreciation. General and
administrative expenses include costs relating to our centralized support functions, such as
accounting, information systems, purchasing and member relations, consulting fees, and real estate
development expenses. Variable costs are primarily related to personal training and ancillary club revenue related
payroll, membership sales compensation, advertising, utilities, insurance and club supplies. As clubs mature and increase their membership base, fixed costs are typically spread over an
increasing revenue base and operating margins tend to improve. Our primary capital expenditures relate to the construction or acquisition of new club
facilities and upgrading and expanding our existing clubs. The construction and equipment costs
vary based on the costs of construction labor, as well as the planned service offerings and size
and configuration of the facility. We perform routine improvements at our clubs and partial
replacement of the fitness equipment each year for which we budget approximately 4.0% of annual
revenue. Expansions of certain facilities are also performed from time to time, when incremental
space becomes available on attractive terms, and utilization and demand for the facility dictates.
In this connection, facility remodeling is also considered where appropriate. Historical Club Growth The following table sets for our club growth during each of the quarters in 2004 and the first
quarter of 2005. 2004
    
    
    2005Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Total
    
    
    Q1Clubs at beginning of period
    
    
    129
    
    
    
    132
    
    
    
    134
    
    
    
    136
    
    
    
    129
    
    
    
    137Greenfield clubs (a)
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    3Acquired clubs
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    Clubs at end of period
    
    
    132
    
    
    
    134
    
    
    
    136
    
    
    
    137
    
    
    
    137
    
    
    
    140Number of partly-owned clubs
included at the end of the
period (b)
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
   (a)
    
    A Greenfield club is a new location constructed by us.(b)
    
    We include in the club count wholly and partly-owned clubs. In addition to the above count,
as of December 31, 2004 and March 31, 2005 we managed four university-owned clubs,
respectively, in which we did not have an equity interest. 18




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##### Table of Contents



Results of Operations The following table sets forth certain operating data as a percentage of revenue for the
periods indicated: Three MonthsEndedMarch 31,2004
    
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %Operating expensesPayroll and related
    
    
    42.1
    
    
    
    38.8Club operating
    
    
    32.4
    
    
    
    33.5General and administrative
    
    
    7.2
    
    
    
    7.1Depreciation and amortization
    
    
    10.6
    
    
    
    10.4Goodwill Impairment
    
    
    2.3
    
    
    
    Operating income
    
    
    5.4
    
    
    
    10.2Interest expense
    
    
    10.3
    
    
    
    10.8Interest income
    
    
    ( 0.2
    )
    
    
    (0.4
    )Equity in the earnings of investees and rental income
    
    
    (0.4
    )
    
    
    (0.5
    )Income (loss) before provision (benefit) for corporate income taxes
    
    
    (4.3
    )
    
    
    0.3Provision (benefit) for corporate income taxes
    
    
    (1.9
    )
    
    
    0.1Net income (loss)
    
    
    (2.4
    )
    
    
    0.2Accreted dividends on preferred stock
    
    
    (0.9
    )
    
    
    Net income (loss) attributable to common stockholders
    
    
    (3.3
    %)
    
    
    0.2
    %
 Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Revenues.Revenues increased $7.7 million, or 8.9%, to $93.8 million during the quarter ended
March 31, 2005 from $86.1 million in the quarter ended March 31, 2004. Revenues increased during
the quarter by $4.0 million, or 4.8%, at the Companys mature clubs (clubs owned and operated for
at least 24 months). The 4.8% increase in mature club revenue is due to a 4.1% increase in
membership and a 1.8% increase in ancillary revenue offset by a 1.1% decrease in price. During the
quarter, revenue increased $3.7 million at the 14 clubs opened subsequent to March 31, 2003. Operating Expenses.Operating expenses increased $2.8 million, or 3.4%, to $84.3 million in
the quarter ended March 31, 2005, from $81.5 million in the quarter ended March 31, 2004. The
increase was due to the following factors: Payroll and related expenses increased by $138,000, or 0.4%, to $36.4 million in the quarter
ended March 31, 2005, from $36.3 million in the quarter ended March 31, 2004. This increase was
principally attributable to the following:  
    Payroll costs directly related to personal training, group exclusives and programming
for children increased $1.5 million, or
28.2%, due to an increase in revenue generated from these programs. Payroll also increased
due to a 6.2% increase
in the total months of club operation from 387 to 411.
    In the first quarter of 2004 we recorded a $492,000 charge related to deferred sales
commissions, because at the time the
costs incurred exceeded the initial enrollment fees we received. GAAP requires that we must
recognize the loss
immediately. For the quarter ended March 31, 2005, we did not incur a deffered sales
commission write-off because our
enrollment fees received exceeded the related costs. This partially offsets the increases in
payroll discussed above.
    Another offset to the increases in payroll related to the $1.1 million one-time bonus
received by vested option holders in the
first quarter of 2004, while no such bonus payment was made in 2005. Club operating expenses increased by $3.6 million, or 12.9%, to $31.5 million in the quarter
ended March 31, 2005, from $27.9 million in the quarter ended March 31, 2004. This increase was
principally attributable to the following:  
    A $1.6 million increase in rent and occupancy expenses. Clubs that have opened or
expanded since March 31, 2003 contributed $1.0 million of the increase and $663,000 relates to
our 124 clubs that have been open for over 24 months.
    Club operating supplies and services intended to improve the member experience
increased $663,000.
    Advertising and marketing increased $625,000, or 28.0%, due to increased efforts to
attract new members.
    Credit card fees increased $265,000, or 15.9%, principally due to increases in revenue
and processed deferred revenue.
    Utilities have increased $255,000, or 7.4%, due to an increase in club square footage. 19




