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                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
/ /  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
   For the fiscal year ended
 
/X/  Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
   For the transition period from June 1, 1998 to December 31, 1998
 
   Commission file number: 333-40907
 
                        TOWN SPORTS INTERNATIONAL, INC.
 
             (Exact name of Registrant as specified in its charter)
 
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<S>                                            <C>
                  NEW YORK                                      13-2749906
       (State or other jurisdiction of             (I.R.S. Employer Identification No.)
       incorporation or organization)
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                               888 SEVENTH AVENUE
                            NEW YORK, NEW YORK 10106
                                 (212)-246-6700
               (Address, including zip code and telephone number,
       including area code, of registrant's principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:  None
 
    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes /X/ No / /
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
 
    The aggregate market value of Common Stock held by non-affiliates of the
registrant: Not applicable
 
    As of March 15, 1999, there were 1,015,714 shares of Class A Common Stock of
the Company outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Certain exhibits filed with the Registrant's Registration Statements on Form
S-1 and Form S-4 (File Nos. 333-61439 and 333-40907, as amended) are
incorporated by reference into Part III of this Report on Form 10-K.
 
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                               TABLE OF CONTENTS
 
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ITEM                                                                                                               PAGE
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             PART I
 
        1.   Business..........................................................................................          2
        2.   Properties........................................................................................         10
        3.   Legal Proceedings.................................................................................         12
        4.   Submission of Matters to a Vote of Security Holders...............................................         13
 
             PART II
 
        5.   Market for Registrant's Common Stock and Related Shareholder Matters..............................         13
        6.   Selected Financial Data...........................................................................         14
        7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.............         16
       7A.   Quantitative and Qualitative Disclosures About Market Risks.......................................         24
        8.   Financial Statements and Supplementary Data.......................................................         24
        9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............         24
 
             PART III
 
       10.   Directors and Executive Officers of the Registrant................................................         24
       11.   Executive Compensation............................................................................         26
       12.   Security Ownership of Certain Beneficial Owners and Management....................................         30
       13.   Certain Relationships and Related Transactions....................................................         31
 
             PART IV
 
       14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................         35
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                        TOWN SPORTS INTERNATIONAL, INC.
                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
    Town Sports International, Inc. (collectively with its subsidiaries, "Town
Sports" or the "Company") is one of the two leading owners and operators of
fitness clubs in the Northeast and Mid-Atlantic regions of the United States. As
of December 31, 1998, the Company operated 69 clubs that collectively served
approximately 179,000 members. The Company develops clusters of clubs to serve
densely populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income of $50,000.
 
    The Company's goal is to develop the premier health club network in each of
the major metropolitan regions in which it operates. Management believes that
clustering clubs allows the Company to achieve strategic operating advantages
that enhance its ability to achieve this goal. When entering new regions, the
Company develops its 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 suburbs and ancillary communities. Capitalizing on this
clustering of clubs, as of December 31, 1998, approximately 45% of the Company's
members participated in a membership plan that allows unlimited access to all of
the Company's clubs for a higher membership fee.
 
    The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its New York Sports Club ("NYSC")
brand name. The Company is the largest fitness club operator in Manhattan with
23 locations and operates a total of 55 clubs under the NYSC name within a
defined radius of New York City. The Company is in the process of more fully
developing clusters within a smaller radius surrounding Washington, DC under its
Washington Sports Club ("WSC") brand name and has begun establishing similar
clusters surrounding Boston and Philadelphia under its Boston Sports Club
("BSC") and Philadelphia Sports Club ("PSC") brand names, respectively. The
Company employs localized brand names for its clubs to create an image and
atmosphere consistent with the local community and to foster recognition as a
local network of quality fitness clubs rather than a national chain.
 
    The Company changed its fiscal year end from May 31 to December 31, which
resulted in a transition period of seven months ended December 31, 1998. The
decision to change the fiscal year was made for more convenience in both
internal and external communications.
 
    The Company has experienced significant growth over the past several years
through a combination of (i) acquiring existing, privately owned, single and
multi-club businesses, and (ii) developing and opening "greenfield" club
locations. From June 1, 1993 to December 31, 1998, the Company acquired 35
existing clubs, opened 16 greenfield clubs, sold one club and closed one club at
the expiration of its lease to increase its total clubs under operation from 20
to 69. The Company plans to acquire or open at least 20 more clubs prior to
December 31, 1999. The Company has achieved revenue growth over the five year
and seven month period ended December 31, 1998 at a compound annual rate of
approximately 38.6% from $24.9 million for the year ended May 31, 1994 to $111.0
million for the twelve months ended December 31, 1998. This growth has been
driven not only by the addition of acquired and greenfield club locations, but
also through comparable club revenue growth, which has ranged from 10.9% to
27.3% for the five year and seven month period ended December 31, 1998 and was
25.5% for the twelve months ended December 31, 1998. Comparable club revenue
growth has enabled the Company to increase revenue per weighted average club
over the five year and seven month period ended December 31, 1998. Revenue per
weighted average club has risen from $1.8 million in fiscal 1994 to $2.1 million
for the
 
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twelve months ended December 31, 1998. Based on the Company's historical
experience, a new club tends to achieve significant increases in revenues during
its first three years of operation as it reaches maturity. Because clubs
experience little incremental cost associated with such revenue increases, the
Company realizes a greater proportionate increase in profitability. This
operating leverage has allowed it to achieve EBITDA growth over the five year
and seven month period ended December 31, 1998 at a compound annual rate of
approximately 45.8% from $3.6 million for the year ended May 31, 1994 to $20.3
million for the twelve month period ended December 31, 1998. The Company's rate
of EBITDA growth from fiscal 1997 to the twelve month period ended December 31,
1998 accelerated to 128.2%
 
    The Company's model club ranges in size from approximately 15,000 to 25,000
square feet and averages approximately 21,000 square feet. Clubs typically have
an open space to accommodate cardiovascular and strength-training exercise, as
well as special purpose rooms to accommodate aerobic class instruction and other
exercise programs. Locker rooms generally include a sauna and steam room.
Management seeks to provide a broad array of high quality exercise programs and
equipment that is both popular and effective, while reinforcing the quality
exercise experience the Company strives to make available to its customers.
While the Company does not generally build locations with amenities such as
swimming pools or racquet and basketball courts, the Company does strive to
establish at least one flagship club that has such amenities in each of its
markets. Management believes that it is generally more economical to acquire
clubs with such amenities than to develop them as greenfield clubs.
 
    Management engages in a detailed site analysis and selection process based
upon information provided by the Company's proprietary development software to
identify potential target areas for additional clubs based upon population
demographics, traffic and commuting patterns, availability of sites and
competitive market information. In addition to the Company's existing 69 clubs
under operation and the 15 sites for which the Company has entered into lease
commitments, management has identified approximately 125 target areas in which
it plans to add clubs under the brand names NYSC, WSC, BSC or PSC. Management
estimates that it will identify approximately 50 additional target areas in
which to add clubs under these brand names. Once the Company begins to approach
saturation of these regions, management will explore expansion opportunities in
contiguous regions along the East Coast and the Mid-Atlantic. Since its
inception, the Company has never closed a club prior to the expiration of a
lease and has closed only one club at the expiration of a lease.
 
    The Company possesses an experienced management team, the top five
executives of which have been working together at the Company since 1990.
Management believes that it has the depth, experience and motivation to manage
the Company's internal and external growth, and that the Company has put in
place the infrastructure and systems to manage effectively the Company's planned
expansion. Management believes that the presence of such infrastructure will
enable the Company over time to leverage certain fixed cost aspects of overhead
to realize increased EBITDA margins as the Company continues to expand its club
base. This operating leverage has already helped the Company to increase its
EBITDA margin by more than 85% to approximately 18.1% for the twelve month
period ended December 31, 1998 compared to approximately 9.7% in fiscal 1997.
 
INDUSTRY OVERVIEW
 
    According to published industry sources, total fitness club industry
revenues have increased at a compound annual rate of approximately 8.6% from
$5.5 billion in 1991 to $9.0 billion in 1997. Over the same period of time,
fitness club memberships have increased at a compound annual rate of 5.1% from
16.7 million to 22.5 million and have increased over 50% since 1987. These
statistics imply that average revenue per member has grown at a compound annual
rate of 3.3% for the industry since 1991. Membership and revenue growth have
dramatically outpaced the growth of fitness clubs, which has grown at a compound
annual rate of only 2.1% to approximately 13,800 in 1997 from approximately
12,150 in 1991. Management believes that fitness clubs, on average, have
experienced significant excess capacity historically. Only more recently has the
industry as a whole experienced the level of membership
 
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and revenue per club to realize the benefits of the inherent operating leverage
in the industry. As a result, fitness club growth accelerated to 5.0% in 1997
and the top 100 fitness club companies planned to open approximately 315 clubs
in 1998, in the aggregate.
 
    Management believes that the growth in fitness club memberships is
attributable to several factors. Americans are focused on achieving a healthier,
more active lifestyle. Of the factors members consider very important in their
decision to join a fitness club, the most commonly mentioned is health, closely
followed by appearance related factors including muscle tone, looking better and
weight control. Management believes that the increased emphasis on appearance
and wellness in the media has heightened the focus on self image and fitness and
will continue to do so. Management also believes that fitness clubs provide a
more convenient venue for exercise than outdoor activities, particularly in
densely populated metropolitan areas. According to published industry reports,
convenience is an important factor in choosing a fitness club.
 
    According to industry sources, the four major trends that are driving
changes in the health and fitness industry include: (i) an influx of
institutional capital investment is leading a transformation of club ownership
from private to public; (ii) large operators are beginning to build regional and
national platforms to consolidate the industry and, in turn, are providing
liquidity for many small operators; (iii) the aging of the American population
is creating an awareness of and a need for healthy living and physical fitness;
(iv) insurers are beginning to partner with corporations to promote preventative
healthcare programs such as fitness clubs memberships.
 
    Across the industry, monthly membership dues have averaged between $54.00
and $58.00 per month for a single adult from 1994 through 1997. Around this
average monthly fee, management believes the industry can be segregated into
three tiers based upon price, service and quality: (i) an upper tier consisting
of clubs with monthly membership dues averaging in excess of $80.00 per month;
(ii) a middle tier consisting of clubs with monthly membership dues averaging
between $80.00 and $40.00 per month; and (ii) a lower tier consisting of clubs
with monthly membership dues averaging less than $40.00 per month. The Company
competes in the middle tier in terms of pricing and is positioned toward the
upper end of this tier. Based upon the quality and service the Company provides
its members, management believes that the Company provides an attractive value
to its members at the monthly membership dues it charges.
 
    The fitness club industry is highly fragmented. In 1997, the ten largest
operators accounted for less than 8.0% of total club ownership and approximately
17.2% of total industry revenues. In addition, approximately 65.0% of the total
industry clubs are operated by single club operators. Based upon this data,
management believes that considerable consolidation will occur in the industry.
According to published industry data, excluding the Company, the ten largest
industry participants planned to acquire approximately 50 clubs in 1998. The
Company expects to play a significant role as a consolidator on a regional
basis.
 
MARKETING
 
    The Company's marketing campaign is directed by its in-house media
department which is headed by the Chief Operating Officer. This team develops
advertising strategies to convey each of the Company's regionally branded
networks as the premier network of fitness clubs in that region. Advertisements
are designed to highlight the consistent quality and high value-to-price ratio
management believes the Company provides through a combination of its membership
programs, club facilities and personnel. The media team's goal is to achieve
broad awareness of the Company's regional brand names primarily through
newspaper, billboard, radio, television and direct mail advertising. Management
believes that the Company's clustering of clubs creates economies in its
marketing and advertising strategy that increase the efficiency and
effectiveness of these campaigns.
 
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    Advertisements generally feature creative slogans that communicate the
serious approach the Company takes toward fitness in a provocative and/or
humorous tone, rather than pictures of the Company's clubs or members
exercising. The Company does not advertise discounts on monthly membership dues.
Promotional marketing campaigns will typically feature opportunities to
participate in value-added services such as personal training for a limited time
at a discount to the standard rate. On occasion, the Company will also offer
reduced initiation fees to encourage enrollment. Additionally, the Company
frequently sponsors member referral incentive programs. Approximately one-third
of the Company's new members cite a referral from an existing member as a reason
for joining. Such incentive programs include a free month of membership,
personal training sessions, sports equipment such as a free gym bag or a gift
certificate for other in-club purchases. In addition, the Company maintains four
Internet sites that provide information about club locations, program offerings
and on-line promotions.
 
    The Company also engages in public relations and special events to promote
its image in the local communities. Management believes that these public
relations efforts enhance the Company's image and the image of its local brand
names in the communities in which it operates. The Company also seeks to build
its community image through co-operative advertising campaigns with local
sporting goods retailers.
 
SALES
 
    Sales of new memberships are generally handled at the club level. The
Company employs approximately 175 "in-club" membership consultants who are
responsible for new membership sales. Each club generally has two full-time and
one part-time membership consultants. These consultants report both to the
general manager of the club as well as to one of the Company's seven area sales
managers, who in turn report to the Company's Vice President Sales. Membership
consultants' compensation consists of a base salary plus commission. Sales
commissions range from $45.00 to $65.00 per new member enrolled. The Company
provides additional incentive-based compensation in the form of bonuses
contingent upon individual, club and Company-wide enrollment goals. Membership
consultants must successfully complete a three-month, in-house training program
through which they learn the Company's sales strategy. In making a sales
presentation, membership consultants emphasize: (i) the proximity of its clubs
to concentrated commercial and residential areas convenient to where target
members live and work; (ii) the lack of a long-term obligation on the part of
the enrollee; (iii) the price value relationship of a Town Sports membership;
and (iv) access to value-added services. All of the Company's area sales
managers have been promoted from within the Company to their current positions.
Management believes that providing employees with opportunities for career
advancement is essential to the Company's ability to attract and retain
qualified sales personnel. The Company also employs a full-time corporate sales
manager whose sole responsibility is to solicit group memberships through senior
level corporate contacts.
 
    Management believes that clustering clubs allows the Company to sell
memberships based upon the opportunity for members to utilize multiple club
locations to differing degrees. The Company has streamlined its membership
structure to simplify the sales process. In addition, the proprietary
centralized computer software utilized by the Company ensures consistency of
pricing and controls enrollment processing at the club level. The Company offers
three principal types of memberships:
 
        THE PASSPORT MEMBERSHIP, priced from $74.00 to $79.00 per month, is the
    Company's highest priced membership and entitles members to use any Town
    Sports club at any time. This membership is held by approximately 45.0% of
    members.
 
        THE GOLD MEMBERSHIP, priced from $49.00 to $74.00 per month based on the
    market area of enrollment, enables members to use a specific club, or a
    group of specific clubs, at any time and any Town Sports club during
    off-peak times. This membership is held by over 53.5% of members.
 
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        THE OFF-PEAK MEMBERSHIP, priced from $44.00 to $66.00 per month, is the
    least expensive membership, and allows members to use any Town Sports club
    only during off-peak times. This membership is held by approximately 1.5% of
    members.
 
    By clustering a group of clubs in a geographic area, the value of Company
memberships is enhanced by the ability to offer Passport Memberships, which
allow the member to use any Company club at any time. Approximately 45.0% of all
members choose the Passport Membership option. Management believes the
popularity of the Passport Membership results from the broader privileges and
greater convenience this membership plan provides through the opportunity for
members to access club facilities near to both their homes and offices.
Management also believes that Passport Memberships will increase as a percentage
of total memberships as the Company continues to build its clusters in the
Washington, DC, Boston and Philadelphia regions. The Boston and Philadelphia
regions, in particular, have not yet developed the critical mass to support
substantial sales of Passport Memberships. The Company's clustering strategy
also allows it to provide access to special facilities such as squash, tennis,
basketball and racquetball courts and swimming pools through flagship locations
strategically located in key target areas without offering such facilities in
every location.
 
    In joining a club, a new member signs a membership agreement which obligates
the member to pay a one-time initiation fee and monthly dues on an ongoing
basis. For the twelve months ended December 31, 1998, initiation fees averaged
$105.13. Monthly membership dues averaged approximately $64.47 per month during
that same period. The Company collects approximately 89.3% of all monthly
membership dues through Electronic Funds Transfer "EFT". Substantially all other
monthly membership dues are paid in advance. EFT members can generally cancel
memberships at any time upon 30 days notice. Based upon detailed statistical
studies of the membership base at the Company's mature clubs, however, the
average length of the Company's memberships is approximately 24 months. The
membership agreement calls for monthly dues to be collected by EFT based on
credit card or bank account debit authorization contained in the agreement.
Management believes that its EFT program of monthly dues collection provides a
predictable and stable cash flow for the Company, eliminates the traditional
accounts receivable function, and minimizes bad-debt write-offs while providing
a significant competitive advantage in terms of the sales process, dues
collection, working capital management and membership retention. In addition, it
enables the Company to increase its dues in an efficient and consistent manner.
During the first week of each month, the Company receives the EFT dues for that
month by wire transfers initiated by Checkfree Corporation. Discrepancies and
insufficient funds incidents are researched and resolved by an in-house staff
that numbered ten at December 31, 1998. For the three years and seven months
ended December 31, 1998, the Company experienced an average of uncollected EFT
receivables of less than 1.2%.
 
    The Company's total EFT revenue has increased by $5.9 million per month from
$2.4 million in May, 1995 to over $8.3 million in December 1998. While the
Company strongly encourages monthly EFT memberships, approximately 10.7% of the
Company's members (often corporate group members) purchase paid-in-full
memberships for a one year term. Annually the Company raises its monthly dues by
between 1% and 3%.
 
CLUB FORMAT AND LOCATIONS
 
    The Company's clubs are typically located in well-established, higher-income
residential, commercial or mixed urban neighborhoods within major metropolitan
areas which are capable of supporting the development of a cluster of clubs.
Fitness clubs generally have relatively high "retail" visibility, and close
proximity to transportation. In the New York City and Washington, DC markets,
the Company has created clusters of clubs in urban areas and their commuter
suburbs in accordance with the Company's operating strategy of offering its
target members the convenience of multiple locations close to where they live
and work, reciprocal use privileges and standardized facilities and services.
 
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    The Company's clubs generally range in size from 15,000 to 25,000 square
feet and averages approximately 21,000 square feet. Membership for each club
ranges from 2,500 to 4,500 members at maturity. Although club members represent
a cross-section of the population in a given geographic market, the Company's
typical member is college educated, between the ages of 20 and 44 and earns an
annual income of $50,000.
 
    The Company's facilities include state-of-the-art cardiovascular equipment,
including Lifecycles, StairMasters, treadmills, and elliptical motion machines;
strength equipment and free weights, including Cybex, Icarian, Nautilus and
Hammer Strength equipment; group exercise and cycling studio(s); Cardio-Theater
entertainment systems; locker rooms, including shower facilities, towel service,
and other amenities such as saunas and steamrooms; babysitting, and a retail
shop. Personal training services are offered at all locations and massage is
offered at most clubs, each at an additional charge. Additional services and
facilities such as physical therapy programs, swimming pools, basketball,
tennis, racquetball and/or squash courts and climbing walls are available in
flagship locations.
 
CLUB OPERATIONS
 
    The Company emphasizes consistency and quality in all of its club
operations, including:
 
    MANAGEMENT.  The Company believes that its success is largely dependent on
the selection and training of its staff and management. The Company's management
structure is designed, therefore, to support the professional development of
highly motivated managers who will execute the Company's directives and support
growth.
 
    Corporate departments are responsible for each area of club services, such
as exercise classes, fitness programming, personal training, facility and
equipment maintenance, housekeeping and laundry. This centralization allows
local general managers at each club to focus on customer service, club staffing
and providing a high quality exercise experience. General managers are
responsible for the day-to-day management of each club, and directly report to
area managers, who liaise with corporate staff ensuring consistent service at
all locations.
 
    The Company provides performance-based incentives to its management. Senior
management compensation, for example, is tied to overall Company performance.
Departmental directors, area managers and general managers have bonuses tied to
financial and member retention targets for a particular club or group of clubs.
 
    PERSONAL TRAINING.  All of the Company's fitness clubs offer one-on-one
personal training, which is sold by the single session or in multi-session
packages, to assist the Company's members with their daily workouts. Personal
trainers are divided into three tiers: House Trainers, Professional Trainers and
Master Trainers. House Trainers are stationed on a club's fitness floor to
provide orientations to new members and to assist with the operation of
equipment. House Trainers who exhibit superior skills receive a commission on
personal training sessions. House Trainers become Professional Trainers once
they have completed the Company's advanced certification program. As a
Professional Trainer, the employee is entitled to a higher commission on
personal training. Finally, trainers, who have obtained national certification
and have developed an established client base, are permitted to collect the
highest commission and to move from club to club to service club members as a
Master Trainer. The Company believes that its personal training programs provide
valuable guidance to its members and a significant source of incremental revenue
from value-added services for the Company.
 
    GROUP FITNESS.  The Company's commitment to providing a quality workout
experience to its members extends to the employment of program instructors, who
teach aerobics, cycling, strength conditioning, boxing, yoga and step aerobics
classes, among others. The Company's clustering strategy enables it to staff
program instructors and professional personal trainers at more than one club. As
a result, the Company can vary a given club's instructors, while providing
instructors sufficient classes to
 
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effectively and economically treat these instructors as full-time employees. The
Company offers its employees various benefits including; health, dental,
disability, insurance and a 401(k) plan. Management believes the availability of
employee benefits provides the Company a strategic advantage in attracting and
retaining quality program instructors and professional personal trainers and
that this strategic advantage in turn translates into a more consistent and
higher quality workout experience for those members who utilize such services.
All program instructors report to a centralized management structure, headed by
the Director of Programming who is responsible for overseeing auditions and
providing in-house training to keep instructors current in the latest training
techniques and program offerings.
 
PROPRIETARY CENTRALIZED INFORMATION SYSTEMS
 
    The Company has developed a proprietary system to track and analyze sales,
leads, and membership statistics which, in conjunction with its other systems,
allows the Company to track the frequency of member workouts, multi-club
utilization, value-added services and demographic profiles by member, which
enables the Company to develop targeted direct marketing programs and to modify
its broadcast and print advertising to improve consumer response. These systems
also assist the Company in evaluating staffing needs and program offerings. In
addition, the Company relies on certain data gathered through its information
systems to assist in the identification of new markets for clubs and site
selection within those markets.
 
PROPRIETARY SOFTWARE AND INTELLECTUAL PROPERTY
 
    Management believes it has been an industry leader in the use of computer
technology since the mid-1980's. The Company uses information technology in
virtually every area of the business, including business development, sales and
marketing, staffing and other operational systems. The Company has begun a
multi-year information technology project by which it has implemented, among
other things: (i) the industry's first multi-site online contracting system
designed to control membership pricing and streamline the creation, processing
and management of the Company's sales contracts for new members; (ii) a sales
compensation system; (iii) a system that automatically updates existing member
records; (iv) extensive club site development databases; (v) a class exercise
scheduling and payroll system; and (vi) ) a personal training revenue tracking
and payroll system, as part of a larger fitness programming project. Other
elements of this project will include the development and implementation of: (i)
a computerized photo and card-swipe system for member check-in; and (ii) a kiosk
system to be deployed throughout the Town Sports network, which will provide a
range of information and content centered around fitness and services provided
by the Company. Management believes that its information management systems,
which are proprietary in many respects, produce a substantial competitive
advantage.
 
    The Company has registered, and is in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office,
including NEW YORK SPORTS CLUBS, WASHINGTON SPORTS CLUBS, BOSTON SPORTS CLUBS,
PHILADELPHIA SPORTS CLUBS, TSI AND TOWN SPORTS INTERNATIONAL, INC.
 
COMPETITION
 
    The fitness club industry is highly competitive. The Company competes with
other fitness clubs, physical fitness and recreational facilities established by
local governments and hospitals and by businesses for their employees, amenity
and condominium clubs, the YMCA and similar organizations and, to a certain
extent, with racquet and tennis and other athletic clubs, country clubs, weight
reducing salons and the home-use fitness equipment industry. The Company also
competes with other entertainment and retail businesses for the discretionary
income of its target markets. There can be no assurance that the Company will be
able to compete effectively in the future in the markets in which it operates.
Competitors, which may include companies which are larger and have greater
resources than the
 
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Company, may enter these markets to the detriment of the Company. These
competitive conditions may limit the Company's ability to increase dues without
a material loss in membership, attract new members and attract and retain
qualified personnel. Additionally, consolidation in the fitness club industry
could result in increased competition among participants, particularly large
multi-facility operators that are able to compete for attractive acquisition
candidates, thereby increasing costs associated with expansion through both
acquisitions, and lease negotiation and real estate availability for
greenfields.
 
    Management believes that its market leadership, experience and operating
efficiencies enable it to provide the consumer with a superior product in terms
of convenience, quality and affordability. Management believes that there are
significant barriers to entry in its urban markets, including restrictive zoning
laws, lengthy permit processes and a shortage of appropriate real estate, which
could discourage any large competitor from attempting to open a chain of clubs
in these markets. However, such a competitor could enter these markets more
easily through one or a series of acquisitions.
 
EMPLOYEES
 
    At December 31, 1998, the Company had approximately 3,650 employees, of
which approximately 1,200 were employed full-time. Approximately 150 employees
were corporate personnel working in the Manhattan or the Washington, DC offices.
The Company is not a party to any collective bargaining agreement with its
employees. The Company has never experienced any significant labor shortages nor
had any difficulty in obtaining adequate replacements for departing employees
and considers its relations with its employees to be good. Management believes
that it offers its employees benefits (including health, dental, disability,
insurance and a 401(k) plan) which are superior to those generally offered by
its competitors.
 
GOVERNMENT REGULATION
 
    The operations and business practices of the Company are subject to
regulation at the federal, state and, in some cases, local levels. State and
local consumer protection laws and regulations govern the Company's advertising,
sales and other trade practices.
 
    Statutes and regulations affecting the fitness industry have been enacted in
states in which the Company conducts business; many other states into which the
Company may expand have adopted or likely will adopt similar legislation.
Typically, these statutes and regulations prescribe certain forms and provisions
of membership contracts, afford members the right to cancel the contract within
a specified time period after signing, require an escrow of funds received from
pre-opening sales or the posting of a bond or proof of financial responsibility,
and may establish maximum prices for membership contracts and limitations on the
term of contracts. In addition, the Company is subject to numerous other types
of federal and state regulations governing the sale of memberships. These laws
and regulations are subject to varying interpretations by a number of state and
federal enforcement agencies and the courts. The Company maintains internal
review procedures in order to comply with these requirements, and believes that
its activities are in substantial compliance with all applicable statutes, rules
and decisions.
 
    Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days (depending on the
applicable state law) and, in such event, is entitled to a refund of any
initiation fee paid. In addition, the Company's membership contracts provide
that a member may cancel his or her membership at any time for medical reasons
or relocation a certain distance from the nearest club. The specific procedures
for cancellation in these circumstances vary due to differing state laws. In
each instance, the canceling member is entitled to a refund of prepaid amounts
only. Furthermore, where permitted by law, a cancellation fee is due to the
Company upon cancellation and the Company may offset such amount against any
refunds owed.
 
                                       9
<PAGE>
                           FORWARD-LOOKING STATEMENTS
 
    Certain statements in this Annual Report on Form 10-K of the Company for the
seven month period ended December 31, 1998 are forward-looking statements,
including, without limitation, statements regarding future financial results and
performance, potential sales revenue and tax benefits. 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, environmental matters, 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
judgement as of the date hereof based on information currently available;
however, the Company does not intend to update this information to reflect
development or information obtained after the date hereof and disclaims any
legal obligation to the contrary.
 
ITEM 2. PROPERTIES
 
<TABLE>
<CAPTION>
                                                                             DATE OPENED OR
                                                                               MANAGEMENT
LOCATION                                           ADDRESS                       ASSUMED
-----------------------------------  ------------------------------------  -------------------
<S>                                  <C>                                   <C>
NEW YORK SPORTS CLUBS:
 1. Manhattan                        404 Fifth Avenue                      January, 1974
 2. Manhattan                        151 East 86th Street                  January, 1977
 3. Manhattan                        61 West 62nd Street                   July, 1983
 4. Manhattan                        614 Second Avenue                     July, 1986
 5. Manhattan                        30 Cliff Street                       January, 1990
 6. Manhattan                        380 Madison Avenue                    January, 1990
 7. Manhattan                        151 Reade Street                      January, 1990
 8. Manhattan                        1601 Broadway                         September, 1991
 9. Manhattan                        50 West 34th Street                   August, 1992
10. Manhattan                        349 East 76th Street                  April, 1994
11. Manhattan                        248 West 80th Street                  May, 1994
12. Manhattan                        502 Park Avenue                       February, 1995
13. Manhattan                        117 Seventh Avenue South              March, 1995
14. Manhattan                        303 Park Avenue South                 December, 1995
15. Manhattan                        30 Wall Street                        May, 1996
16. Manhattan                        1635 Third Avenue                     October, 1996
17. Manhattan                        575 Lexington Avenue                  November, 1996
18. Manhattan                        278 Eighth Avenue                     December, 1996
19. Manhattan                        200 Madison Avenue                    February, 1997
20. Manhattan                        131 East 31st Street                  February, 1997
21. Manhattan                        2162 Broadway                         November, 1997
22. Manhattan                        633 Third Avenue                      April, 1998
23. Manhattan                        1657 Broadway                         July, 1998
24. Manhattan                        217 Broadway                          March 1999
25. Manhattan+                       34 West 14th Street                   Opening 1999
26. Manhattan+                       503-511 Broadway                      Opening 1999
27. Manhattan+                       23 West 73rd Street                   Opening 1999
28. Manhattan*                       300 West 125th Street                 Opening 1999
29. Manhattan*                       Battery Park City                     Opening 2000
 
30. Brooklyn, NY                     110 Boerum Place                      October 1985
31. Brooklyn, NY                     1736 Shore Parkway                    June, 1998
</TABLE>
 
                                       10
<PAGE>
<TABLE>
<CAPTION>
                                                                             DATE OPENED OR
                                                                               MANAGEMENT
LOCATION                                           ADDRESS                       ASSUMED
-----------------------------------  ------------------------------------  -------------------
<S>                                  <C>                                   <C>
32. Queens, NY                       69-33 Austin Street, Forest Hills     April, 1997
33. Queens, NY                       153-67 A Cross Island Parkway         June, 1998
34. Staten Island, NY                300 West Service Road                 June, 1998
 
35. Great Neck, NY                   15 Barstow Road                       July, 1989
36. Scarsdale, NY                    696 White Plains Road                 October 1995
37. Mamaroneck, NY                   124 Palmer Avenue                     January, 1997
38. White Plains, NY                 1 North Broadway                      September, 1997
39. Croton-on-Hudson, NY             420 South Riverside Drive             January, 1998
40. Nanuet, NY                       58 Demarest Mill Road                 May, 1998
41. Larchmont, NY                    15 Madison Avenue                     December, 1998
42. Oceanside, NY+                   2909 Lincoln Avenue                   Opening 1999
 
43. Stamford, CT                     6 Landmark Square                     December, 1997
44. Stamford, CT                     106 Commerce Road                     January, 1998
45. Danbury, CT                      38 Mill Plain Road                    January, 1998
46. Stamford, CT                     1063 Hope Street                      November, 1998
47. Norwalk, CT                      250 Westport Avenue                   March 1999
 
48. East Brunswick, NJ               8 Cornwall Court                      January, 1990
49. Princeton, NJ                    301 North Harrison Street             May, 1997
50. Freehold, NJ                     200 Daniels Way                       April, 1998
51. Matawan, NJ                      163 Route 34                          April, 1998
52. Old Bridge, NJ                   Gaub Road and Route 516               April, 1998
53. Marlboro, NJ                     34 Route 9 North                      April, 1998
54. Fort Lee, NJ                     1355 15th Street                      June, 1998
55. Ramsey, NJ                       1100 Route 17 North                   June, 1998
56. Mahwah, NJ                       7 Leighton Place                      June, 1998
57. Parsippany, NJ                   2651 Route 10                         August, 1998
58. Springfield, NJ                  215 Morris Avenue                     August, 1998
59. Colonia, NJ                      1250 Route 27                         August, 1998
60. Franklin Park, NJ                3911 Route 27                         August, 1998
61. Plainsboro, NJ                   10 Schalks Crossing                   August, 1998
62. Somerset, NJ                     120 Cedar Grove Lane                  August, 1998
63. Hoboken, NJ                      221 Washington Street                 October 1998
64. West Caldwell, NJ+               Bloomfield Avenue                     Opening 1999
WASHINGTON SPORTS CLUBS:
65. Washington, DC                   214 D Street, S.E.                    January, 1980
66. Washington, DC                   1835 Connecticut Avenue, N.W.         January, 1990
67. Washington, DC                   1990 M Street, N.W.                   February, 1993
68. Washington, DC                   2251 Wisconsin Avenue, N.W.           May, 1994
 
69. Bethesda, MD                     4903 Elm Street                       May, 1994
70. North Bethesda, MD               10400 Old Georgetown Road             June, 1998
71. Germantown, MD                   12623 Wisteria Drive                  July, 1998
 
72. Centreville, VA                  Old Centreville Crossing              December, 1997
73. Alexandria, VA+                  3654 King Street                      Opening 1999
74. Fairfax, VA*                     Lee Highway                           Opening 1999
BOSTON SPORTS CLUBS:
75. Boston, MA                       561 Boylston Street                   November, 1991
</TABLE>
 
                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                             DATE OPENED OR
                                                                               MANAGEMENT
LOCATION                                           ADDRESS                       ASSUMED
-----------------------------------  ------------------------------------  -------------------
<S>                                  <C>                                   <C>
76. Allston, MA                      15 Gorham Street                      July, 1997
77. Boston, MA                       1 Bulfinch Place                      August, 1998
78. Framingham, MA                   Sherwood Plaza, 124 Worcester Rd      September, 1998
79. Weymouth, MA+                    553 Washington Street                 Opening 1999
80. Boston, MA*                      201 Brookline Avenue                  Opening 2000
PHILADELPHIA SPORTS CLUBS:
81. Philadelphia, PA                 220 South 5th Street                  January 1999
82. Philadelphia, PA+                2000 Hamilton Street                  Opening 1999
SWISS SPORTS CLUBS:
83. Basel, Switzerland               St. Johanns-Vorstadt 41               August, 1987
84. Zurich, Switzerland              Glarnischstrasse 35                   August, 1987
</TABLE>
 
------------------------
 
+   Under construction, club in "pre-sales."
 
*   Signed leases for greenfield club development.
 
    In addition to the club locations listed above, the Company owns the 151
East 86th Street location, which houses a Company club and a retail tenant that
generated approximately $500,000 of rental income for the Company during twelve
months ended December 31, 1998. All other clubs occupy leased space pursuant to
long-term leases (generally 15 to 25 years, including options). In the next five
years (ending December 31, 2004), only two of the Company's club leases will
expire without any renewal option.
 
    The Company leases approximately 35,000 square feet of office space in New
York City, and 3,000 square feet of office space in Washington, DC, for
administrative, accounting and general corporate purposes. The Company also
leases warehouse and commercial space in Long Island City, New York, for storage
purposes and for the operation of a centralized laundry facility for certain New
York clubs.
 
    As of December 31, 1998, 65 of the existing clubs were wholly-owned by the
Company and four were managed and/or partly-owned by the Company (the "Managed
Clubs"). The Managed Clubs are controlled by the Company, which acts as either
general partner or managing agent, and are operated by the Company in the same
manner as wholly owned clubs, subject to certain rights held by the Company's
partners or the club owners, according to the applicable partnership or
management agreements. As partner or manager, the Company receives a share of
club cash flow, which varies from club to club, but is typically 40.0%. These
amounts appear on the Company's operating statements as management fees and
other. However, the gross revenue generated by the Managed Clubs (approximately
$7.5 million per year) is not reflected in the financial statements, because the
Managed Clubs are not consolidated. The Company acquired two Managed Clubs
during fiscal 1995 and three Managed Clubs during fiscal 1998 which were
originally party to management agreements with the Company. In the future, the
Company may seek to acquire Managed Clubs, if such opportunities arise.
 
ITEM 3. LEGAL PROCEEDINGS
 
    A claim had been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. A further claim was filed in New York State Supreme Court on April
1998 and was dismissed in December 1998.
 
    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 adverse effect on the Company's business,
results of operations or financial condition.
 
                                       12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    Not applicable
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
    Not applicable
 
                                       13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
 
                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
            (IN THOUSANDS, EXCEPT PER SHARE AND CLUB OPERATING DATA)
 
    Set forth below are selected historical consolidated financial and other
operating data of the Company as of the dates and for the periods presented. The
selected historical consolidated statement of operations data for the years
ended May 31, 1996, 1997, 1998 and the seven months ended December 31, 1998 and
the selected historical consolidated balance sheet data as of May 31, 1997, 1998
and December 31, 1998 were derived from the audited Consolidated Financial
Statements of the Company, which are included herein. The selected historical
consolidated statement of operations data for the seven months ended December
31, 1997 were derived from the unaudited consolidated financial statements of
the Company which are included herein and the selected historical consolidated
balance sheet data as of December 31, 1997 were derived from the unaudited
consolidated financial statements which are not included herein. The selected
historical consolidated statement of operations data for the years ended May 31,
1994 and 1995 and the selected historical consolidated balance sheet data as of
May 31, 1994, 1995 and 1996 were derived from the audited consolidated financial
statements of the Company, which are not included herein. The information
contained in this table and accompanying notes should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes
thereto appearing elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                                            YEAR ENDED MAY 31,
                                                                           -----------------------------------------------------
<S>                                                                        <C>        <C>        <C>        <C>        <C>
                                                                             1994       1995       1996       1997       1998
                                                                           ---------  ---------  ---------  ---------  ---------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................  $  24,890  $  33,349  $  43,755  $  56,567  $  82,350
Operating expenses:
  Payroll and related....................................................     10,799     16,105     18,626     23,321     33,309
  Club operating.........................................................      8,115     11,740     14,542     18,044     25,858
  General and administrative.............................................      2,359      3,321      3,562      3,774      5,825
  Depreciation and amortization..........................................      1,514      2,168      2,929      4,219      7,736
  Compensation expense incurred in connection with stock options(1)......         --        635      1,967      5,933      1,442
                                                                           ---------  ---------  ---------  ---------  ---------
    Operating income (loss)..............................................      2,103       (620)     2,129      1,276      8,180
Interest expense, net of interest income.................................        342        654        952      2,455      5,902
                                                                           ---------  ---------  ---------  ---------  ---------
    Income (loss) before provision (benefit) for income tax..............      1,761     (1,274)     1,177     (1,179)     2,278
Provision (benefit) for income tax.......................................        824       (541)       628       (243)     1,131
Extraordinary item(2)....................................................         --         --         --         --       (782)
Cumulative effect of change in accounting policy(3)......................         --         --         --         --        (88)
                                                                           ---------  ---------  ---------  ---------  ---------
    Net income (loss)....................................................        937       (733)       549       (936)       277
Accreted dividends on preferred stock....................................         --       (258)      (400)    (1,286)    (2,387)
    Net Income (loss) attributable to common stockholders................  $     937  ($    991) $     149  ($  2,222) ($  2,110)
                                                                           ---------  ---------  ---------  ---------  ---------
                                                                           ---------  ---------  ---------  ---------  ---------
OTHER OPERATING DATA:
EBITDA(4)................................................................  $   3,617  $   1,548  $   5,058  $   5,495  $  15,916
EBITDA margin(4).........................................................       14.5%       4.6%      11.6%       9.7%      19.3%
Deferred lease expense...................................................  $   1,017  $   1,232  $   1,277  $   1,620  $   2,671
Cash provided by (used in):
  Operating activities...................................................      2,839      3,283      5,695     12,302     15,733
  Investing activities...................................................     (5,648)    (7,674)    (5,487)   (13,571)   (36,040)
  Financing activities...................................................  $   2,910  $   4,244  $     144  $   2,809  $  40,836
New clubs opened(5)......................................................          4          2          2          3          1
Clubs acquired(5)........................................................         --         --          1          5         13
Wholly owned clubs operated at end of period(5)..........................         16         20         23         28         45
Total clubs operated at end of period(6).................................         23         25         28         35         49
Members at end of period(7)..............................................     38,300     48,300     54,800     78,600    125,100
Comparable club revenue increase(8)......................................       10.9%      14.7%      27.3%      17.7%      26.2%
Revenue per weighted average club(9).....................................  $   1,809  $   1,794  $   2,017  $   2,267  $   2,287
</TABLE>
 