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##### Table of Contents



General and administrative expenses increased $451,000 or 7.2% to $6.7 million in the quarter
ended March 31, 2005 from $6.2 million in the quarter ended March 31, 2004. This increase was
principally attributable to the following:  
    Accounting consulting increased by $365,000 principally due to increases in consulting
with respect to the
Sarbanes-Oxley Act  Section 404 preparedness
    Increases in a variety of other general and administrative expenses were offset by a
$218,000 decrease in liability insurance. Depreciation and amortization increased by $622,000, or 6.8%, to $9.7 million in the quarter
ended March 31, 2005, from $9.1 million in the quarter ended March 31, 2004 principally due to new
and expanded clubs. Goodwil Impairment:In the quarter ended March 31, 2004 the Company performed its annual
impairment test and determined that the goodwill at one of its remote clubs were not recoverable.
The goodwill impairment amounted to $2.0 million. A deferred tax benefit of $881,000 has been
recorded in connection with this impairment. Since this club is remote form one of the Companys
clusters, it does not benefit from the competitive advantage that our clustered clubs have, and as
a result it is more susceptible to competion. We have reduced our projections for future cash
flows of this club to take into account the impact of a recent opening of a competitor. While this
club is expected to generate cash flow in the future, we not longer expect it to operate at the
levels that were projected at the time the club was acquired. There was no goodwill impairment
from the 2005 annual impairment testing. Interest Expense.Interest expense increased $1.3 million to $10.1 million during the quarter
ended March 31, 2005 from $8.8 million in the quarter ended March 31, 2004. This increase is due
to the issuance of the Discount Notes in February 2004. Interest Income.Interest income increased $195,000 to $369,000 in the quarter ended March 31,
2005 from $174,000 in the quarter ended March 31, 2004 due to increases in cash and cash
equivalents as well as increases in the rate of interest earned on invested cash. Provision for Income Tax.We have recorded an income tax provision of $126,000 in the quarter
ended March 31, 2005 compared to a tax benefit of $1.6 million in the quarter ended March 31, 2004. Accreted Dividends on Preferred Stock.In connection with the February 2004 issuance of
Discount Notes , all outstanding preferred stock was redeemed. Therefore, we did not accrete
dividends in the first quarter of 2005, while in 2004 $783,000 of dividends were accreted. Liquidity and Capital Resources Historically, we have satisfied our liquidity needs through cash from operations and various
borrowing arrangements. Principal liquidity needs have included the acquisition and development of
new clubs, debt service requirements and other capital expenditures necessary to upgrade, expand
and renovate existing clubs. Operating Activities.Net cash provided by operating activities for the three months ended
March 31, 2005 was $24.9 million compared to $19.7 million during the three months ended March 31,
2004. Net cash flows from operations have increased due to the increase in operating income
excluding the effects of noncash interest expense, depreciation and amortization and goodwill
impairment. Net changes in operating assets and liabilities, including the increase in deferred
revenue, have further contributed to the increase in cash flows from operations. Excluding the effects of cash and cash equivalent balances, we normally operate with a working
capital deficit because we receive dues and program and services fees either (i) during the month
services are rendered, or (ii) when paid-in-full, in advance. As a result, we typically do not have
significant accounts receivable. We record deferred liabilities for revenue received in advance in
connection with dues and services paid-in-full and for initiation fees paid at the time of
enrollment. Initiation fees received are deferred and amortized over a 24-month period, which
represents the approximate life of a member. At the time a member joins our club we incur
enrollment costs which are deferred over 24 months. These costs typically offset the impact
initiation fees have on working capital. We do not believe we will have to finance this working
capital deficit in the foreseeable future, because as we increase the number of clubs open, we
expect we will continue to have deferred revenue balances that reflect services and dues that are
paid-in-full in advance at levels similar to, or greater than, those currently maintained. The
deferred revenue balances that give rise to this working capital deficit represent cash received in
advance of services performed, and do not represent liabilities that must be funded with cash. Investing Activities.We invested $10.2 million and $8.2 million in capital expenditures and during
the three months ended March 31, 2005 and 2004, respectively. For the year ended December 31, 2005,
we are committed to invest an additional $53.0 million in capital expenditures, which includes $8.0
million that management intends to invest to expand and renovate certain existing clubs, $13.9 20