                                       14
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                                  SEVEN MONTHS
                                                                                                               ENDED DECEMBER 31,
                                                                                                              --------------------
<S>                                                                                                           <C>        <C>
                                                                                                                1997       1998
                                                                                                              ---------  ---------
STATEMENT OF OPERATIONS DATA:
Revenues....................................................................................................  $  42,990  $  71,662
Operating expenses:
  Payroll and related.......................................................................................     17,621     28,001
  Club operating............................................................................................     13,258     24,261
  General and administrative................................................................................      2,742      5,828
  Depreciation and amortization.............................................................................      3,944      8,818
  Compensation expense incurred in connection with stock options(1).........................................        397        434
                                                                                                              ---------  ---------
    Operating income........................................................................................      5,028      4,320
Interest expense, net of interest income....................................................................      3,270      5,279
                                                                                                              ---------  ---------
    Income (loss) before provision (benefit) for income tax.................................................      1,758       (959)
Provision (benefit) for income tax..........................................................................        888       (399)
Extraordinary item(2).......................................................................................       (782)        --
Cumulative effect of change in accounting policy(3).........................................................        (88)        --
                                                                                                              ---------  ---------
    Net income (loss).......................................................................................         --       (560)
Accreted dividends on preferred stock.......................................................................     (1,485)    (2,146)
    Net (loss) attributable to common stockholders..........................................................  ($  1,485) ($  2,706)
                                                                                                              ---------  ---------
                                                                                                              ---------  ---------
OTHER OPERATING DATA:
EBITDA(4)...................................................................................................      8,972     13,138
EBITDA margin(4)............................................................................................       20.9%      18.3%
Deferred lease expense......................................................................................  $   1,354  $   1,493
Cash provided by (used in):
  Operating activities......................................................................................      7,193      7,393
  Investing activities......................................................................................    (12,362)   (47,352)
  Financing activities......................................................................................  $  42,361  $  36,116
New clubs opened(5).........................................................................................         --          4
Clubs acquired(5)...........................................................................................          5         16
Wholly owned clubs operated at end of period(5).............................................................         35         65
Total clubs operated at end of period(6)....................................................................         40         69
Members at end of period(7).................................................................................     99,900    178,700
Comparable club revenue increase(8).........................................................................       24.1%      25.5%
Revenue per weighted average club(9)........................................................................  $   1,289  $   1,184
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                      AS OF DECEMBER
                                                                       AS OF MAY 31,                       31,
                                                        -------------------------------------------  ----------------
                                                         1994     1995     1996     1997     1998     1997     1998
                                                        -------  -------  -------  -------  -------  -------  -------
<S>                                                     <C>      <C>      <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:
Working capital.......................................  ($1,219) ($2,329) ($4,048) ($8,436) $ 5,898  $26,772  $   478
Total assets..........................................   18,421   27,274   34,805   52,923  111,977  104,948  157,416
Long-term debt, including current installments........   10,205   10,430   10,453   41,071   88,289   89,368   89,524
Redeemable senior preferred stock.....................    --       --       --       --       --       --      36,735
Stockholders' equity (accumulated deficit)............    2,343    1,987    5,474   (6,951)  (5,107)  (6,342)  (2,333)
</TABLE>
 
------------------------
 
(1) Represents non-cash charges related to the vesting of certain stock options
    issued to management and the accretion of preferred dividends related to
    preferred stock underlying certain of such options.
 
(2) Reflects the write-off of previously capitalized fees and expenses of
    $782,000, net of taxes of $624,000, related to the repayment of certain
    indebtedness. See Note 15 to the Company's Consolidated Financial
    Statements.
 
(3) Prior to fiscal 1998, the Company capitalized direct costs incurred to
    obtain leases for new clubs to be constructed by the Company. During the
    quarter ended May 31, 1998, the Company adopted the provisions of Statement
    of Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5")
    which requires that these costs be expensed as incurred. In connection with
    the adoption of SOP 98-5 the Company, effective June 1, 1997, recorded a
    pre-tax charge of $88,000 net of $70,000 in taxes, as the cumulative effect
    of this accounting change. See Note 2(n) to the Company's Consolidated
    Financial Statements.
 
(4) EBITDA is defined as earnings before interest, taxes, depreciation,
    amortization, extraordinary charges and cumulative effect of changes in
    accounting policy. EBITDA is presented because management believes it
    provides useful information regarding the operating performance and
    financial condition of the Company. EBITDA should not be considered in
    isolation or as a substitute for net income, cash flows, or other
    consolidated income (loss) or cash flow data prepared in accordance with
    GAAP or as a measure of the Company's profitability or liquidity. EBITDA
    Margin is defined as EBITDA as a percentage of revenues.
 
                                       15
<PAGE>
(5) During fiscal 1995, the Company acquired two formerly managed clubs. During
    fiscal 1997, the Company opened or acquired six clubs and closed one club
    upon the expiration of its lease. During fiscal 1998, the Company opened or
    acquired 14 clubs and acquired three formerly managed clubs.
 
(6) Includes all clubs whether wholly-owned or managed.
 
(7) Represents members at wholly-owned clubs only.
 
(8) The Company defines comparable clubs as those clubs operated by the Company
    for at least 13 full months.
 
(9) Revenue per weighted average club is calculated as club revenue divided by
    the product of the total numbers of clubs and their weighted average months
    in operation as a percentage of the total year, or the seven months ended
    December 31 as applicable.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS
 
CHANGE OF FINANCIAL REPORTING PERIOD
 
    The Company changed its fiscal year end from May 31 to December 31, which
resulted in a transition period of seven months ended December 31, 1998. The
decision to change the fiscal year was made for more convenience in both
internal and external communications. To aid comparative analysis, the Company
has elected to present the results of operations for the seven month periods
ended December 31, 1998, and December 31, 1997, unaudited, along with the
previously reported results of operations for the twelve months ended May 31,
1998, and May 31, 1997.
 
INTRODUCTION
 
    The Company is one of the two leading owners and operators of fitness clubs
in the Northeast and Mid-Atlantic regions of the United States. As of December
31, 1998, the Company operated 69 clubs that collectively served approximately
179,000 members. The Company develops clusters of clubs to serve densely
populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income in excess of
$50,000.
 
    The Company's goal is to develop the premier health club network in each of
the major metropolitan regions it enters. Management believes that clustering
clubs allows the Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. In entering new regions, the Company develops
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 suburbs and ancillary communities. Capitalizing on this clustering of
clubs, as of December 31, 1998, approximately half of the Company's members
participated in a membership plan that allows unlimited access to all of the
Company's clubs for a higher membership fee.
 
    The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its NYSC brand name. The Company
is the largest fitness club operator in Manhattan with 23 locations and operates
a total of 55 clubs under the NYSC name within a defined radius of New York
City. The Company is in the process of more fully developing clusters within a
smaller radius surrounding Washington, DC under its WSC brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its BSC
and PSC brand names, respectively. The Company employs localized brand names for
its 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.
 
    The Company's operating and selling expenses are comprised of both fixed and
variable costs. The fixed costs include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commissions, advertising and 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.
 
                                       16
<PAGE>
    During the last several years, the Company has increased revenues and EBITDA
by expanding its club base in the New York, Washington, DC, Boston and other
metropolitan areas along the Northeast Corridor. As a result of the Company's
expanding club base and relatively fixed nature of the Company's operating
costs, the Company's EBITDA has increased from $1.5 million in fiscal 1995 to
$20.3 million for the twelve month period ended December 31, 1998, and EBITDA as
a percentage of revenues has increased from 4.6% to 18.6% over the same period.
Management expects the strong growth in revenues, and EBITDA to continue as the
45 clubs opened or acquired since the beginning of fiscal 1996 continue to
mature. Based on the Company's historical experience, a new club tends to
experience significant increase in revenues during its first three years of
operation as it reaches maturity. Because there is relatively little incremental
cost associated with such increasing revenue, there is a greater proportionate
increase in profitability. The Company believes that the revenues, EBITDA
(before corporate overhead) and operating income (before corporate overhead) of
these 45 clubs will increase as they mature. As a result of the Company's
accelerated expansion program, however, management expects EBITDA and operating
income margins to be negatively impacted in the near term, as further new clubs
are added.
 
COMPARABLE CLUB REVENUE
 
    The Company defines comparable clubs as those clubs that were operated by
the Company for at least 13 full months. The Company's comparable club revenue
increased 25.5%, 26.2%, 17.7%, and 27.3%, for the seven months ended December
31, 1998 and fiscal 1998, 1997 and 1996, respectively.
 
NET LOSSES
 
    The Company incurred a net loss of $560,000, $936,000 and $733,000 for the
seven months ended December 31,1998, fiscal 1997 and fiscal 1995 respectively.
Losses have resulted from a variety of costs, including, but not limited to,
amortization of goodwill and debt financing costs resulting from the Company's
acquisition strategy as well as compensation expense incurred in connection with
the vesting of certain stock options held by management. Increased goodwill,
amortization, depreciation and financing costs associated with future
acquisitions and greenfield club openings will impact profitability and may
result in net losses in the future.
 
RECENT DEVELOPMENTS
 
    The Company acquired two clubs and opened three greenfield clubs from
January 1, 1999 through March 15, 1999. The aggregate purchase price of the
acquired clubs totaled $1,709 which included a cash payment of $1,000 and the
issuance of a note payable totaling $709. In January 1999, the Company commenced
operations in the Philadelphia market with the opening of a new club under the
PSC name.
 
                                       17
<PAGE>
RESULTS OF OPERATIONS
 
    The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                                                         SEVEN MONTHS ENDED
                                                                             YEAR ENDED MAY 31,             DECEMBER 31,
                                                                       -------------------------------  --------------------
<S>                                                                    <C>        <C>        <C>        <C>        <C>
                                                                         1996       1997       1998       1997       1998
                                                                       ---------  ---------  ---------  ---------  ---------
Revenue..............................................................     100.0%     100.0%     100.0%     100.0%     100.0%
Operating Expenses:
Payroll and related..................................................       42.6       41.2       40.4       41.0       39.1
Club operating.......................................................       33.2       31.9       31.4       30.8       33.9
General and administrative...........................................        8.1        6.7        7.1        6.4        8.1
Depreciation and amortization........................................        6.7        7.5        9.4        9.2       12.3
Compensation expense incurred in connection with stock options.......        4.5       10.5        1.8        0.9        0.6
                                                                       ---------  ---------  ---------  ---------  ---------
    Operating income.................................................        4.9        2.2        9.9       11.7        6.0
Interest expense, net of interest income.............................        2.2        4.3        7.2        7.6        7.3
                                                                       ---------  ---------  ---------  ---------  ---------
  Income (loss) before provision (benefit) for income tax............        2.7       (2.1)       2.7        4.1       (1.3)
Provision (benefit) for income tax...................................        1.4       (0.4)       1.4        2.1       (0.5)
Extraordinary item...................................................     --         --           (0.9)      (1.8)    --
Cumulative effect of change in accounting policy.....................     --         --           (0.1)      (0.2)    --
                                                                       ---------  ---------  ---------  ---------  ---------
  Net income (loss)..................................................        1.3       (1.7)       0.3        0.0       (0.8)
Accreted dividend on preferred stock.................................        0.9        2.2        2.9        3.4        3.0
                                                                       ---------  ---------  ---------  ---------  ---------
  Net income (loss) attributable to common stockholders..............       0.4%       (3.9)%      (2.6)%      (3.4)%      (3.8)%
                                                                       ---------  ---------  ---------  ---------  ---------
                                                                       ---------  ---------  ---------  ---------  ---------
</TABLE>
 
SEVEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SEVEN MONTHS ENDED DECEMBER 31,
                                      1997
 
    REVENUES.  Revenues increased approximately $28.7 million, or 66.7%, to
$71.7 million during the seven months ended December 31, 1998 from $43.0 million
in the seven months ended December 31, 1997. This increase resulted primarily
from maturation of the 16 clubs opened or acquired during fiscal 1998
(approximately $13.2 million) and the 20 clubs opened or acquired during the
seven months ended December 31, 1998 (approximately $8.0 million). In addition,
revenues increased during the period by $7.1 million at the Company's mature
clubs resulting from increased membership and non membership revenues such as
private training.
 
    OPERATING EXPENSES.  Operating expenses increased $29.3 million, or 77.4%,
to $67.3 million in the seven months ended December 31, 1998, from $38.0 million
in the seven months ended December 31, 1997. The increase was primarily due to
an 89.5% increase in total months of club operations to 417 in the seven months
ended December 31, 1998 from 220 in the seven months ended December 31, 1997, as
highlighted by the following factors:
 
        Payroll and related increased by $10.4 million, or 58.9% to $28.0
    million in the seven months ended December 31, 1998, from $17.6 million in
    the seven months ended December 31, 1997. This increase was attributable to
    the acquisition or opening of 16 clubs in fiscal 1998 and 20 clubs during
    the seven month period ended December 31, 1998.
 
        Club operating increased by $11.0 million, or 83.0% to $24.3 million in
    the seven months ended December 31, 1998, from $13.3 million in the seven
    months ended December 31, 1997. This increase is attributable to the
    acquisition or opening of 16 clubs in fiscal 1998 and 20 clubs during the
    seven month period ended December 31, 1998.
 
                                       18
<PAGE>
        General and administrative increased by $3.1 million, or 112.5% to $5.8
    million in the seven months ended December 31, 1998, from $2.7 million, in
    the seven months ended December 31, 1997. This increase is attributable to
    expenses associated with the Company's expansion, including the expansion of
    the Company's corporate office and upgrade of the Company's management
    information systems. In addition the Company wrote-off $169,000 of expenses
    associated with the preparation for an initial public offering, which has
    been postponed due to market volatility.
 
        Depreciation and amortization increased by $4.9 million, or 123.6% to
    $8.8 million in the seven months ended December 31, 1998, from $3.9 million
    in the seven months ended December 31, 1997. This increase is attributable
    primarily to the increased fixed and intangible assets arising out of new
    club acquisitions and openings during the seven months ended December 31,
    1998, and depreciation and amortization for fixed asset additions,
    acquisitions or openings since December 31, 1997. Fixed and intangible
    assets acquired during the last five months ended May 31, 1998 totaled $12.6
    million and $9.8 million, respectively. Fixed and intangible assets acquired
    during the first seven months ended December 31, 1998 totaled $33.0 million
    and $20.7 million respectively.
 
        Compensation expense in connection with stock options increased $37,000,
    or 9.3% to $434,000 in the seven months ended December 31, 1998, from
    $397,000 in the seven months ended December 31, 1997, as a result of a
    compounding feature in the calculation of dividends on the Preferred stock
    options.
 
    INTEREST EXPENSE.  Interest expense increased $1.8 million to $5.6 million
during the seven months ended December 31, 1998, from $3.8 million in the seven
months ended December 31, 1997. The increased level of interest expense was
primarily due to a full period of interest related to the Senior Notes (drawn
down in October 1997), as well as drawings under the line of credit to fund
certain acquisitions during 1998.
 
    INTEREST INCOME.  Interest income decreased $254,000 to $272,000 during the
seven months ended December 31, 1998, from $526,000 in the seven months ended
December 31, 1997. The decreased level of interest income was primarily due to
lower cash on hand as the Company invested in acquisitions and new club
construction.
 
    PROVISION (BENEFIT) FOR INCOME TAX. The income tax benefit for the seven
months ended December 31, 1998 was $399,000 compared to a tax expense of
$888,000 for the seven months ended December 31, 1997. During the seven months
ended December 31, 1998, the Company's effective tax rate was impacted by net
operating losses incurred by certain clubs located in states where such losses
could not currently be utilized and higher tax-exempt interest income.
 
    CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY.  In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5 (Accounting for the Costs of Start-up Activities), the Company has
expensed all Organizational Costs capitalized in previous fiscal years.
Accordingly, $158,000 was written off, $88,000 net of a tax effect of $70,000
 
    EXTRAORDINARY ITEM.  During the seven months ended December 31, 1997, the
Company issued 9 3/4% Senior Notes due 2004 pursuant to which the Company repaid
its existing indebtedness. Accordingly, previously capitalized fees and expenses
of $1.4 million relating to the former debt were written off, $782,000 net of a
tax effect of $624,000.
 
    ACCRETED DIVIDENDS ON PREFERRED STOCK.  Accreted dividends on the preferred
stock increased $0.6 million to $2.1 million in the seven months ended December
31, 1998, from $1.5 million in the seven months ended December 31, 1997. This
increase is as a result of a compounding feature in the calculation of the
accretion of dividends on the Series A and B preferred stock, as well as
dividends subsequent to the issuance of redeemable senior preferred stock.
 
                                       19
<PAGE>
   FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
 
    REVENUES.  Revenues increased approximately $25.8 million, or 45.6%, to
$82.4 million during fiscal 1998 from $56.6 million in fiscal 1997. This
increase resulted from the maturation of three clubs opened or acquired during
fiscal 1996 (approximately $3.0 million); the six clubs opened or acquired
during fiscal 1997 (approximately $8.1 million) and 14 clubs opened or acquired
during fiscal 1998 (approximately $10.1 million). In addition, revenues
increased during fiscal 1998 by $4.2 million at the Company's mature clubs.
 
    OPERATING EXPENSES.  Operating expenses increased $18.9 million, or 34.1%,
to $74.2 million in fiscal 1998 from $55.3 million in fiscal 1997. This increase
was primarily due to a 40.4% increase in total months of club operations to 417
in fiscal 1997 from 297 in fiscal 1996, as highlighted by the following factors:
 
        Payroll and related increased by $10.0 million, or 42.8%, to $33.3
    million in fiscal 1998, from $23.3 million in fiscal 1997. This increase was
    attributable to the acquisition or opening of 14 clubs in fiscal 1998 and a
    full year of operating the six clubs opened or acquired in fiscal 1997.
 
        Club operating increased by $7.9 million, or 43.3%, to $25.9 million in
    fiscal 1998, from $18.0 million in fiscal 1997. This increase is
    attributable to the acquisition or opening of 14 clubs in fiscal 1998 and
    the additional expenses attributable to operating the six clubs opened or
    acquired in fiscal 1997.
 
        General and administrative increased by $2.0 million, or 54.3%, to $5.8
    million in fiscal 1998, from $3.8 million. This increase is attributable to
    associated expenses as a result of the Company's expansion, such as the
    expansion of the Company's corporate office, the change in accounting policy
    to expense certain Organizational Costs in the period in which they are
    incurred rather than capitalizing them.
 
        Depreciation and amortization increased by $3.5 million, or 83.4%, to
    $7.7 million in fiscal 1998, from $4.2 million in fiscal 1997. This increase
    is attributable primarily to increased fixed assets and intangible assets
    arising out of new club acquisitions and openings during fiscal 1998, and a
    full year of depreciation and amortization for fixed asset additions,
    acquisitions or openings during fiscal 1997. Intangible assets acquired in
    fiscal 1997 and 1998 totaled $1.7 million and $14.5 million, respectively.
 
        Compensation expense in connection with stock options decreased by $4.5
    million, or 75.7%, to $1.4 million in fiscal 1998, from $5.9 million in
    fiscal 1997. In 1997, this expense was attributable to the adjustment of the
    Company's stock options to fair market value in connection with the
    Recapitalization.
 
    INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense, net of interest
income increased $3.4 million to $5.9 million during fiscal 1998 from $2.5
million in fiscal 1997. The increased level of interest expense was primarily
due to the issuance of the Senior Notes. (See Note 6 to the Consolidated
Financial Statements.)
 
    PROVISION FOR INCOME TAX (BENEFIT). The income tax provision for fiscal 1998
was $1.1 million compared to a tax benefit of $243,000 for fiscal 1997. For
fiscal 1998, the Company's effective tax rate was negatively impacted by high
state and local tax rates combined with a tax rate change. In fiscal 1997, the
income tax benefit was reduced by adjustments to expected tax refunds reduced in
part by the reversal of a valuation allowance on state net operating losses
carryforward, which was no longer needed.
 