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##### Table of Contents



million to continue to upgrade existing clubs and $2.4 million to enhance our management
information systems. The remainder of our 2005 capital expenditures will be committed to build or
acquire clubs. Total committed capital expenditures for the full year ended December 31, 2005 total
$63.3 million. We expect that these expenditures will be funded by cash flow provided by operations
and available cash on hand. Financing Activities.Net cash used in financing activities was $389,000 for the three months
ended March 31, 2005 compared to net cash provided by financing activities of $1.4 million for the
same period in 2004. On February 4, 2004, TSI Holdings successfully completed an offering of 11.0% Senior Discount
Notes (the Discount Notes) that will mature in February 2014. TSI Holdings received a total of
$124.8 million in connection with this issuance. Fees and expenses related to this transaction
totaled approximately $4.4 million. No cash interest is required to be paid prior to February 2009.
The accreted value of each Discount Note will increase from the date of issuance until February 1,
2009, at a rate of 11.0% per annum compounded semi-annually such that on February 1, 2009 the
accreted value will equal $213.0 million, the aggregate principal amount due at maturity.
Subsequent to February 1, 2009 cash interest on the Discount Notes will accrue and be payable
semi-annually in arrears February 1 and August 1 of each year, commencing August 1, 2009. The
Discount Notes are structurally subordinated and effectively rank junior to all indebtedness of
TSI. TSI Holdings debt is not guaranteed or secured by the assets of TSI, and TSI Holdings relies
on the cash flows of TSI to service its debt. The indenture governing the Senior Notes described
below contains restrictions on payments by TSI to TSI Holdings On February 6, 2004, all of TSI Holdings outstanding Series A stock and Series B stock were
redeemed for a total of $50.6 million. On March 12, 2004, 65,536 vested common stock options of TSI Holdings were exercised. TSI
Holdings received $539,000 in cash related to these exercises. On March 15, 2004, the Board of Directors of TSI Holdings approved a common stock distribution
of $52.50 per share to all shareholders of record on March 15, 2004. This distribution totaled
$68.9 million and was paid on March 17, 2004. Also, in lieu of a common stock distribution, TSI
Holdings vested common option holders were paid a total of $1.1 million recorded as payroll
expense at the TSI level under GAAP. As of March 31, 2005, our total consolidated debt was $400.0 million. This substantial amount
of debt could have significant consequences, including:  
    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 $24.5 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. These limitations and consequences may place us at a competitive disadvantage to other
less-leveraged competitors. As of March 31, 2005, TSI had $255.0 million of Senior Notes outstanding. The Senior Notes
bear interest at a rate of 9 5/8% and mature in 2011. Under the provisions of the Senior Note
Indenture, TSI may not issue additional Senior Notes without modification of the indenture with the
bondholders consent. The Senior Credit Facility contains various covenants including limits on capital
expenditures, the maintenance of a consolidated interest coverage ratio of not less than 2.75:1.00
during 2005, and a maximum permitted total leverage ratio of 3.75:1.00 through December 30, 2005
and 3.5 to 1.00 from December 31, 2005 through December 30, 2006. TSIs interest coverage and
leverage ratios were 3.25 to 1.00 and 3.32 to 1.00 respectively as of March 31, 2005. Given the
Companys operating plans and expected performance for 2005, the Company expects it will continue
to be in compliance with its covenants. These covenants limit TSIs ability to incur additional
debt, and as of March 31, 2005 TSIs permitted borrowing capacity under the line of credit totaled
$34,616. Loans under the Senior Credit Facility will, at TSIs option, bear interest at either the
banks prime rate plus 3.0% or the Eurodollar 21