    EXTRAORDINARY ITEM.  During fiscal 1998, the Company issued 9 3/4% Senior
Notes due 2004 pursuant to which the Company repaid its existing indebtedness.
Accordingly, previously capitalized fees and expenses of $1.4 million relating
to the former debt were written off, $782,000 net of a tax effect of $624,000.
 
                                       20
<PAGE>
    CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY.  In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5 (Accounting for the Costs of Start-up Activities), the Company has
expensed all Organizational Costs capitalized in previous fiscal years.
Accordingly, $158,000 was written off, $88,000 net of a tax effect of $70,000.
 
    ACCRETED DIVIDENDS ON PREFERRED STOCK.  Accreted dividends on the Preferred
Stock increased $1.1 million to $2.4 million during fiscal 1998, from $1.3
million in fiscal 1997. This increase is the result of the Preferred Stock being
outstanding for a full year in 1998 and for only five months in 1997.
 
   FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
 
    REVENUES.  Revenues increased $12.8 million, or 29.3%, to $56.6 million
during fiscal 1997 from $43.8 million in fiscal 1996. This increase resulted
from the maturation of four clubs opened or acquired during fiscal 1995
(approximately $2.8 million), the three clubs opened or acquired in fiscal 1996
(approximately $4.3 million), and the six clubs opened or acquired in fiscal
1997 (approximately $3.7 million). In addition, revenues increased during fiscal
1997 due to revenue growth at the Company's mature clubs resulting from
membership growth (approximately $2.1 million).
 
    OPERATING EXPENSES.  Operating expenses increased $13.7 million, or 32.8%,
to $55.3 million in fiscal 1997, from $41.6 million in fiscal 1996. This
increase was primarily due to a 16.5% increase in total months of club
operations to 297 in fiscal 1996 from 255 in fiscal 1995, as highlighted by the
following factors:
 
        Payroll and related increased by $4.7 million, or 25.2%, to $23.3
    million in fiscal 1997, from $18.6 million in fiscal 1996. This increase was
    attributable to the acquisition or opening of six clubs in fiscal 1997 and a
    full year of operating the three clubs opened or acquired in fiscal 1996.
 
        Club operating increased by $3.5 million, or 24.1%, to $18.0 million in
    fiscal 1997, from $14.5 million in fiscal 1996. This increase is
    attributable to the acquisition or opening of six clubs in fiscal 1997 and
    the additional expenses attributable to operating three clubs opened or
    acquired by the Company in fiscal 1996.
 
        General and administrative increased by $212,000, or 6.0%, to $3.8
    million in fiscal 1997, from $3.6 million in fiscal 1996.
 
        Depreciation and amortization increased by $1.3 million, or 44.0%, to
    $4.2 million in fiscal 1997, from $2.9 million in fiscal 1996. This increase
    is attributable to the increased fixed assets placed in service and
    intangible assets acquired arising out of acquisition or opening of new
    clubs.
 
        Compensation expense in connection with stock options increased by $3.9
    million, or 201.6%, to $5.9 million in fiscal 1997, from $2.0 million in
    fiscal 1996. In 1997, this expense was attributable to the adjustment of the
    Company's stock options to fair market value in connection with the
    Recapitalization.
 
    INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense net of interest
income, increased $1.5 million to $2.5 million in fiscal 1997 from $1.0 million
in fiscal 1996, primarily as a result of increased indebtedness due to the
Recapitalization during this period.
 
    PROVISION FOR INCOME TAX (BENEFIT). Provision for income tax (benefit)
changed by $871,000 to a benefit of $243,000 in fiscal 1997 from an expense of
$628,000 in fiscal 1996, as a result of the loss after interest expense in
fiscal 1997. The Company's effective tax rate in fiscal 1996 was negatively
impacted by losses at certain of the Company's clubs, incurred in states where
the net operating loss could not be currently utilized. In fiscal 1997, the
income tax benefit was reduced by adjustments to expected tax refunds partially
offset by a reduction in the valuation allowance for the deferred tax assets.
 
    ACCRETED DIVIDENDS ON PREFERRED STOCK.  Accreted dividends on the Preferred
Stock increased $886,000 to $1.3 million during fiscal 1997, from $400,000 in
fiscal 1996. This increase reflects the issuance of the Preferred Stock in
connection with the Recapitalization and redemption of formerly existing
preferred stock.
 
                                       21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
 
    Historically, the Company has satisfied its 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 maintain existing
clubs.
 
    OPERATING ACTIVITIES.  Net cash provided by operating activities for the
seven months ended December 31, 1998 was $7.4 million compared to $7.2 million
during the seven months ended December 31, 1997. This slight increase was
primarily due to improved performance by the Company's mature clubs offset by
recently opened or acquired clubs which are immature and not yet operating at
normal operating margins. Excluding cash and cash equivalents, the Company
normally operates with a working capital deficit because it receives dues or fee
revenue either (i) during the month services are rendered, or (ii) when
paid-in-full, 12 months in advance. As a result, the Company has no material
accounts receivable. In addition, because initiation fees are received at
enrollment and are recognized over the estimated average term of membership, the
Company records a deferred revenue liability. Management believes that the
Company's working capital deficit is an important source of cash flow from
operating activities that it believes will continue to grow as the Company's
membership revenues increase.
 
    INVESTING ACTIVITIES.  The Company invested $47.4 million and $12.4 million
in capital expenditures and asset acquisitions during the seven months ended
December 31, 1998 and 1997, respectively, primarily as a result of the Company's
expansion efforts. The Company estimates that for the year ended December 31,
1999, it will invest an additional amount of approximately $50.0 million in
capital expenditures and asset acquisitions, which includes $16.4 million that
management intends to invest to renovate and expand certain existing clubs, $5.7
million to maintain certain existing clubs and $1.5 million to further upgrade
its management information systems. This expenditure will be funded by cash flow
generated from operations, available cash and credit facilities.
 
    FINANCING ACTIVITIES.  In October 1997, the Company issued $85.0 million
Senior Notes and entered into the Credit Facility. After payment of fees and
expenses of $3.3 million, the Company received net proceeds of $81.7 million, of
which $41.5 million was used for the repayment of certain indebtedness. The
Senior Notes contain certain restrictive covenants and restrict the payment of
dividends. The Credit Facility notes contain restrictive covenants, including a
leverage ratio and interest coverage ratio and dividend payment restrictions and
is collateralized by all the assets of the Company. Other cash flow financing
activities during 1997 and 1998 include borrowings under the Credit Facility and
the repayment of long-term debt.
 
    As of December 31, 1998,the Company has approximately $23.0 million
available under the current Credit Facility, which matures in October 2002, and
has no scheduled amortization requirements. The Credit Facility was recently
amended to allow for maximum borrowings of $25.0 million. Although management
believes that the Company will be able to obtain or generate sufficient funds to
finance the Company's current operating and growth plans through the end of
1999, any material acceleration or expansion of that plan through additional
greenfields or acquisitions (to the extent such acquisitions include cash
payments) may require the Company to pursue additional sources of financing
prior to the end of 1999. There can be no assurance that such financing will be
available or that it will be available on acceptable terms. The inability to
finance such further or accelerated expansion on acceptable terms may negatively
impact the Company's competitive position and or materially adversely affect the
Company's business, results of operations or financial condition.
 
    In November 1998, the Company sold $40.0 million of redeemable senior
preferred stock "Senior stock". After payment of fees and expenses of
approximately $400,000 the Company received net proceeds of $39.6 million. The
Senior stock is redeemable in November 2008, and carries a cumulative
 
                                       22
<PAGE>
12.0% annual dividend which is added to the liquidation value of such preferred
shares, if not paid in cash, at the option of the Company.
 
EFFECT OF RECENT CHANGES IN ACCOUNTING STANDARDS
 
    In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which standardizes the accounting for derivative instruments by
requiring that all derivatives be recognized as assets and liabilities and
measured at fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999.
 
    Based on current estimates, management does not believe that of SFAS No.
133, will have a material effect on the Company's financial statements.
 
INFLATION
 
    The Company believes that inflation has not had a material impact on its
results of operations for the three year and seven month period ended December
31, 1998.
 
YEAR 2000 COMPLIANCE
 
    The Company has implemented a three phase program to identify and resolve
Year 2000 ("Y2K") issues related to the integrity and reliability of its
computerized information systems, computer systems embedded in the machinery and
equipment used in its operations, as well as third party or in-house developed
software. Phase one of the Company's program involved an assessment of Y2K
compliance and has been completed. In phase two of the program, the Company is
modifying, or replacing, and testing all non-Y2K compliant hardware systems.
Completion of Phase two is expected by August 1999. Phase three of the program
involves upgrades, or replacement, and testing all non-Y2K compliant software
and is also expected to be completed by August 1999.
 
    As of December 31, 1998, the Company has spent approximately $250,000 in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $400,000 to
complete phases two and three of the program.
 
    The Company requested documentation regarding Y2K compliance from all of its
suppliers and service providers. As of December 31, 1998, the Company received
confirmations from approximately 75% indicating that they are or will be Y2K
compliant. The Company expects to have further communications with those who
have not responded or have indicated further work was required to achieve Y2K
compliance.
 
    Among other things, the Company's operations depend on the availability of
utility services, principally electricity and reliable performance by
telecommunication services. A substantial disruption in any of these services
due to providers of these services failing to achieve Y2K compliance could have
a significant adverse impact on the Company's financial results depending on the
length and severity of the disruption.
 
    The Company will complete a contingency plan for each of its principal
operations by June 1999. The purpose of the contingency plan is to identify
possible alternatives which could be used in the event of a disruption in the
delivery of essential goods or services and to minimize the effect of such a
disruption.
 
FORWARD-LOOKING STATEMENTS
 
    Certain statements in this Annual Report on Form 10-K of the Company for the
seven month period ended December 31, 1998 are forward-looking statements,
including, without limitation, statements regarding future financial results and
performance, potential sales revenue and tax benefits. These
 
                                       23
<PAGE>
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, environmental
matters, 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 judgement as of the date hereof based on information currently
available; however, the Company does not intend to update this information to
reflect development or information obtained after the date hereof and disclaims
any legal obligation to the contrary.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
    Not applicable
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    The Registrant's financial statements are included in this report beginning
on page F-1.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE
 
    None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The following table sets forth the names, ages and a brief account of the
business experience of each person who is currently a director or executive
officer of the Company.
 
<TABLE>
<CAPTION>
NAME                                                       AGE                            POSITION
-----------------------------------------------------      ---      -----------------------------------------------------
<S>                                                    <C>          <C>
Mark Smith...........................................          39   Chief Executive Officer and Director
Robert Giardina......................................          41   President and Chief Operating Officer
Alexander Alimanestianu..............................          39   Executive Vice President, Development
Richard Pyle.........................................          40   Executive Vice President and Chief Financial Officer
Deborah Smith........................................          39   Senior Vice President, Operations
                                                                    Senior Vice President, Information Management and
Leslie Kimerling.....................................          36   Planning
Keith Alessi.........................................          43   Director
Paul Arnold..........................................          52   Director
Bruce Bruckmann......................................          45   Director
Stephen Edwards......................................          35   Director
Jason Fish...........................................          40   Director
</TABLE>
 
    MARK SMITH joined the Company in 1985 and was appointed Chief Executive
Officer in 1995. Prior to this appointment, he held the position of Executive
Vice President of Development and International Operations. Mr. Smith has also
served as a director of the Company since September 1995. Mr. Smith has had
primary responsibility for the development and/or acquisition of the Company's
clubs since 1990, as well as responsibility for the Company's Managed Clubs in
Switzerland. Before joining the Company, Mr. Smith was a chartered accountant
with Coopers & Lybrand in New York City, London and New Zealand, and a
professional squash player.
 
    ROBERT GIARDINA has served as President and Chief Operating Officer of the
Company since 1992. Mr. Giardina joined the Company in 1981 (when the Company
had four clubs) after six years of
 
                                       24
<PAGE>
employment with other fitness club companies. With over 20 years of experience
in the club industry, Mr. Giardina has expertise in virtually every aspect of
facility management and club operations. In addition to operations, Mr. Giardina
has primary responsibility for sales and marketing.
 
    ALEXANDER ALIMANESTIANU joined the Company in 1990, and became Executive
Vice President, Development in 1995. From 1990 to 1995, Mr. Alimanestianu served
as Vice President and Senior Vice President. Before joining the Company, he
worked as a corporate attorney for six years with one of the Company's outside
law firms. Mr. Alimanestianu has been involved in the development or acquisition
of over 40 of the Company's clubs.
 
    RICHARD PYLE, a British chartered accountant, joined the Company in 1987 and
has been chiefly responsible for the Company's financial matters since that
time, as a Vice President in 1988, Senior Vice President and Chief Financial
Officer in 1992 and Executive Vice President in 1995, successively. Before
joining the Company, Mr. Pyle worked in public accounting (in the United States,
Bermuda, Spain and in England) specializing in the hospitality industry, and as
the corporate controller for a British public company in the leisure industry.
 
    DEBORAH SMITH joined the Company in 1987, and served as Vice President
before her appointment as a Senior Vice President of Operations in 1995. Ms.
Smith has been responsible for the startup and operation of Company clubs in New
York, Switzerland, Maryland and Washington, DC. She oversees club operations in
all U.S. geographic areas.
 
    LESLIE KIMERLING joined the Company in 1994 and became Senior Vice President
in 1995 with responsibility for the development of the Company's information
management and planning capabilities. Prior to joining the Company, Ms.
Kimerling was a management consultant for four years.
 
    KEITH ALESSI has served as a director of the Company since April, 1997. Mr.
Alessi is President, Chief Executive Officer and a director of Telespectrum
Worldwide, Inc., a position he has held since March 1998. From May 1996 to March
1998, Mr. Alessi served as Chairman, President and Chief Executive Officer of
Jackson Hewitt, Inc. Prior to that, Mr. Alessi held various positions with Farm
Fresh, Inc. including Chief Financial Officer and President. Mr. Alessi is also
a director of Cort Business Services, Inc. and Shoppers Food Warehouse Corp.
 
    PAUL ARNOLD has served as a director of the Company since April, 1997. Mr.
Arnold has served as President and Chief Executive Officer of Cort Business
Services, Inc., a leading national supplier of high end rental furniture since
1992.
 
    BRUCE BRUCKMANN has served as a director of the Company since December,
1996. Since 1994, Mr. Bruckmann has served as a principal of BRS. From 1983
until 1994, Mr. Bruckmann served as an officer and subsequently a Managing
Director of Citicorp Venture Capital, Ltd. ("CVC"). Mr. Bruckmann is currently a
director of Mediq Inc., Penhall International, Inc., Jitney Jungle Stores of
America, Inc., Mohawk Industries, Inc., AmeriSource Health Corporation,
Chromcraft Revington Corporation, Cort Business Services, Inc., California Pizza
Kitchen, Inc., Acapulco Restaurants, Inc., and Anvil Knitwear, Inc. and a
director of several private companies.
 
    STEPHEN EDWARDS has served as a director of the Company since December,
1996. Since 1994, Mr. Edwards has served as a principal of BRS. From 1993 until
1994, Mr. Edwards served as an officer of CVC. From 1988 through 1991, he was an
associate of CVC. Prior to joining CVC, Mr. Edwards worked with
Citicorp/Citibank in various corporate finance positions. Mr. Edwards is
currently a director of Anvil Knitwear, Inc. and American Paper Group, Inc., and
a director of several private companies.
 
    JASON FISH has been a director of the Company since December, 1996. Mr. Fish
has been a Managing Member of Farallon Capital Management, L.L.C. ("FCM") and
Farallon Partners, L.L.C., the Farallon's two management entities, since April
1996. Mr. Fish was a General Partner of the Farallon investment
 
                                       25
<PAGE>
partnerships and a Managing Director of FCM's predecessor, Farallon Capital
Management, Inc., from 1990 to 1996.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    The following summarizes, for the fiscal year indicated, the principal
components of compensation for the Company's Chief Executive Officer and the
four highest compensated executive officers (collectively, the "named executive
officers"). The compensation set forth below fully reflects compensation for
work performed on behalf of the Company.
 
<TABLE>
<CAPTION>
                                                      ANNUAL COMPENSATION
                                          -------------------------------------------
                                                                      OTHER ANNUAL         LONG-TERM COMPENSATION
                                            SALARY      BONUS(1)      COMPENSATION           AWARDS COMMON STOCK
 NAME AND PRINCIPAL POSITION    PERIOD        ($)          ($)             ($)          UNDERLYING OPTIONS/ SARS (#)
-----------------------------  ---------  -----------  -----------  -----------------  -------------------------------
<S>                            <C>        <C>          <C>          <C>                <C>
Mark Smith, Chief Executive
  Officer....................     1998(2)     216,600      167,367             --                        --
                                  1998(3)     360,500      330,000             --                        --
                                  1997(3)     350,000      176,000             --                     8,830
 
Robert Giardina, President
  and Chief Operating
  Officer....................     1998(2)     205,429      127,402             --                        --
                                  1998(3)     341,906      250,000             --                        --
                                  1997(3)     331,948      118,000             --                     8,829
 
Richard Pyle, Executive Vice
  President and Chief
  Financial Officer..........     1998(2)     112,596       97,143             --                        --
                                  1998(3)     187,399      187,500             --                        --
                                  1997(3)     181,941       85,000             --                     8,828
 
Alexander Alimanestianu,
  Executive Vice President,
  Development................     1998(2)     112,596       97,143             --                        --
                                  1998(3)     187,399      187,500             --                        --
                                  1997(3)     178,711       85,000             --                     8,828
 
Deborah Smith, Senior Vice
  President, Operations......     1998(2)      90,539       64,539             --                        --
                                  1998(3)     141,100      125,000             --                       400
                                  1997(3)     136,990       63,475             --                     5,350
</TABLE>
 
------------------------
 
(1) Includes annual bonus payments under the Company's Annual Bonus Plan for
    fiscal 1998 and 1997, and Company estimates of annual pro-rated amounts for
    the seven month period ended December 31, 1998.
 
(2) Includes the seven months ended December 31, 1998.
 
(3) Includes the twelve month period ended May 31.
 
                                       26
<PAGE>
OPTION/SAR GRANTS DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1998
 
    There were no options granted by the Company during the seven months ended
December 31, 1998.
 
AGGREGATED OPTION/SAR EXERCISES DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1998
  AND 1998 YEAR-END OPTION/SAR VALUES
 
    The following summarizes exercises of stock options (granted in prior years)
by the named executive officers during the seven months ended December 31, 1998
as well as the number and value of all unexercised options held by the named
executive officers as of December 31, 1998.
 
<TABLE>
<CAPTION>
                                                       EXERCISABLE/UNEXERCISABLE
                                                       -------------------------      EXERCISABLE/UNEXERCISABLE
                                                                                  ----------------------------------
                                                         NUMBER OF SECURITIES
                         SHARES                         OPTIONS/SARS AT FY- END      VALUE OF UNEXERCISED IN-THE-
                        ACQUIRED                                  (#)                   MONEY OPTIONS/SARS AT
                           ON              VALUE        UNDERLYING UNEXERCISED               FY-END($)(1)
                      EXERCISE (#)       REALIZED      -------------------------  ----------------------------------
NAME                     COMMON         ($) COMMON        COMMON      PREFERRED         COMMON           PREFERRED
-------------------  ---------------  ---------------  -------------  ----------  -------------------  -------------
<S>                  <C>              <C>              <C>            <C>         <C>                  <C>
Mark Smith.........        --               --           3,532/5,298    42,812/0      187,196/280,794    1,418,793/0
Robert Giardina....        --               --           3,532/5,297    32,793/0      187,196/280,741    1,086,763/0
Richard Pyle.......        --               --           3,532/5,296    27,569/0      187,196/280,688      913,639/0
Alexander
  Alimanestianu....        --               --           3,532/5,296    27,199/0      187,196/280,688      901,377/0
Deborah Smith......        --               --           2,220/3,530     9,530/0      116,260/181,490      315,825/0
</TABLE>
 
------------------------
 
(1) Value realized is based upon the fair market value of the stock at the
    exercise date minus the exercise price. Fair market value was determined in
    good faith by the Board of Directors and was based upon the historical and
    projected financial performance of the Company.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
    The current members of the Compensation Committee are Bruce Bruckmann,
Stephen Edwards and Mark Smith. Messrs. Bruckmann and Edwards are non-employee
directors of the Company.
 
MANAGEMENT EQUITY AGREEMENTS
 
    Simultaneously with the Recapitalization, the Company entered into Executive
Stock Agreements with certain of the officers and other key employees of the
Company. Pursuant to the Executive Stock Agreements, the executives each have
purchased shares of Common Stock and/or shares of Series B Preferred of the
Company at a purchase price of $1.00 per share of Common Stock and $35.00 per
share of Series B Preferred Stock.
 
EQUITY INCENTIVE PLAN
 
    The Company intends to adopt the Long-Term Equity Incentive Plan (the
"Equity Incentive Plan"), designed to provide incentives to present and future
executive, managerial, marketing, technical and other key employees, and
consultants and advisors of the Company and its subsidiaries ("Participants") as
may be selected in the sole discretion of the Company's Board of Directors. The
Equity Incentive Plan will provide for the granting to participants of the
following types of incentive awards: stock options, stock appreciation rights
("SARs"), restricted stock, performance units, performance grants and other
types of awards that the Compensation Committee of the Board (the "Committee")
deems to be consistent with the purposes of the Equity Incentive Plan. An
aggregate amount of shares of Common Stock (which amount represents
approximately 5.0% of the Company's authorized Common Stock) are reserved for
issuance under the Equity Incentive Plan. The Equity Incentive Plan affords the
Company
 
                                       27
<PAGE>
latitude in tailoring incentive compensation for the retention of key personnel,
to support corporate and business objectives, and to anticipate and respond to a
changing business environment and competitive compensation practices.
 
    The Committee will have exclusive discretion to select the Participants and
to determine the type, size and terms of each award, to modify the terms of
awards, to determine when awards will be granted and paid, and to make all other
determinations which it deems necessary or desirable in the interpretation and
administration of the Equity Incentive Plan. The Equity Incentive Plan will
terminate ten years from the date that is approved and adopted by the
stockholders of the Company, unless extended for up to an additional five years
by action of the Board of Directors. With limited exceptions, including
termination of employment as a result of death, disability or retirement, or
except as otherwise determined by the Committee, rights to these forms of
contingent compensation will be forfeited if a recipient's employment or
performance of services terminates within a specified period following the
award. Generally, a Participant's rights and interest under the Equity Incentive
Plan will not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order.
 
    Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock at
a price fixed by the Committee. The option price may be less than, equal to or
greater than the fair market value of the underlying shares of Common Stock, but
in no event shall the exercise price of an incentive stock option be less than
the fair market value on the date of grant. Options generally will expire no
later than ten years after the date on which they are granted. Options will
become exercisable at such times and in such installments as the Committee shall
determine. Payment of the option price must be made in full at the time of
exercise in such form (including, but not limited to, cash or Common Stock of
the Company) as the Committee may determine.
 
    The Equity Incentive Plan will provide that an SAR may be granted alone, or
in connection with the grant of an option, either at the time of grant of the
related option or by amendment thereafter to an outstanding option. SARs granted
in connection with options shall be exercisable only when, to the extent and on
the condition that, any related option is exercisable. The exercise of an option
shall result in an immediate forfeiture of any related SAR to the extent the
option is exercised, and the exercise of an SAR shall cause an immediate
forfeiture of any related option to the extent the SAR is exercised.
 
    Upon the exercise of an SAR, the Participant shall be entitled to a
distribution in an amount equal to the difference between the fair market value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any option to which
the SAR is related, multiplied by the number of shares of Common Stock as to
which the SAR is exercised. The Committee shall decide whether such distribution
shall be in cash, in shares of Common Stock having a fair market value equal to
such amount, in other securities having a fair market value equal to such amount
or in a combination thereof.
 
    A restricted stock award will be an award of a given number of shares of
Common Stock which are subject to a restriction against transfer and to a risk
of forfeiture, during a period set by the Committee. During the restriction
period, the Participant generally will have the right to vote and receive
dividends on the shares. Dividends received while under restriction will be
treated as compensation.
 
    The Equity Incentive Plan will provide that performance awards are those
whose final value, if any, is determined by the degree to which specified
performance objectives have been achieved during an award period set by the
Committee, subject to such adjustments as the Committee may approve based on
relevant factors. Performance objectives will be based on measures of Company,
unit or Participant performance, or any combination of these and other factors,
as the Committee may determine. The Committee will make such adjustments in the
computation of any performance measure as it deems appropriate. The Committee
shall determine the portion of each performance award that has been earned by a
participant on the basis of the Company's performance over the performance cycle
in
 
                                       28
<PAGE>
relation to the performance goals for such cycle. The earned portion of a
performance award may be paid out in shares of Common Stock, cash, other
securities of the Company, or any combination thereof, as the Committee may
determine.
 
    The Equity Incentive Plan will also provide that, upon the liquidation or
dissolution of the Company, all outstanding awards under the Equity Incentive
Plan shall terminate immediately prior to the consummation of such liquidation
or dissolution, unless otherwise provided by the Committee. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, distribution of assets, or any other change in
the corporate structure or shares of the Company, the Committee shall make such
adjustment as it deems appropriate in the number and kind of shares or other
property reserved for issuance under the Equity Incentive Plan, in the number
and kind of shares or other property covered by grants previously made under the
Equity Incentive Plan, and in the exercise price of outstanding options and
SARs. In the event of any merger, consolidation or other reorganization in which
the Company is not the surviving or continuing entity or in which a change in
control is to occur, all of the Company's obligations regarding options, SARs
performance awards, and restricted stock that were granted hereunder and that
are outstanding on the date of such event shall, on such terms as may be
approved by the Committee prior to such event, be assumed by the surviving or
continuing entity or canceled in exchange for property (including cash).
 
COMPANY BENEFIT PLANS
 
    In April 1996, the Company implemented a 401(k) salary deferral plan (the
"401(k) Plan") which is available to eligible employees, as defined. The 401(k)
Plan provides for the Company to make discretionary contributions. The Company,
however, elected not to make contributions for the seven months ended December
31, 1998, fiscal 1998, 1997 or 1996.
 
                                       29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The following table sets forth (as of December 31, 1998) certain information
with respect to the beneficial ownership of the Common Stock and Preferred Stock
by: (i) each person or entity who owns of record or beneficially more than 5% or
more of any class of the Company's voting securities; (ii) each named executive
officer and director of the Company; and (iii) all directors and named executive
officers of the Company as a group.
 
<TABLE>
<CAPTION>
                                                      PERCENTAGE
                                   COMMON STOCK           OF             REDEEMABLE
                                   BENEFICIALLY      COMMON STOCK          SENIOR            SERIES A          SERIES B
NAME                                 OWNED(1)       OUTSTANDING(1)     PREFERRED STOCK   PREFERRED STOCK   PREFERRED STOCK
--------------------------------  ---------------  -----------------  -----------------  ----------------  ----------------
<S>                               <C>              <C>                <C>                <C>               <C>
BRS (2)
  126 East 56th Street, 29th
  Floor
  New York, New York 10022......       504,456             38.6%                 --             104,330               --
The Farrallon Entities (3)
  One Maritime Plaza, Suite 1325
  San Francisco, California
  94111.........................       270,091             20.7%             20,000              41,045               --
The Canterbury Entities
  600 Fifth Avenue, 23rd Floor
  New York, New York 10020......       139,437             10.7%             15,000                  --               --
Rosewood Capital L.P. (5)
  One Maritime Plaza, Suite 1330
  San Francisco, California
  94111.........................        17,908              1.4%              5,000                  --               --
 
EXECUTIVE OFFICERS AND
  DIRECTORS:
Mark Smith (6)..................        56,432              4.3%                 --                  --           42,812
Robert Giardina (6).............        44,052              3.4%                 --                  --           32,793
Richard Pyle (6)................        37,597              2.9%                 --                  --           27,569
Alexander Alimanestianu (6).....        37,140              2.8%                 --                  --           27,199
Deborah Smith (6)...............        14,946              1.1%                 --                  --           10,080
Bruce C. Bruckmann (7)..........       517,642             39.6%                 --             107,057               --
Stehpen Edwards (8).............       504,456             38.6%                 --             104,330               --
Jason Fish (9)..................       270,091             20.7%             20,000              41,045               --
Paul Arnold.....................             *                 *                 --                 591               --
Keith Alessi....................             *                 *                 --                 591               --
 
EXECUTIVE OFFICERS AND DIRECTORS
  AS A GROUP:
10 Persons (10).................       983,614             75.3%             20,000             149,284          140,453
</TABLE>
 
------------------------
 
*   Represents less than 1%.
 
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
    Exchange Act. In computing the number of shares beneficially owned by a
    person and the percentage ownership of that person, shares of Common Stock
    subject to options held by that person that are currently exercisable or
    exercisable within 60 days of March 15, 1999 are deemed outstanding. Such
    shares, however, are not deemed outstanding for the purposes of computing
    the percentage ownership of any other person.
 
(2) Excludes shares held individually by Mr. Bruckmann and other individuals
    (and affiliates and family members thereof), each of whom are employed by
    BRS.
 
(3) Includes shares held by each of Farallon Capital Partners, L.P., Farallon
    Capital Institutional Partners, L.P., Farallon Capital Institutional
    Partners II, L.P. and R.R. Capital Partners, L.P. (the "Farallon Entities").
    Farallon Partners, L.L.C. is the general partner of each of the Farallon
    Entities. Farallon Partners, L.L.C. disclaims beneficial ownership of such
    shares. Also includes warrants to purchase 71,360 shares of Common Stock
    with an exercise price of $.01 per share and an expiration date of November
    30, 2008.
 
(4) Includes a warrant to purchase 75,714 shares of Common Stock with an
    exercise price of $.01 per share and an expiration date of December 10, 2006
    and warrants to purchase 53,723 shares of Common Stock with an exercise
    price of $.01 and an expiration date of November 15, 2008.
 
                                       30
<PAGE>
(5) Includes warrants to purchase 17,908 shares of Common Stock with an exercise
    price of $.01 per share and an expiration date of November 30, 2008
 
(6) Includes options to acquire, exercisable within 60 days, Common Stock, and
    Series B Preferred Stock options, exercisable within 60 days, pursuant to
    the Old Option Plan and the Preferred Option Plan, respectively. Messrs.
    Smith, Giardina, Pyle, Alimanestianu and Ms. Smith each hold such options on
    8,830, 8,829, 8,828, 8,828 and 5,430 shares of Common Stock, respectively.
    All shares of Series B Preferred Stock beneficially owned by such persons
    are in the form of Series B Options, except with respect to Ms. Smith only,
    9,530 shares are in the form of Series B Options. The address for each of
    these named executive officers is the same as the address of the Company's
    principal executive offices
 
(7) Includes 504,456 shares held by BRS, and approximately 2,276 shares held by
    certain other family members of Mr. Bruckmann. Mr. Bruckmann disclaims
    beneficial ownership of such shares held by BRS.
 
(8) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
    such shares.
 
(9) Includes shares held by each of the Farallon Entities. Mr. Fish is a
    managing member of Farallon Partners, L.L.C., which is the general partner
    of each of the Farallon Entities. Mr. Fish disclaims beneficial ownership of
    such shares.
 
(10) Includes (i) shares held by BRS, which may be deemed to be owned
    beneficially by Messrs. Bruckmann and Edwards, and (ii) shares held by the
    Farallon Entities, which may be deemed to be owned beneficially by Mr. Fish.
    Excluding the shares beneficially owned by BRS and the Farallon Entities,
    the directors and named executive offices as a group beneficially own (i)
    209,067 shares of Common Stock (which represents approximately 16.0% of the
    Common Stock on a fully diluted basis), (ii) no shares of Redeemable Senior
    Preferred Stock, (iii) 3,909 shares of Series A Preferred Stock, and (iv)
    140,453 shares of Series B Preferred Stock.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
THE RECAPITALIZATION
 
    In December 1996, the Company consummated the Recapitalization pursuant to
which, among other things: (i) all shares of the Company's preferred stock
outstanding prior to the Recapitalization were redeemed or converted into shares
of the Company's then authorized common stock ("Old Common Stock"); (ii) all
shares of Old Common Stock (other than shares held by certain members of the
Company's management team) were exchanged for cash; and (iii) BRS and the
Farallon Entities acquired shares of the Company's Common Stock and Series A
Preferred Stock, representing approximately 73.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, certain members of the
Company's management acquired shares of the Company's Common Stock and Series B
Preferred Stock representing approximately 27.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, pursuant to the
Recapitalization, the Company instituted the Old Option Plan and the Preferred
Option Plan, which granted certain members of the Company's management, options
to acquire the Company's Common Stock and Series B Options, respectively.
 
REDEEMABLE SENIOR PREFERRED STOCK
 
    In November 1998, the Company issued 40,000 shares of Redeemable Senior
Preferred Stock ("Senior"). After the payment of fees and expenses of
approximately $400,000 the Company received net proceeds of approximately $39.6
million. The Senior stock is redeemable in November 2008. The Senior stock may,
at the option of the holder, be converted into Common stock upon the initial
public offering of common stock of the Company.
 
REGISTRATION RIGHTS AGREEMENT
 
    In connection with the Recapitalization, the Company, BRS, the Farallon
Entities, Canterbury Mezzanine Capital, L.P. ("CMC"), certain members of
management and other shareholders of the Company entered into a Registration
Rights Agreement, dated December 10, 1996 (as amended on November 13, 1998, in
connection with the issuance of Senior Preferred Stock, the "Registration Rights
Agreement"). Pursuant to the terms of the Registration Rights Agreement, BRS,
the Farallon Entities and CMC have the right to require the Company, at the
expense of the Company and subject to certain limitations, to register under the
Securities Act all or part of the shares of Common Stock (the "Registrable
Securities")
 
                                       31
<PAGE>
held by them. BRS is entitled to demand up to three long-form registrations at
any time and unlimited short-form registrations. Farallon is entitled to demand
one long-form registration (but only one year after the Company has consummated
an initial registered public offering of its Common Stock) and up to three
short-form registrations. CMC is entitled to demand up to two short-form
registrations.
 
    All holders of Registrable Securities are entitled to an unlimited number of
"piggyback" registrations, with the Company paying all expenses of the Offering,
whenever the Company proposes to register its Common Stock under the Securities
Act. Each such holder is subject to certain pro rata limitations on its ability
to participate in such a "piggyback" registration. In addition, pursuant to the
Registration Rights Agreement, the Company has agreed to indemnify all holders
of Registrable Securities against certain liabilities, including certain
liabilities under the Securities Act.
 
PROFESSIONAL SERVICES AGREEMENT AND TRANSACTION FEES
 
    In connection with the Recapitalization, Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS Co."), an affiliate of BRS, and the Company entered into a
Professional Services Agreement, whereby BRS Co. agreed to provide certain
advisory and consulting services to the Company. In exchange for such services,
BRS Co. receives an annual fee of $250,000 per calendar year while they own at
least 20.0% of the outstanding Common Stock of the Company. The Company also
paid BRS Co. and the Farallon Entities transaction fees of $584,000 and
$216,000, respectively for investment banking advisory services rendered to the
Company in connection with the Recapitalization.
 
                                       32
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 15, 1999.
 
                                TOWN SPORTS INTERNATIONAL, INC.
 
                                By:  /s/ MARK SMITH
                                     -----------------------------------------
                                     Mark Smith
                                     CHIEF EXECUTIVE OFFICER
                                       (PRINCIPAL EXECUTIVE OFFICER)
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<S>                             <C>  <C>
                                By:  /s/ MARK SMITH
                                     -----------------------------------------
                                     Mark Smith
                                     CHIEF EXECUTIVE OFFICER
                                       (PRINCIPAL EXECUTIVE OFFICER)
 
                                By:  /s/ RICHARD PYLE
                                     -----------------------------------------
                                     Richard Pyle
                                     EXECUTIVE VICE PRESIDENT AND CHIEF
                                       FINANCIAL OFFICER (PRINCIPAL FINANCIAL
                                       AND ACCOUNTING OFFICER)
 
                                By:  /s/ KEITH ALESSI
                                     -----------------------------------------
                                     Keith Alessi
                                     DIRECTOR
 
                                By:  /s/ PAUL ARNOLD
                                     -----------------------------------------
                                     Paul Arnold
                                     DIRECTOR
 
                                By:  /s/ BRUCE BRUCKMANN
                                     -----------------------------------------
                                     Bruce Bruckmann
                                     DIRECTOR
</TABLE>
 
                                       33
<PAGE>
<TABLE>
<S>                             <C>  <C>
                                By:  /s/ STEPHEN EDWARDS
                                     -----------------------------------------
                                     Stephen Edwards
                                     DIRECTOR
 
                                By:  /s/ JASON FISH
                                     -----------------------------------------
                                     Jason Fish
                                     DIRECTOR
</TABLE>
 
                                       34
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
    (a) Document List
 
    1. Financial Statements
 
    The following consolidated financial statements of the Company are included
in Item 8:
 
<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                             ---------
<S>                                                                                                          <C>
Report of independent accountants..........................................................................        F-1
 
Consolidated balance sheets at May 31, 1997, 1998 and December 31, 1998....................................        F-2
 
Consolidated statements of operations for the years ended May 31, 1996, 1997, 1998, and the seven months
  ended December 31, 1997 (Unaudited) and 1998.............................................................        F-3
 
Consolidated statements of stockholders' equity (deficit) for the years ended May 31, 1996, 1997,1998, and
  the seven months ended December 31, 1998.................................................................        F-4
 
Consolidated statements of cash flows for the years ended May 31, 1996, 1997, 1998, and the seven months
  ended December 31, 1997 (Unaudited) and 1998.............................................................        F-5
 
Notes to consolidated financial statements.................................................................        F-6
 
    2. Financial Statement Schedule includes:
 
Report of independent accountants..........................................................................       F-26
 
Schedule II, Valuation and Qualifying Accounts.............................................................       F-27
</TABLE>
 
    (b) Reports on Form 8-K
 
    The Company filed reports on Form 8-K on January 8, 1999 and on August 26,
1998.
 
    (c) Exhibits:
 
<TABLE>
<C>          <S>
       2.1   Agreement and Plan of Merger dated as of November 8, 1996 by and among the Company,
             various Sellers and Option Holders and TSI Recapitalization Sub, Inc.+
 
       2.2   Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
             Merger Sub, Inc., the Company and certain stockholders and option holders of the
             Company.+
 
       3.1   Amended and Restated Certificate of Incorporation of the Company.+
 
       3.2   By-Laws of the Company.+
 
       3.3   Certificate of Amendment of the Certificate of Incorporation of the Company, dated
             as of November 13, 1998.
 
       4.1   Indenture dated as of October 16, 1997 between the Company and United States Trust
             Company of New York.+
 
       4.2   Purchase Agreement dated as of October 9, 1997 among the Company and BT Alex. Brown
             Incorporated.+
 
       4.3   Registration Rights Agreement dated as of October 16, 1997 among the Company, and
             BT Alex. Brown Incorporated.+
 
       4.4   Registration Rights Agreement dated as of December 10, 1996 by and among the
             Company, BRS and various investors, the Farallon Entities, CMC, and certain Town
             Sports stockholders.+
</TABLE>
 
                                       35
<PAGE>
<TABLE>
<C>          <S>
       4.5   First Amendment to Registration Rights Agreement by and among the Company, BRS,
             CMC, Canterbury Detroit Partners L.P. "CDP", Rosewood Capital Partners L.P. "RC",
             the Farallon Entities and certain other stockholders of the Company, dated as of
             November 13, 1998.
 
      10.1   Amended and Restated Credit Agreement among the Company, Various Lending
             Institutions and Bankers Trust Company, as Administrative Agent dated as of October
             16, 1997.+
 
      10.2   First Amendment to the Amended and Restated Credit Agreement among the Company,
             various Lending Institutions and Bankers Trust Company, as Administrative Agent
             dated as of August 6, 1998.*
 
      10.3   Stock Purchase Agreement among the Company, CMC and CDP, dated as of November 13,
             1998.
 
      10.4   Stock Purchase Agreement among the Company, the Farallon Entities and RC, dated as
             of November 30, 1998.
 