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rate plus 4.0%, as defined. There were no borrowings outstanding at March 31, 2005 and
outstanding letters of credit issued totaled $5.5 million. TSI is required to pay a commitment fee
of 0.75% per annum on the daily unutilized amount. The unutilized portion of the Senior Credit
Facility as of March 31, 2005 was $44.5 million. The line of credit accrues interest at variable
rates based on market conditions, accordingly, future increases in interest rates could have a
negative impact on net income should borrowings be required. As of March 31, 2005, we had $71.8 million of cash and cash equivalents. Our common stock is not publicly traded and therefore our ability to raise equity financing is
not as readily available as it is for companies that have publicly traded common stock. We believe that we have or will be able to obtain or generate sufficient funds to finance
our current operating and growth plans through the end of 2006. Any material acceleration or
expansion of our plans through additional greenfields or acquisitions (to the extent such
acquisitions include cash payments) may require us to pursue additional sources of financing prior
to the end of 2006. There can be no assurance that such financing will be available, or that it
will be available on acceptable terms. Notes payable were incurred upon the acquisition of various clubs and are subject to possible
post acquisition downward adjustments arising out of operations of the acquired clubs. These notes
bear interest at rates between 5% and 9%, and are non-collateralized. The notes are due on various
dates through 2012. The aggregate long-term debt, capital lease, and operating lease obligations as of March 31,
2005 were as follows: Payments Due by Period (in $000)Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    2-3 years
    
    
    4-5 years
    
    
    5 yearsLong-Term Debt (1)
    
    $
    399,963
    
    
    $
    1,237
    
    
    $
    1,453
    
    
    $
    410
    
    
    $
    396,863Operating Lease Obligations (2)
    
    
    685,942
    
    
    
    55,045
    
    
    
    117,666
    
    
    
    110,029
    
    
    
    403,202Total Contractual Cash Obligations
    
    $
    1,085,905
    
    
    $
    56,282
    
    
    $
    119,119
    
    
    $
    110,439
    
    
    $
    800,065
   Notes:(1)
    
    The long-term debt contractual cash obligations include principal payment requirements only.
Interest on our 9 5/8% Senior Notes amounts to $24.5 million annually. Interest on our 11.0%
Discount Notes approximates $15.5 million in 2005.(2)
    
    Operating lease obligations include base rent only. Certain leases provide for additional
rent based on in real estate taxes, common area maintance and defined amounts based on the
operating results of the lessee. Equity Transactions and Restructuring On January 26, 2004, warrants to purchase 71,631 shares of Class A common stock were
exercised. On
February 4, 2004, TSI and its shareholders and TSI Holdings entered into a Restructuring
Agreement (the Restructuring). In connection with this Restructuring, the holders of TSIs Series
A preferred stock, Series B preferred stock and Class A common stock contributed their shares of
TSIs capital stock to TSI Holdings in exchange for an equal amount of newly issued shares of the
same form in TSI Holdings. Immediately following this exchange, TSI Holdings contributed to TSI the
certificates representing all of TSIs shares contributed in the aforementioned exchange. In
return, TSI issued 1,000 shares of common stock to TSI Holdings, and cancelled the certificates
representing TSI shares contributed to it by TSI Holdings. In addition as part of the
Restructuring, all holders of options to purchase Class A common stock of TSI exchanged their
options for options to purchase an equal number of shares of Class A common stock of TSI Holdings
at strike prices adjusted to reflect the Restructuring. On February 6, 2004, all of TSI Holdings outstanding Series A and Series B Preferred stock
were redeemed for a total of $50.6 million. 22