      10.5   Shareholders' Agreement dated as of December 10, 1996 by and among the Company,
             BRS, the Farallon Entities, CMC and certain other stockholders of the Company.+
 
      10.6   Amended and Restated Shareholders' Agreement among the Company, BRS, the Farallon
             Entities, RC, CMC, and CDP, dated as of November 13, 1998.
 
      21.1   Subsidiaries of the Company.
 
      27.1   Financial Data Schedule.
</TABLE>
 
------------------------
 
+  Incorporated by reference to the Registrant's Registration Statement on Form
    S-4, File No. 333-40907.
 
*   Incorporated by reference to the Registrant's Registration Statement on Form
    S-1, File No. 333-61439.
 
                                       36
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
                                          New York, New York
                                          February 16, 1999
 
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
 
    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of TOWN
SPORTS INTERNATIONAL, INC. and SUBSIDIARIES at May 31, 1997 and 1998 and
December 31, 1998, and the results of their operations and their cash flows for
each of the three years ended May 31, 1996, 1997 and 1998 and for the seven
months ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
 
    As discussed in Note 2n to the consolidated financial statements, the
Company changed its method of accounting for organizational costs effective June
1, 1997.
 
                                          PRICEWATERHOUSECOOPERS LLP
 
                                      F-1
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
                    MAY 31, 1997, 1998 AND DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                                                   MAY 31,          DECEMBER 31,
                                                                            ---------------------  --------------
                                                                              1997        1998          1998
                                                                            ---------  ----------  --------------
<S>                                                                         <C>        <C>         <C>
                                                     ASSETS:
Current assets:
  Cash and cash equivalents...............................................  $   2,468  $   22,997    $   19,154
  Accounts receivable.....................................................        312         420           628
  Inventory...............................................................        327         673         1,253
  Prepaid expenses and other current assets...............................        493         677         1,205
  Prepaid corporate income taxes..........................................        202      --            --
                                                                            ---------  ----------  --------------
    Total current assets..................................................      3,802      24,767        22,240
Fixed assets, net.........................................................     34,214      54,518        81,426
Intangible assets, net....................................................      4,425      19,923        37,064
Deferred tax asset........................................................      5,972       7,159         8,570
Deferred membership costs.................................................      3,530       4,933         7,005
Other assets..............................................................        980         677         1,111
                                                                            ---------  ----------  --------------
    Total assets..........................................................  $  52,923  $  111,977    $  157,416
                                                                            ---------  ----------  --------------
                                                                            ---------  ----------  --------------
 
                                     LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
  Current portion of long-term debt and capital lease obligations.........  $   1,924  $    2,036    $    2,191
  Accounts payable........................................................      1,802       2,451         3,711
  Accrued expenses........................................................      4,017       7,869         6,305
  Corporate income taxes payable..........................................     --             122            62
  Deferred revenue........................................................      4,599       6,391         9,493
                                                                            ---------  ----------  --------------
    Total current liabilities.............................................     12,342      18,869        21,762
Long-term debt and capital lease obligations..............................     39,147      86,253        87,333
Deferred lease liabilities................................................      6,625       9,298        10,791
Deferred revenue..........................................................      1,036       1,890         2,446
Other liabilities.........................................................        724         774           682
                                                                            ---------  ----------  --------------
    Total liabilities.....................................................     59,874     117,084       123,014
                                                                            ---------  ----------  --------------
Commitments and contingencies (Notes 6, 7, 8 and 13)
 
Redeemable senior preferred stock, $1.00 par value; liquidation value
  $40,488; authorized 100,000 shares; no shares issued and outstanding at
  May 31, 1997 and 1998, 40,000 shares at December 31, 1998...............     --          --            36,735
                                                                            ---------  ----------  --------------
Stockholders' deficit:
  Series A preferred stock, $1.00 par value; at liquidation value;
    authorized 200,000 shares; issued and outstanding 152,455 shares at
    May 31, 1997, 153,637 shares at May 31, 1998 and December 31, 1998....     16,250      18,736        20,351
  Series B preferred stock, $1.00 par value; at liquidation value;
    authorized 200,000 shares; issued and outstanding 3,857 shares at May
    31, 1997, 1998 and December 31,1998...................................        144         164           179
  Class A voting common stock, $.001 par value; authorized 2,500,000
    shares; issued and outstanding 1,010,000 shares at May 31, 1997,
    1,015,714 shares at May 31, 1998 and December 31, 1998................          1           1             1
  Paid-in capital.........................................................     --           3,994         7,844
  Unearned compensation...................................................     --          (2,546)       (2,546)
  Accumulated deficit.....................................................    (23,346)    (25,456)      (28,162)
                                                                            ---------  ----------  --------------
    Total stockholders' deficit...........................................     (6,951)     (5,107)       (2,333)
                                                                            ---------  ----------  --------------
    Total liabilities and stockholders' deficit...........................  $  52,923  $  111,977    $  157,416
                                                                            ---------  ----------  --------------
                                                                            ---------  ----------  --------------
</TABLE>
 
                See notes to consolidated financial statements.
 
                                      F-2
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                               ALL FIGURES $'000
 
                  FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
 
       AND THE SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
<TABLE>
<CAPTION>
                                                                                             SEVEN MONTHS ENDED
                                                                YEAR ENDED MAY 31,              DECEMBER 31,
                                                          -------------------------------  -----------------------
<S>                                                       <C>        <C>        <C>        <C>           <C>
                                                            1996       1997       1998         1997        1998
                                                          ---------  ---------  ---------  ------------  ---------
 
<CAPTION>
                                                                                           (UNAUDITED)
<S>                                                       <C>        <C>        <C>        <C>           <C>
Revenues:
  Club operations.......................................  $  40,796  $  54,164  $  79,719   $   41,490   $  69,964
  Management fees and other.............................      2,959      2,403      2,631        1,500       1,698
                                                          ---------  ---------  ---------  ------------  ---------
                                                             43,755     56,567     82,350       42,990      71,662
                                                          ---------  ---------  ---------  ------------  ---------
Operating expenses:
  Payroll and related...................................     18,626     23,321     33,309       17,621      28,001
  Club operating........................................     14,542     18,044     25,858       13,258      24,261
  General and administrative............................      3,562      3,774      5,825        2,742       5,828
  Depreciation and amortization.........................      2,929      4,219      7,736        3,944       8,818
  Compensation expense incurred in connection with stock
    options.............................................      1,967      5,933      1,442          397         434
                                                          ---------  ---------  ---------  ------------  ---------
                                                             41,626     55,291     74,170       37,962      67,342
                                                          ---------  ---------  ---------  ------------  ---------
    Operating income....................................      2,129      1,276      8,180        5,028       4,320
Interest expense, net of interest income of $60, $115,
  $1,228, $526 and $272, respectively...................        952      2,455      5,902        3,270       5,279
                                                          ---------  ---------  ---------  ------------  ---------
    Income (loss) before provision (benefit) for
      corporate income taxes............................      1,177     (1,179)     2,278        1,758        (959)
Provision (benefit) for corporate income taxes..........        628       (243)     1,131          888        (399)
                                                          ---------  ---------  ---------  ------------  ---------
    Income (loss) before extraordinary item and
      cumulative effect of change in accounting
      policy............................................        549       (936)     1,147          870        (560)
Extraordinary loss from early extinguishment of debt,
  net of income tax benefit of $624.....................         --         --       (782)        (782)         --
                                                          ---------  ---------  ---------  ------------  ---------
    Income (loss) before cumulative effect of change in
      accounting policy.................................        549       (936)       365           88        (560)
Cumulative effect on prior years of a change in
  accounting for club organizational costs, net of
  income tax benefit of $70.............................         --         --        (88)         (88)         --
                                                          ---------  ---------  ---------  ------------  ---------
    Net income (loss)...................................        549       (936)       277           --        (560)
Accreted dividends on preferred stock...................       (400)    (1,286)    (2,387)      (1,485)     (2,146)
                                                          ---------  ---------  ---------  ------------  ---------
    Net income (loss) attributable to common
      stockholders......................................  $     149  $  (2,222) $  (2,110)  $   (1,485)  $  (2,706)
                                                          ---------  ---------  ---------  ------------  ---------
                                                          ---------  ---------  ---------  ------------  ---------
</TABLE>
 
                See notes to consolidated financial statements.
 
                                      F-3
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                      ALL FIGURES $'000, EXCEPT SHARE DATA
                  FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
                  AND THE SEVEN MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                                                PREFERRED STOCK
                                                              ---------------------------------------------------
                                                              SERIES A ($1.00    SERIES A ($.10   SERIES B ($1.00
                                                                    PAR)              PAR)             PAR)
                                                              ----------------  ----------------  ---------------
                                                              SHARES   AMOUNT   SHARES   AMOUNT   SHARES   AMOUNT
                                                              -------  -------  ------   -------  ------   ------
<S>                                                           <C>      <C>      <C>      <C>      <C>      <C>
Balance at May 31, 1995.....................................                      496
Issuance of Class A Common Stock............................
Issuance of Class A and B Common Stock......................
Accretion of Series B redeemable convertible preferred stock
  dividends ($1.22 per share)...............................
Compensation expense incurred in connection with stock
  options...................................................
Net income..................................................
                                                                                ------   -------
  Balance at May 31, 1996...................................                      496
Liquidation of Series A Preferred Stock, for $1,000 per
  share, redemption of Class A and B Common Stock for a cash
  price of $35 per share and change in equity related to
  exercise of stock options.................................                     (496)
Issuance of Series A and B Preferred and Common Stock at
  cash price of $100, $35 and $1, respectively..............  152,455  $15,245                    3,857     $135
Warrant exercise at $.01 per share..........................
Original issue discount in connection with the issuance of
  warrants and subordinated debt............................
Compensation expense incurred in connection with common
  stock options.............................................
Compensation expense incurred in connection with Series B
  Preferred Stock options...................................
Accretion of Series A and Series B preferred stock dividend
  ($6.59 and $2.32 per share, respectively).................             1,005                                 9
Net loss....................................................
                                                              -------  -------  ------   -------  ------   ------
  Balance at May 31, 1997...................................  152,455   16,250     --         --  3,857      144
                                                                                ------   -------
                                                                                ------   -------
Issuance of Series A Preferred Stock and Class A Common
  Stock.....................................................    1,182      119
Unearned Compensation incurred in connection with common
  stock options.............................................
Amortization of unearned compensation.......................
Compensation expense incurred in connection with Series B
  Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
  ($15.14 and $5.44 per share, respectively)................             2,367                                20
Net income..................................................
                                                              -------  -------                    ------   ------
  Balance at May 31, 1998...................................  153,637   18,736                    3,857      164
Warrant issuance in connection with Redeemable Senior
  Preferred Stock...........................................
Compensation expense incurred with connection with Series B
  Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
  ($10.51 and $3.89 per share, respectively)................             1,615                                15
Accretion of redeemable senior preferred stock dividend
  ($12.20 per share plus accretion to liquidation value)....
Net loss....................................................
                                                              -------  -------                    ------   ------
  Balance at December 31, 1998..............................  153,637  $20,351                    3,857     $179
                                                              -------  -------                    ------   ------
                                                              -------  -------                    ------   ------












<CAPTION>
                                                                                   COMMON STOCK
                                                              ------------------------------------------------------
 
                                                               CLASS A ($.001      CLASS A ($.01         CLASS B
                                                                    PAR)                PAR)           CONVERTIBLE
                                                              -----------------   ----------------   ---------------
                                                               SHARES    AMOUNT    SHARES   AMOUNT   SHARES  AMOUNT
                                                              ---------  ------   --------  ------   ------  -------
<S>                                                           <C>       <C>            <C>            <C>
Balance at May 31, 1995.....................................                       475,000   $ 5
Issuance of Class A Common Stock............................                        87,948     1
Issuance of Class A and B Common Stock......................                        13,358            2,351
Accretion of Series B redeemable convertible preferred stock
  dividends ($1.22 per share)...............................
Compensation expense incurred in connection with stock
  options...................................................
Net income..................................................
                                                                                              --
                                                                                  --------           ------  -------
  Balance at May 31, 1996...................................                       576,306     6      2,351
Liquidation of Series A Preferred Stock, for $1,000 per
  share, redemption of Class A and B Common Stock for a cash
  price of $35 per share and change in equity related to
  exercise of stock options.................................                      (576,306)   (6)    (2,351)
Issuance of Series A and B Preferred and Common Stock at
  cash price of $100, $35 and $1, respectively..............  1,000,000    $1
Warrant exercise at $.01 per share..........................     10,000
Original issue discount in connection with the issuance of
  warrants and subordinated debt............................
Compensation expense incurred in connection with common
  stock options.............................................
Compensation expense incurred in connection with Series B
  Preferred Stock options...................................
Accretion of Series A and Series B preferred stock dividend
  ($6.59 and $2.32 per share, respectively).................
Net loss....................................................
                                                                           --                 --
                                                              ---------           --------           ------  -------
  Balance at May 31, 1997...................................  1,010,000     1           --    --         --       --
                                                                                              --
                                                                                              --
                                                                                  --------           ------  -------
                                                                                  --------           ------  -------
Issuance of Series A Preferred Stock and Class A Common
  Stock.....................................................      5,714    --
Unearned Compensation incurred in connection with common
  stock options.............................................                                                   3,352
Amortization of unearned compensation.......................
Compensation expense incurred in connection with Series B
  Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
  ($15.14 and $5.44 per share, respectively)................
Net income..................................................
                                                                           --
                                                              ---------
  Balance at May 31, 1998...................................  1,015,714     1
Warrant issuance in connection with Redeemable Senior
  Preferred Stock...........................................
Compensation expense incurred with connection with Series B
  Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
  ($10.51 and $3.89 per share, respectively)................
Accretion of redeemable senior preferred stock dividend
  ($12.20 per share plus accretion to liquidation value)....
Net loss....................................................
                                                                           --
                                                              ---------
  Balance at December 31, 1998..............................  1,015,714    $1
                                                                           --
                                                                           --
                                                              ---------
                                                              ---------






<CAPTION>
 
                                                                                       (ACCUMULATED
                                                                                         DEFICIT)          TOTAL
 
                                                              PAID-IN     UNEARNED       RETAINED      STOCKHOLDERS'
 
                                                              CAPITAL   COMPENSATION     EARNINGS     EQUITY (DEFICIT)
 
                                                              --------  ------------   ------------   ----------------
 
Balance at May 31, 1995.....................................  $  1,788                   $    193         $ 1,986
 
Issuance of Class A Common Stock............................     1,371                                      1,372
 
Issuance of Class A and B Common Stock......................       144                                        144
 
Accretion of Series B redeemable convertible preferred stock
  dividends ($1.22 per share)...............................                                 (400)           (400)
 
Compensation expense incurred in connection with stock
  options...................................................     1,823                                      1,823
 
Net income..................................................                                  549             549
 
                                                              --------                 ------------       -------
 
  Balance at May 31, 1996...................................     5,126                        342           5,474
 
Liquidation of Series A Preferred Stock, for $1,000 per
  share, redemption of Class A and B Common Stock for a cash
  price of $35 per share and change in equity related to
  exercise of stock options.................................   (11,228)                   (21,466)        (32,700)
 
Issuance of Series A and B Preferred and Common Stock at
  cash price of $100, $35 and $1, respectively..............      (226)                                    15,155
 
Warrant exercise at $.01 per share..........................
Original issue discount in connection with the issuance of
  warrants and subordinated debt............................       123                                        123
 
Compensation expense incurred in connection with common
  stock options.............................................     5,660                                      5,660
 
Compensation expense incurred in connection with Series B
  Preferred Stock options...................................       273                                        273
 
Accretion of Series A and Series B preferred stock dividend
  ($6.59 and $2.32 per share, respectively).................       272                     (1,286)
Net loss....................................................                                 (936)           (936)
 
                                                              --------                 ------------       -------
 
  Balance at May 31, 1997...................................                              (23,346)         (6,951)
 
Issuance of Series A Preferred Stock and Class A Common
  Stock.....................................................         6                                        125
 
Unearned Compensation incurred in connection with common
  stock options.............................................    (3,352)
Amortization of unearned compensation.......................                  806                             806
 
Compensation expense incurred in connection with Series B
  Preferred stock options...................................       636                                        636
 
Accretion of Series A and Series B preferred stock dividend
  ($15.14 and $5.44 per share, respectively)................                               (2,387)
Net income..................................................                                  277             277
 
                                                              --------  ------------   ------------       -------
 
  Balance at May 31, 1998...................................     3,994     (2,546)        (25,456)         (5,107)
 
Warrant issuance in connection with Redeemable Senior
  Preferred Stock...........................................     3,416                                      3,416
 
Compensation expense incurred with connection with Series B
  Preferred stock options...................................       434                                        434
 
Accretion of Series A and Series B preferred stock dividend
  ($10.51 and $3.89 per share, respectively)................                               (1,630)
Accretion of redeemable senior preferred stock dividend
  ($12.20 per share plus accretion to liquidation value)....                                 (516)           (516)
 
Net loss....................................................                                 (560)           (560)
 
                                                              --------  ------------   ------------       -------
 
  Balance at December 31, 1998..............................  $  7,844    $(2,546)       $(28,162)        $(2,333)
 
                                                              --------  ------------   ------------       -------
 
                                                              --------  ------------   ------------       -------
 
</TABLE>
 
                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
                                      F-4
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                               ALL FIGURES $'000
 
                  FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
       AND THE SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
                                                                                               SEVEN MONTHS ENDED
                                                                  YEAR ENDED MAY 31,              DECEMBER 31,
                                                            -------------------------------  -----------------------
<S>                                                         <C>        <C>        <C>        <C>           <C>
                                                              1996       1997       1998         1997        1998
                                                            ---------  ---------  ---------  ------------  ---------
 
<CAPTION>
                                                                                             (UNAUDITED)
<S>                                                         <C>        <C>        <C>        <C>           <C>
Cash flows from operating activities:
  Net income (loss).......................................  $     549  $    (936) $     277   $   --       $    (560)
                                                            ---------  ---------  ---------  ------------  ---------
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Compensation expense incurred in connection with stock
      options.............................................      1,967      5,933      1,442          397         434
    Depreciation and amortization.........................      2,929      4,219      7,736        3,944       8,818
    Amortization of debt issuance costs...................     --            156        412          245         363
    Losses from extinguishment of debt....................     --         --          1,406        1,377      --
    Write-off of organization costs.......................     --         --            158          158      --
    Noncash rental expense, net of noncash rental
      income..............................................      1,277      1,620      2,670        1,354       1,493
    Change in certain working capital components..........      1,216      4,389      4,316        1,620         204
    Increase in deferred tax asset........................     (1,539)    (2,058)    (1,187)      (1,081)     (1,411)
    Increase in deferred membership costs.................       (926)      (847)    (1,403)        (708)     (2,072)
    Other.................................................        222       (174)       (94)        (113)        124
                                                            ---------  ---------  ---------  ------------  ---------
    Total adjustments.....................................      5,146     13,238     15,456        7,193       7,953
                                                            ---------  ---------  ---------  ------------  ---------
    Net cash provided by operating activities.............      5,695     12,302     15,733        7,193       7,393
 
Cash flows from investing activities:
  Capital expenditures, net of effect of acquired
    businesses............................................     (5,380)   (11,403)   (16,170)      (5,304)    (21,815)
  Acquisition of businesses...............................        (35)    (1,888)   (19,733)      (7,058)    (25,103)
  Intangible and other assets.............................        (72)      (280)      (137)      --            (434)
                                                            ---------  ---------  ---------  ------------  ---------
    Net cash used in investing activities.................     (5,487)   (13,571)   (36,040)     (12,362)    (47,352)
                                                            ---------  ---------  ---------  ------------  ---------
Cash flows from financing activities:
  Issuance of stock, net of expenses......................      2,000     15,155        125          125      --
  Issuance of Senior Preferred Stock, net of expenses.....     --         --         --           --          39,635
  Redemption and liquidation of stock, including
    expenses..............................................     --        (38,820)    --           --          --
  Proceeds from borrowings, net of expenses...............      5,365     40,081     85,841       85,570      16,975
  Repayments of borrowings................................     (7,221)   (13,607)   (45,130)     (43,334)    (20,494)
                                                            ---------  ---------  ---------  ------------  ---------
    Net cash provided by financing activities.............        144      2,809     40,836       42,361      36,116
                                                            ---------  ---------  ---------  ------------  ---------
    Net (decrease) increase in cash and cash
      equivalents.........................................        352      1,540     20,529       37,192      (3,843)
Cash and cash equivalents at beginning of period..........        576        928      2,468        2,468      22,997
                                                            ---------  ---------  ---------  ------------  ---------
    Cash and cash equivalents at end of period............  $     928  $   2,468  $  22,997   $   39,660   $  19,154
                                                            ---------  ---------  ---------  ------------  ---------
                                                            ---------  ---------  ---------  ------------  ---------
Summary of the change in certain working capital
  components, net of effects of acquired businesses:
    (Increase) decrease in accounts receivable............  $     (19) $     469  $    (108)  $       69   $    (208)
    Increase in inventory.................................       (135)       (39)      (343)        (323)       (580)
    (Increase) decrease in prepaid expenses and other
      current assets......................................        (38)       631         30          (18)       (336)
    Increase (decrease) in accounts payable and accrued
      expenses............................................        805      2,055      1,895          981      (2,330)
    (Decrease) increase in prepaid corporate income
      taxes...............................................       (913)       156        324       --          --
    Increase in deferred revenue..........................      1,516      1,117      2,518          911       3,658
                                                            ---------  ---------  ---------  ------------  ---------
      Net change in certain working capital components....  $   1,216  $   4,389  $   4,316   $    1,620   $     204
                                                            ---------  ---------  ---------  ------------  ---------
                                                            ---------  ---------  ---------  ------------  ---------
</TABLE>
 
                See notes to consolidated financial statements.
 