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On March 12, 2004, 65,536 vested common stock options of TSI Holdings were exercised. TSI
Holdings received $539,000 in cash related to these exercises. On March 15, 2004, the Board of Directors of TSI Holdings approved a common stock distribution
of $52.50 per share to all shareholders of record on March 15, 2004. This distribution totaled
$68.9 million and was paid on March 17, 2004. Also, in lieu of a common stock distribution, vested
common option holders were paid a total of $1.1 million recorded as payroll expense at the TSI
level under GAAP. Forward-Looking Statements Certain
statements in this report on Form 10-Q of the Company for the three-month period ended
March 31, 2005 are forward-looking statements, including, without limitation, statements regarding
future financial results and performance, capital expenditures, liquidity and potential sales
revenue. These statements are subject to various risks and uncertainties, many of which are outside
the control of the Company, including the level of market demand for the Companys services,
competitive pressures, the ability to achieve reductions in operating costs and to continue to
integrate acquisitions, the application of Federal and state tax laws and regulations, and other
specific factors discussed herein and in other Securities and Exchange Commission filings by the
Company. The information contained herein represents managements best judgment as of the date
hereof based on information currently available; however, the Company does not intend to update
this information, except as required by law to reflect developments or information obtained after
the date hereof and disclaims any legal obligation to the contrary. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk We do not believe that we have any significant risk related to interest rate fluctuations since we
currently only carry fixed-rate debt. We invest our excess cash in highly liquid short-term
investments. These investments are not held for trading or other speculative purposes. Changes in
interest rates affect the investment income we earn on our cash equivalents and, therefore impact
our cash flows and results of operations. If short-term interest rates were to have increased by
100 basis points during the first fiscal quarter of 2005, our interest income from cash equivalents
would have increased by approximately $164,000. These amounts are determined by considering the
impact of the hypothetical interest rates on our cash equivalents balance during this quarter. For additional information concerning the terms of our fixed-rate debt see Note 6 to our December
31, 2004 financial statements filed with our Form 10K. 
 Item 4.Controls and Procedures. (a) As of March 31, 2005, the Company carried out an evaluation, under the supervision and
with the participation of the Companys management, including the Chairman, Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chairman, Chief Executive Officer and Chief Financial Officer have concluded that,
as of March 31, 2005, the Companys disclosure controls and procedures were reasonably designed and
effective, reasonably ensuring that (i) material information was properly disclosed by the Company in
the reports filed or submitted by the Company under the Exchange Act,
and (ii) such information is accumulated and communicated to our
management, including our Chairman, Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. (b) There have been no changes in the Companys internal controls over financial reporting
during the quarter ended March 31, 2005 that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting. 23




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PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings. On February 13, 2003, in an action styled Joseph Anaya vs. Town Sports International, Inc. et
al.an individual filed suit against us in the Supreme Court, New York County, alleging that on
January 14, 2003, he sustained serious bodily injury at one of our club locations. He filed an
amended complaint on September 17, 2003 seeking two billion dollars in damages for personal
injuries. His cause of action seeking punitive damages, in the amount of $250.0 million dollars,
was dismissed on January 26, 2004. While the Company is unable to determine the ultimate outcome of
the above action, it intends to contest the matter vigorously. We have in force $51.0 million dollars of insurance to cover claims of this nature. If any
such judgment exceeds the amount for which we are covered by insurance by $2.5 million, we would be
in default under the credit agreement governing TSI senior secured revolving credit facility. Also,
if any uninsured judgment, when aggregated with any other judgment not covered by insurance equals
$5.0 million or more, the judgment would constitute an event of default under the indentures
governing the Senior Notes and Discount Notes. It is possible that a final settlement or a award
related to these matters may exceed our insurance coverage. Depending upon the outcome, this matter may have a material effect on our consolidated
financial position, results of operation or cash flow. The Company is a party to various other lawsuits arising in the normal course of business.
Management believes that the ultimate outcome of these matters will not have a material effect on
the Companys consolidated financial position, results of operations or cash flows. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable. 
 Item 3.Defaults Upon Senior Securities. Not applicable. 
 Item 4.Submission of Matters to a Vote of Security Holders. Not applicable. 
 Item 5.Other Information. Not applicable. 
 Item 6.Exhibits. (a) Exhibits Exhibit 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 31.3
    
    Certification by Mark Smith 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.Exhibit 32.3
    
    Certification by Mark Smith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 24




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SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOWN SPORTS INTERNATIONAL HOLDINGS, INC.DATE: May 3, 2005
    By:
    /s/ Richard PyleRichard PyleChief Financial Officer, Office of the President
(principal financial, accounting officer) DATE: May 3, 2005
    By:
    /s/ Robert GiardinaRobert GiardinaChief Executive Officer, Office of the President
(principal executive officer) 25