                                      F-5
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
1. NATURE OF BUSINESS:
 
    Town Sports International, Inc. and Subsidiaries (the "Company") owns,
operates or manages 55 fitness clubs ("clubs") in the New York metropolitan
market, eight clubs in Washington, D.C., four clubs in Boston, and two clubs in
Switzerland as of December 31, 1998. The Company's geographic concentration in
the New York metropolitan market may expose the Company to adverse developments
related to competition, demographic changes, real estate costs and economic down
turns. The Company operates in a single segment as defined by Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION.
 
    On December 10, 1996, the Company completed a restructuring of its ownership
and debt capitalization. The restructuring was undertaken to increase
stockholder value by providing access to growth capital and financial advisory
skills thereby enabling the Company to optimize its competitive advantage in the
market place, and to present certain existing equity holders the opportunity to
diversify their respective equity interests in the Company. The restructuring
was accounted for as a leveraged recapitalization whereby new investors, on a
fully-diluted basis, effectively acquired 73% of the Company resulting in a
reduction of equity of $32,700. The reduction in equity included the liquidation
of Series A Preferred Stock of $496, and the redemption of stock and stock
options outstanding immediately prior to the recapitalization of $28,025 and
$4,179, respectively. In addition, 368,333 shares of Series B Redeemable
Preferred Stock, which had been accounted for as mezzanine financing, were
redeemed at a cost of $6,121. New and existing investors acquired newly
constituted preferred and common stock. Closing fees paid to certain new
investors totaled approximately $800. Senior and subordinated debt facilities
were obtained to finance the repayment of existing bank facilities and to
provide growth capital.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
    A. PRINCIPLES OF CONSOLIDATION:
 
    The accompanying consolidated financial statements include the accounts of
Town Sports International, Inc. and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
 
    B. CHANGE IN YEAR END:
 
    On January 7, 1999, the Company's board of directors approved a change in
the Company's fiscal year end from May 31 to December 31, effective beginning
with the seven month period ended December 31, 1998 ("the transition period").
 
    C. REVENUE RECOGNITION:
 
    The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time with
30 days notice. Initiation fees and related direct expenses, primarily salaries
and sales commissions payable to membership consultants, are deferred and
recognized, on a straight-line basis, in operations over an estimated membership
period of twenty four (24) months. Dues that are received in advance are
recognized on a pro-rata basis over the periods in which services are to be
provided.
 
                                      F-6
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $1,975, pursuant to various state consumer
protection laws.
 
    Management fees earned for services rendered are recognized at the time the
related services are performed.
 
    The Company recognizes revenue from merchandise sales upon delivery to the
member.
 
    D. INVENTORY:
 
    Inventory consists primarily of athletic equipment and supplies for sale to
members and club supplies. Inventories are valued at the lower of cost or market
by the first-in, first-out method.
 
    E. FIXED ASSETS:
 
    Fixed assets are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which are thirty years for
building and improvements, five years for club equipment, furniture, fixtures
and computer equipment, and three years for proprietary computer software.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining period of the lease. Expenditures for maintenance and
repairs are charged to operations as incurred. The cost and related accumulated
depreciation or amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in operations.
 
    F. ADVERTISING AND CLUB PREOPENING COSTS
 
    Advertising costs and club preopening costs are charged to operations during
the period in which they are incurred. Total advertising costs incurred by the
Company during the years ended May 31, 1996, 1997, 1998 and the seven months
ended December 31, 1998 totaled $1,291, $1,627, $2,147 and $2,081, respectively.
 
    G. USE OF ESTIMATES
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
 
    The most significant assumptions and estimates relate to the useful lives
and recoverability of fixed and intangible assets, deferred income tax
valuation, valuation of and expense incurred in connection with stock options
and warrants and the estimated membership period.
 
    H. CORPORATE INCOME TAXES:
 
    Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined on the basis of the difference between the financial statement and
tax bases of assets and liabilities ("temporary differences") at enacted tax
rates in effect for the years in which
 
                                      F-7
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the temporary differences are expected to reverse. A valuation allowance is
recorded if it is more likely than not that all or part of a deferred tax asset
will not be realized.
 
    I. STATEMENTS OF CASH FLOWS:
 
    Supplemental disclosure of cash flow information:
 
<TABLE>
<CAPTION>
                                                                                                       SEVEN MONTHS ENDED
                                                                          YEARS ENDED MAY 31,             DECEMBER 31,
                                                                    -------------------------------  -----------------------
                                                                      1996       1997       1998         1997        1998
                                                                    ---------  ---------  ---------  ------------  ---------
<S>                                                                 <C>        <C>        <C>        <C>           <C>
                                                                                                     (UNAUDITED)
Cash paid for:
  Interest (net of amounts capitalized)...........................  $   1,118  $   1,603  $   6,798   $    2,430   $   4,705
  Taxes...........................................................      3,080      1,655      1,300          455       1,072
 
Noncash investing and financing activities:
  Acquisition of fixed assets included in accounts payable........        293        850      2,496           99       1,966
 
Acquisition of equipment financed by suppliers or lessors.........      1,475      1,411        562          261          --
 
See Notes 9 and 10 for additional noncash investing and financing
  activities.
</TABLE>
 
    J. CASH AND CASH EQUIVALENTS:
 
    The Company considers all highly liquid debt instruments which have
maturities of three months or less when acquired to be cash equivalents. The
carrying amounts reported in the balance sheets for cash and cash equivalents
approximate fair value.
 
    K. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE:
 
    The Company recognizes rental expense for leases with scheduled rent
increases on the straight-line basis over the life of the lease.
 
    L. FOREIGN CURRENCY:
 
    Transactions denominated in a foreign currency have been translated into
U.S. dollars at the rates of exchange at the transaction dates. Assets and
liabilities have been translated at the respective year-end exchange rates. For
the years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998, the Company recognized foreign exchange gains (losses) of approximately
$20, ($65), ($3) and $1, respectively. These gains (losses) relate to certain
management fees earned in Switzerland.
 
    M. INVESTMENTS IN AFFILIATED COMPANIES:
 
    The Company has investments in Capitol Hill Squash Club Associates and
Kalorama Sports Management Associates (collectively referred to as the
"Affiliates"). The Affiliates have operations, which are similar, or 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
the Affiliates and the
 
                                      F-8
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Company's pro rata share of the Affiliates' net assets and operating results
were not material for all periods presented.
 
    N. INTANGIBLE ASSETS:
 
    Intangible assets consist of acquired leasehold rights, membership lists,
debt issuance costs, goodwill and covenants-not-to-compete. Such intangibles are
stated at cost and, except debt issuance costs, are being amortized by the
straight-line method over their estimated lives. Debt issuance costs are
amortized as additional interest expense over life of the underlying debt using
the interest method. Effective June 1, 1997, the Company changed the estimated
useful lives of membership lists from three to two years. The effect on
operating results for the year ended May 31, 1998 of decreasing the useful life
was to increase amortization expense by $234, $117 net of taxes. Goodwill and
acquired leasehold rights are being amortized over the remaining lives of the
respective leases, five to fifteen years, and debt issuance costs are being
amortized over the term of the respective borrowings, five to seven years.
 
    Prior to the year ended May 31, 1998, the Company capitalized direct costs
(legal fees and real-estate commissions) incurred to obtain leases for new clubs
to be constructed by the Company ("Organizational Costs"). Such amounts were
amortized over a five year period using the straight-line method. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement of
Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5") which
requires that Organizational Costs be expensed as incurred. In connection with
the adoption of SOP 98-5, the Company restated its first-quarter operating
results as if adoption had occurred on June 1, 1997 and recorded a pre-tax
charge of $158, $88 net of taxes, as the cumulative effect of this accounting
change.
 
    O. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:
 
    Long-lived assets, such as fixed assets and intangible assets, including
goodwill, are reviewed for impairment when events or circumstances indicate that
their carrying value may not be recoverable. Estimated undiscounted expected
future cash flows are used to determine if an asset is impaired in which case
the asset's carrying value would be reduced to fair value. For all periods
presented, no impairment losses were recorded.
 
    P. CONCENTRATIONS OF CREDIT RISK:
 
    Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents. Such amounts are
held, primarily, in a single commercial bank. The Company holds no collateral
for these financial instruments.
 
    Q. 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 as
defined; however, to the extent that stock options are granted to employees with
 
                                      F-9
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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. However, the fair value of
options or warrants granted to nonemployees for financing are included in
operating results as an expense.
 
    Disclosures, including pro forma operating results had the Company prepared
its financial statements in accordance with the fair value based method of
accounting for stock-based compensation, have been included in Note 9.
 
    R. OTHER RECENT ACCOUNTING PRONOUNCEMENTS:
 
    During the transition period, the Company adopted the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the
Company to capitalize certain costs incurred in connection with developing
software to be used internally. The amounts capitalized during the period were
$558.
 
    In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 standardizes the accounting for derivative instruments
by requiring that all derivatives be recognized as assets and liabilities and
measured at fair value. This statement is effective for fiscal years beginning
after June 15, 1999. Based on current estimates, management does not believe
that the future adoption of SFAS No. 133 will have an effect on the Company's
financial statements.
 
3. FIXED ASSETS:
 
    Fixed assets as of May 31, 1997, 1998 and December 31, 1998, are shown at
cost, less accumulated depreciation and amortization, and are summarized below:
 
<TABLE>
<CAPTION>
                                                                                  MAY 31,          DECEMBER 31,
                                                                            --------------------  --------------
                                                                              1997       1998          1998
                                                                            ---------  ---------  --------------
<S>                                                                         <C>        <C>        <C>
Leasehold improvements....................................................  $  26,309  $  39,029    $   58,835
Club equipment............................................................      8,581     13,394        19,984
Furniture, fixtures and computer equipment................................      5,171      6,841        10,794
Building and improvements.................................................      4,995      4,995         4,995
Land......................................................................        986        986           986
Construction in progress..................................................      1,284      6,937         8,488
                                                                            ---------  ---------  --------------
                                                                               47,326     72,182       104,082
  Less, Accumulated depreciation and amortization.........................     13,112     17,664        22,656
                                                                            ---------  ---------  --------------
                                                                            $  34,214  $  54,518    $   81,426
                                                                            ---------  ---------  --------------
                                                                            ---------  ---------  --------------
</TABLE>
 
    Depreciation and leasehold amortization expense for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998 was approximately
$2,813, $3,843, $6,130 and $5,664, respectively.
 
                                      F-10
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
4. INTANGIBLE ASSETS:
 
    Intangible assets as of May 31, 1997, 1998 and December 31, 1998 are shown
at cost, less accumulated amortization, and are summarized below:
 
<TABLE>
<CAPTION>
                                                                                    MAY 31,          DECEMBER 31,
                                                                              --------------------  --------------
                                                                                1997       1998          1998
                                                                              ---------  ---------  --------------
<S>                                                                           <C>        <C>        <C>
Goodwill arising on acquisition of businesses...............................  $   2,798  $  14,755    $   32,627
Membership lists............................................................        176      3,154         5,712
Deferred financing costs....................................................      2,150      4,103         4,203
Covenants-not-to-compete....................................................     --            400           550
Organizational expenses.....................................................        158     --            --
                                                                              ---------  ---------  --------------
                                                                                  5,282     22,412        43,092
  Less, Accumulated amortization............................................        857      2,489         6,028
                                                                              ---------  ---------  --------------
                                                                              $   4,425  $  19,923    $   37,064
                                                                              ---------  ---------  --------------
                                                                              ---------  ---------  --------------
</TABLE>
 
    Amortization expense of intangible assets for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998 was approximately $116,
$532, $2,018 and $3,517, respectively. Such amount includes amortization expense
of deferred financing costs of $0, $156, $412 and $363, respectively, which has
been classified as interest expense for financial reporting purposes.
 
5. ACCRUED EXPENSES:
 
<TABLE>
<CAPTION>
                                                                                     MAY 31,          DECEMBER 31,
                                                                               --------------------  --------------
                                                                                 1997       1998          1998
                                                                               ---------  ---------  --------------
<S>                                                                            <C>        <C>        <C>
Accrued payroll..............................................................  $   1,882  $   3,359    $    2,210
Accrued interest.............................................................        839      1,171         2,017
Accrued other................................................................      1,296      2,089         2,078
Amounts payable under agreement to purchase a club...........................         --      1,250            --
                                                                               ---------  ---------       -------
                                                                               $   4,017  $   7,869    $    6,305
                                                                               ---------  ---------       -------
                                                                               ---------  ---------       -------
</TABLE>
 
                                      F-11
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
 
    Long-term debt and capital lease obligations consist of the following:
 
<TABLE>
<CAPTION>
                                                                                  MAY 31,          DECEMBER 31,
                                                                            --------------------  --------------
                                                                              1997       1998          1998
                                                                            ---------  ---------  --------------
<S>                                                                         <C>        <C>        <C>
Series B 9-3/4% Senior Notes, due 2004....................................         --  $  85,000    $   85,000
Term Loan.................................................................  $  30,000         --            --
Subordinated note payable--face value of $7,500. Note shown net of
  original issue discount arising out of issuance of warrants to buy
  common stock............................................................      7,384         --            --
Notes payable for acquired business.......................................      1,370      1,826         3,739
Capital lease obligations.................................................      2,317      1,463           785
                                                                            ---------  ---------  --------------
                                                                               41,071     88,289        89,524
  Less, Current portion due within one year...............................      1,924      2,036         2,191
                                                                            ---------  ---------  --------------
Long-term portion.........................................................  $  39,147  $  86,253    $   87,333
                                                                            ---------  ---------  --------------
                                                                            ---------  ---------  --------------
</TABLE>
 
    The aggregate long-term debt and capital lease obligations maturing during
the next five years and thereafter is as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                                          AMOUNT DUE
-------------------------------------------------------------------------------  -------------
<S>                                                                              <C>
1999...........................................................................   $     2,191
2000...........................................................................         1,137
2001...........................................................................           519
2002...........................................................................           208
2003...........................................................................           216
Thereafter.....................................................................        85,253
                                                                                 -------------
                                                                                  $    89,524
                                                                                 -------------
                                                                                 -------------
</TABLE>
 
    On October 16, 1997, the Company issued $85,000 of Series B 9-3/4% Senior
Notes ("Senior Notes"), due October 2004. The net proceeds from the Senior Notes
totaled approximately $81,700 of which $41,500 was used to repay the term loan,
the line of credit and the subordinated note payable. The transaction fees of
approximately $3,300, were accounted for as deferred financing costs. The Senior
Notes bear interest at an annual rate of 9-3/4%, payable semi-annually. The
notes are redeemable at the option of the Company on or after October 15, 2001.
The Senior Notes are non-collateralized and rank "PARI PASSU" with all
unsubordinated debt and senior in right of payment with all subordinated
indebtedness of the Company. The note indenture under which the Senior Notes
were issued contains certain covenants that, among other things, limit the
Company's ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, engage in transactions with affiliates, incur
liens and engage in asset sales.
 
    The Company has a line of credit with its principal bank for direct
borrowings and letters of credit of up to $25,000. The line of credit carries
interest at the Company's option based upon the Eurodollar borrowing rate plus
2.50% or the bank's prime rate plus 1.50%, as defined and the Company is
required to pay a commitment commission of 0.375% per annum based upon the daily
unutilized amount. There
 
                                      F-12
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
were no outstanding borrowings against this line of credit as of December 31,
1998; however the amount available for borrowing has been reduced by outstanding
letters of credit totaling $2,007 (see Note 8). This line of credit expires on
October 15, 2002. The line of credit, as amended, contains various covenants
including interest coverage and a leverage ratio as well as restrictions on the
payment of dividends. The line of credit is collateralized by a mortgage on
land, building and equipment, which, as of December 31, 1998, had an aggregate
book value of approximately $3,447, and by all other assets of the Company.
 
    The Term Loan, prior to repayment, carried interest based upon Eurodollar
borrowing rate plus 3.25%, or the base prime rate plus 2.00% as determined by
the Company.
 
    The Subordinated note, prior to repayment, carried interest of 11.5%.
 
    Notes payable were incurred upon the acquisition of various fitness clubs
and are subject to the Company's right of offset for possible post acquisition
adjustments arising out of operations of the acquired clubs. These notes are
stated at a discount from face value at rates of between 5% and 7%, and are
non-collateralized.
 
    The carrying value of long-term debt, other than the Senior Notes,
approximates fair market value as of May 31, 1997, 1998 and December 31, 1998 as
the debt is generally short term in nature. The Senior Notes have a fair value
of approximately $82,000 as of December 31, 1998, based on the quoted market
price.
 
    The Company's interest expense and capitalized interest related to club
facilities under construction for the years ended May 31, 1996, 1997, 1998 and
the seven months ended December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                                                                       SEVEN MONTHS
                                                                                                          ENDED
                                                                           YEAR ENDED MAY 31,          DECEMBER 31,
                                                                     -------------------------------  --------------
                                                                       1996       1997       1998          1998
                                                                     ---------  ---------  ---------  --------------
<S>                                                                  <C>        <C>        <C>        <C>
Interest costs expensed............................................  $   1,012  $   2,570  $   7,130    $    5,551
Interest costs capitalized.........................................         46         28        526           308
                                                                     ---------  ---------  ---------       -------
                                                                     $   1,058  $   2,598  $   7,656    $    5,859
                                                                     ---------  ---------  ---------       -------
                                                                     ---------  ---------  ---------       -------
</TABLE>
 
    The Company leases equipment under noncancelable capital leases. The initial
lease terms range from three to five years, after which the Company is required
to purchase the equipment at amounts defined by the agreements.
 
                                      F-13
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
    As of December 31, 1998, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
 
<TABLE>
<CAPTION>
                                                                                     MINIMUM
YEAR ENDING DECEMBER 31,                                                          ANNUAL RENTAL
------------------------------------------------------------------------------  -----------------
<S>                                                                             <C>
1999..........................................................................      $     629
2000..........................................................................            191
2001..........................................................................             50
2002..........................................................................              4
                                                                                        -----
                                                                                          874
  Less, Amounts representing interest.........................................             89
                                                                                        -----
    Present value of minimum capital lease payments...........................      $     785
                                                                                        -----
                                                                                        -----
</TABLE>
 
    The cost of leased equipment included in club equipment was approximately
$4,190, $5,033 and $5,033 at May 31, 1997, 1998 and December 31, 1998,
respectively; related accumulated depreciation was $1,283, $2,234 and $3,222,
respectively.
 
7. RELATED PARTY TRANSACTIONS:
 
    a.  The Company entered into a management agreement with Town Squash AG
       ("TSAG"). The Company, together with the shareholders of TSAG, is
       contingently liable to fund shortfalls in operating cash flow of TSAG, as
       defined. The terms of the agreement provide for the Company to fund a
       maximum amount of operating cash flow of approximately $142 ("Advances").
       As of May 31, 1997, 1998 and December 31, 1998, the Company had no
       outstanding Advances to TSAG.
 
       Management fees earned during the years ended May 31, 1996, 1997, 1998
       and the seven months ended December 31, 1998 amounted to approximately
       $695, $223, $239 and $224, respectively.
 
    b.  The Company entered into a professional service agreement with
       Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS"), for strategic and
       financial advisory services on December 10, 1996. Fees for such services
       are $250 per annum, and are payable while BRS owns 20% or more of the
       outstanding Common stock of the Company. Amounts due BRS on May 31, 1997
       and 1998, which are included in accounts payable, were $104. No amounts
       were due BRS at December 31, 1998.
 
8. LEASES:
 
    The Company leases office, warehouse and multi-recreational facilities and
certain equipment under noncancelable operating leases. In addition to base
rent, the facility leases generally provide for additional rent based on
increases in real estate taxes and other costs. Certain leases give the Company
the right to acquire the leased facility at defined prices based on fair value
and provide for additional rent based upon defined formulas of revenue, cash
flow or operating results of the respective facilities. Under
 
                                      F-14
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
8. LEASES: (CONTINUED)
the provisions of certain of these leases, the Company is required to maintain
irrevocable letters of credit, which total $2,007.
 
    The leases expire at various times through December 31, 2021, and certain
leases may be extended at the Company's option.
 
    Future minimum rental payments under noncancelable operating leases are as
follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                               MINIMUM ANNUAL RENTAL
--------------------------------------------------------------------  ------------------------
<S>                                                                   <C>
1999................................................................        $     20,616
2000................................................................              22,095
2001................................................................              22,259
2002................................................................              22,019
2003................................................................              21,789
Aggregate thereafter................................................             176,925
                                                                              ----------
                                                                            $    285,703
                                                                              ----------
                                                                              ----------
</TABLE>
 
    Rent expense, including the effect of deferred lease liabilities, for the
years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998 was approximately $8,653, $10,169, $15,493 and $13,914, respectively. Such
amounts include additional rent of $1,863, $2,146, $2,590 and $2,087,
respectively.
 
    The Company, as landlord, leases space under noncancelable operating leases.
In addition to base rent, certain leases provide for additional rent based on
increases in real estate taxes, indexation, utilities and defined amounts based
on the operating results of the lessee. The leases expire at various times
through December 31, 2013. Future minimum rentals receivable under noncancelable
leases are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                                MINIMUM ANNUAL RENTAL
--------------------------------------------------------------------  -------------------------
<S>                                                                   <C>
1999................................................................          $     828
2000................................................................                825
2001................................................................                829
2002................................................................                761
2003................................................................                599
Aggregate thereafter................................................              1,033
                                                                                -------
                                                                              $   4,875
                                                                                -------
                                                                                -------
</TABLE>
 
    Rental income, including noncash rental income, for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998, was approximately
$882, $936, $963 and $822, respectively. Such amounts included additional rental
charges above the base rent of $570, $620, $651 and $608, respectively.
 
                                      F-15
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK:
 
    a.  CAPITALIZATION:
 
       The Company's certificate of incorporation, as amended during November
       1998, provides for the issuance of up to 3,500,000 shares of capital
       stock, consisting of 2,500,000 shares of Class A Voting Common Stock
       ("Class A"), par value $0.001 per share; 500,000 shares of Class B Non-
       voting Common Stock ("Class B"), par value of $0.001 per share, (Class A
       and Class B are collectively referred to herein as "Common Stock");
       100,000 shares of Redeemable Senior Preferred Stock ("Senior"), par value
       $1.00 per share; 200,000 shares of Series A Preferred Stock, ("Series A")
       par value $1.00 per share, and 200,000 shares of Series B Preferred Stock
       ("Series B") par value $1.00 per share.
 
       All stockholders have preemptive rights to purchase a pro-rata share of
       any future sales of securities, as defined.
 
       REDEEMABLE SENIOR PREFERRED STOCK
 
       During November 1998, the Company issued 40,000 shares of mandatorily
       redeemable Senior stock and 143,261 warrants. The Senior stock has no
       voting rights except as required by law. The warrants have an exercise
       price of $0.01, expire in November 2008 and are exercisable into an equal
       number of shares of Class A Common Stock. After payment of fees and
       expenses of approximately $365 the Company received net proceeds of
       $39,635. Upon issuance, a $3,416 value was ascribed to the warrants. The
       initial fair value of the Senior stock ($36,219) is being accreted to
       it's liquidation value using the interest method. The accreted amount for
       the seven months ended December 31, 1998 was $28. The Senior stock is
       redeemable in November 2008. In the event that certain defined events
       occur, the number of warrants exercisable will be reduced.
 
       The Senior stock has liquidation preferences over Series A, Series B and
       Common stock. The Senior stock may, at the option of the holder, be
       converted into Common stock upon the initial public offering ("IPO") of
       the Company's common stock at a conversion rate equal to the IPO price.
 
       The Senior stock has a liquidation value of $1,000 per share plus
       cumulative unpaid dividends of $488 as of December 31, 1998. The Senior
       stockholders are entitled to a cumulative 12% annual dividend, based upon
       the per share price of $1,000.
 
                                      F-16
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
       A summary of transactions related to the Senior stock for the seventh
       month period ended December 31, 1998 is as follows:
 
<TABLE>
<S>                                                                 <C>
Proceeds received in connection with the issuance of Senior stock
  and warrants....................................................  $  40,000
Expenses incurred in connection with issuance.....................       (365)
Fair value ascribed to warrants at issuance.......................     (3,416)
                                                                    ---------
Fair value of Senior stock at date of issuance....................     36,219
 
Accretion to Senior stock liquidation value.......................         28
Accretion of Senior stock dividends...............................        488
                                                                    ---------
December 31, 1998 Senior stock carrying value.....................  $  36,735
                                                                    ---------
                                                                    ---------
</TABLE>
 
       Cumulative unpaid dividends on Senior stock are payable upon certain
       defined events which include: the dissolution, liquidation or winding up
       of the Company; the redemption of such shares; or the sale of
       substantially all of the assets of the Company.
 
       PREFERRED STOCK
 
       The Preferred Stock has liquidation preferences over Common Stock. The
       Company's Series A and Series B stock have no conversion features or
       voting rights except as required by law, and rank "PARI PASSU."
 
       Series A stock has a liquidation value of $100 per share plus cumulative
       unpaid dividends of $4,987 as of December 31, 1998. Series A stockholders
       are entitled to a cumulative 14% annual dividend based upon the per share
       price of $100.
 
       Series B stock has a liquidation value of $35 per share plus cumulative
       unpaid dividends of $44 as of December 31, 1998. Series B stockholders
       are entitled to a cumulative 14% annual dividend based upon the per share
       price of $35.
 
       Cumulative unpaid dividends on all Preferred Stock are payable upon
       certain defined events which include: the dissolution; liquidation or
       winding up of the Company; the redemption of such shares; or the sale of
       substantially all of the assets of the Company.
 
       COMMON STOCK
 
       Class A stock and Class B stock each have identical terms with the
       exception that Class A stock is entitled to one vote per share, while
       Class B stock has no voting rights, except as required by law. In
       addition, Class B stock is convertible into an equal number of Class A
       shares, at the option of the holder of the majority of the Class B stock.
       To date, the Company has not issued Class B stock.
 
                                      F-17
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
    b.  STOCK OPTIONS and WARRANTS:
 
    The following table summarizes the stock option activity for the years ended
May 31, 1996, 1997, 1998 and the seven months ended December 31, 1998:
 
<TABLE>
<CAPTION>
                                                  CLASS A      CLASS A
                                                   COMMON      COMMON       CLASS B       SERIES B
                                                   ($0.01      ($.001     CONVERTIBLE    REDEEMABLE    SERIES B
STOCK OPTIONS                                    PAR VALUE)  PAR VALUE)      COMMON      PREFERRED     PREFERRED
-----------------------------------------------  ----------  -----------  ------------  ------------  -----------
<S>                                              <C>         <C>          <C>           <C>           <C>
Number of shares under option:
  Outstanding at June 1, 1995..................     150,000                   121,000        21,251
  Options exercised............................     (13,358)                   (2,351)
  Options cancelled............................      (6,642)                     (349)
                                                 ----------               ------------  ------------
    Outstanding at May 31, 1996................     130,000                   118,300        21,251
  Options granted..............................                  57,142        20,000                     164,783
  Options exercised............................    (130,000)                 (138,300)      (21,251)
                                                 ----------  -----------  ------------  ------------  -----------
    Outstanding at May 31, 1997................          --      57,142            --            --       164,783
                                                 ----------               ------------  ------------
                                                 ----------               ------------  ------------
Options granted................................                  14,700
                                                             -----------                              -----------
    Outstanding at May 31, 1998 and December
      31, 1998.................................                  71,842                                   164,783
                                                             -----------                              -----------
                                                             -----------                              -----------
Exercise price:
  Outstanding at June 1, 1995..................  $     3.40                $    10.00    $     3.00
  Options exercised............................        2.40                      9.89
  Options cancelled............................        2.40                      9.89
                                                 ----------               ------------  ------------
Weighted average price of outstanding options
  at May 31, 1996..............................        3.55                     10.06          3.00
  Options granted..............................               $    1.00(i)        6.00 (ii            $     10.00(ii)
  Options exercised............................        3.55                      9.47          3.00
                                                 ----------  -----------  ------------  ------------  -----------
Weighted average price of outstanding options
  at May 31, 1997..............................          --        1.00            --            --         10.00
                                                 ----------               ------------  ------------
                                                 ----------               ------------  ------------
  Options granted..............................                   17.50 (ii
                                                             -----------                              -----------
Weighted average price of outstanding options
  at May 31, 1998 and December 31, 1998........                    4.38                                     10.00
                                                             -----------                              -----------
                                                             -----------                              -----------
</TABLE>
 
------------------------
 
(i) Option exercise price equal to market price on the grant date based upon
    independent appraisal.
 
(ii) Option exercise price less than market price on the grant date based upon
    independent appraisal.
 
    As of May 31, 1996, all outstanding options were exercisable. As of May 31,
1997 and 1998, all outstanding options for Series B Redeemable Preferred Stock
were exercisable and 11,428 and 25,797 options of Class A stock respectively
were exercisable.
 
                                      F-18
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
    The following table summarizes stock option information as of December 31,
1998:
 
<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING
                                               -----------------------------------------    OPTIONS EXERCISABLE
                                                               WEIGHTED-                  ------------------------
                                                                AVERAGE       WEIGHTED-                 WEIGHTED-
                                                               REMAINING       AVERAGE                   AVERAGE
                                                  NUMBER      CONTRACTUAL     EXERCISE      NUMBER      EXERCISE
                                               OUTSTANDING        LIFE          PRICE     EXERCISABLE     PRICE
                                               ------------  --------------  -----------  -----------  -----------
<S>                                            <C>           <C>             <C>          <C>          <C>
Class A Common:
  1997 Grants................................       57,142        99 months   $    1.00       22,857    $    1.00
  1998 Grants................................       14,700        99 months   $   17.50        2,940    $   17.50
 
Series B Preferred...........................      164,783       275 months   $   10.00      164,783    $   10.00
</TABLE>
 
    CLASS A COMMON STOCK ($.001 PAR VALUE) OPTIONS:
 
    During the year ended May 31, 1997 the Company adopted the Town Sports
International Inc. 1997 Common Stock Option Plan (the "1997 Plan"). The
provisions of the 1997 Plan, as amended and restated, provide for the Company's
Board of Directors to grant to executives and key employees options to acquire
80,876 shares of Class A stock.
 
    The Company granted 57,142 options ("1997 Grants") with an exercise price of
$1.00 on December 10, 1996. The 1997 Grants have a term of 10 years and
originally vested based on the achievement of annual equity values as defined.
During the year ended May 31, 1998, the 1997 Grants were amended. The amendment
impacted 45,714 options, which had not previously vested (the "Amended Grants")
by adding a provision whereby unvested outstanding options would automatically
vest on December 10, 2005. Vesting will be accelerated in the event that certain
defined events occur including the achievement of certain equity values, the
sale of the Company, or an initial public offering of equity securities as
defined.
 
    During the year ended May 31, 1998, the Company granted 14,700 options
("1998 Grants") with an exercise price of $17.50 and a term of 10 years. This
exercise price was below the estimated fair value of the Class A stock of $60.50
on the date of grant. The 1998 Grants vest in full on December 10, 2005;
however, vesting will be accelerated in the event that certain defined events
occur including the achievement of annual equity values or the sale of the
Company.
 
    In accordance with APB No. 25, the Company recorded unearned compensation in
connection with the Amended Grants and the 1998 Grants. Such amount is included
within stockholders' deficit and represented the difference between the
estimated fair value of the Class A stock on the date of amendment or grant,
respectively, and the exercise price. Unearned compensation will be amortized as
compensation expense over the vesting period. During the year ended May 31,
1998, amortization of unearned compensation totaled $806. For the seven months
ended December 31, 1998, no additional options vested and accordingly there was
no amortization of unearned compensation.
 
    As of December 31, 1998, shares reserved for future option awards totaled
9,034.
 
                                      F-19
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
    SERIES B PREFERRED STOCK OPTIONS:
 
    During the year ended May 31, 1997, the Company granted 164,783 options
("Series B Options") to certain employees which entitle the holders to purchase
an equal number of shares of Series B stock at an exercise price of $10.00 per
share. The estimated fair value of the Series B stock on the date of grant was
$35.00 per share. Accordingly, the Company recognized an aggregate charge for
the difference between the Series B Options' exercise price and the estimated
fair value of the Series B stock, which totaled $4,120. Series B Options were
fully vested on the date of grant and expire on December 31, 2021. The terms of
the Series B Options also contain provisions whereby the exercise price will be
reduced or in certain cases, the option holder will receive cash in accordance
with a formula as defined. The aggregate value of either a reduction in exercise
price or the distribution of cash will be deemed compensatory and accordingly
the Company will record compensation expense. For the years ended May 31, 1997
and 1998 and the seven months ended December 31, 1998, compensation expense
recognized in connection with Series B Options totaled $273, $636 and $434,
respectively. There are no shares of Series B Preferred Stock reserved for
future option grants.
 
    CLASS A ($0.01 PAR VALUE) AND CLASS B CONVERTIBLE OPTIONS:
 
    During the years ended May 31, 1996 and 1997, in connection with the
granting of Class A Common Stock ($0.001 par value) and Class B Convertible
Common Stock Options, the Company recognized a compensation charge of
approximately $1,967 and $5,933, respectively. Such charges represented the
difference between the exercise price of the respective options and the fair
market value of the underlying stock as determined by the Board of Directors.
 
    PRO FORMA OPERATING RESULTS:
 
    The following table summarizes the pro forma operating results of the
Company had compensation costs for the outstanding options been determined in
accordance with the fair value based method of accounting for stock-based
compensation. There were no options granted during the year ended May 31, 1996
and the seven months ended December 31, 1998.
 
    Since option grants vest over several years and additional grants are
expected in the future, the pro forma results noted below are not likely to be
representative of the effects on future years of the application of the fair
value based method. No additional options vested during the seven months ended
December 31, 1998, therefore the effects of the fair value based method on
operating results for that period was immaterial.
 
<TABLE>
<CAPTION>
                                                                                MAY 31,
                                                                          --------------------
                                                                            1997       1998
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Pro forma amounts:
  Net loss to common stockholder........................................  $  (1,826) $  (1,804)
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
    For the purposes of the above pro forma information, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. For the years ending May 31, 1997 and 1998, the weighted-average
fair value of the option grants was approximately $26.00 and $44.00,
respectively. The following weighted-average assumptions were used in computing
the fair
 
                                      F-20
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
value of options grants: expected volatility of 60% for all periods; risk-free
interest rate of approximately 6.5% for May 31, 1997 and 5.5% for May 31, 1998;
expected lives of five years for May 31, 1997, and three to five years for May
31, 1998; and a zero dividend yield for all periods.
 
    WARRANTS TO BUY COMMON STOCK:
 
    In connection with the issuance of the Subordinated note payable on December
10, 1996, warrants to buy 124,022 Class A Common Shares were issued at an
exercise price of $0.01 per share. Original issue discount arising upon this
issue, totaled approximately $123. 10,000 warrants were exercised on December
10, 1996. The amount of warrants outstanding was reduced during the seven months
ended December 31, 1998 by 38,308 to 75,714 in connection with the issuance of
the Senior stock. As of December 31, 1998, the remaining outstanding warrants
are fully exercisable and expire in December 2006.
 
10. ASSET ACQUISITIONS:
 
    During the years ended May 31, 1996, 1997, 1998 and the seven months ended
December 31, 1998, the Company completed the acquisition of 36 fitness clubs.
With the exception of the Ultrafit, Inc. and Affiliates ("Ovox") and Lifestyle
Fitness of Springfield, Inc. and Affiliates ("Lifestyle") acquisitions, as
discussed below, the individual acquisitions were not material to the financial
position or results of operations of the Company. The table below summarizes the
aggregate purchase price and the purchase price allocation to assets acquired:
 
<TABLE>
<CAPTION>
                                                                                                       SEVEN MONTHS
                                                                                                          ENDED
                                                                           YEAR ENDED MAY 31,          DECEMBER 31,
                                                                     -------------------------------  --------------
                                                                       1996       1997       1998          1998
                                                                     ---------  ---------  ---------  --------------
<S>                                                                  <C>        <C>        <C>        <C>
Number of clubs acquired...........................................          1          3         16            16
                                                                     ---------  ---------  ---------  --------------
                                                                     ---------  ---------  ---------  --------------
Purchase prices payable in cash at closing.........................  $      35  $   1,888  $  19,733    $   25,103
Issuance and assumption of notes payable...........................        269      2,250      4,110         4,654
                                                                     ---------  ---------  ---------  --------------
    Total purchase prices..........................................  $     304  $   4,138  $  23,843    $   29,757
                                                                     ---------  ---------  ---------  --------------
                                                                     ---------  ---------  ---------  --------------
Allocation of purchase prices:
  Fixed assets.....................................................  $     299  $   2,462  $   9,011    $    9,177
  Membership lists.................................................         --        177      2,978         2,559
  Goodwill.........................................................         --      1,484     11,557        18,021
  Other net assets acquired........................................          5         15        297        --
                                                                     ---------  ---------  ---------  --------------
    Total allocation of purchase prices............................  $     304  $   4,138  $  23,843    $   29,757
                                                                     ---------  ---------  ---------  --------------
                                                                     ---------  ---------  ---------  --------------
</TABLE>
 
    For financial reporting purposes, these acquisitions have been accounted for
under the purchase method and, accordingly, the purchase prices have been
assigned to the assets and liabilities acquired on the basis of their respective
fair values on the date of acquisition. The excess of purchase prices over the
net tangible assets acquired has been allocated to membership lists acquired,
covenant-not-to compete and goodwill. Intangible assets are amortized by the
straight-line basis over the estimated life of the asset. Acquired membership
lists are amortized over a 2 year period and goodwill is amortized over
remaining
 
                                      F-21
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
10. ASSET ACQUISITIONS: (CONTINUED)
lives of the leases of the acquired fitness club which range from 3.5 to 15
years. The results of operations of the clubs have been included in the
Company's consolidated financial statements from the respective dates of
acquisition and the impact of these acquisitions on the consolidated financial
statements of the Company was not material, with the exception of the following
acquisitions.
 
    On April 6, 1998, the Company acquired Ovox. Ovox's operations consisted of
four fitness clubs in New Jersey which were owned and operated by a common group
of investors. The purchase price totaled $8,177, which included $7,750 of cash
and notes payable of $236. Transaction costs amounted to $191. The excess of the
purchase price over the net fair value of the assets acquired was $6,589, and
has been allocated to the membership lists acquired and goodwill. The following
unaudited pro forma information has been prepared assuming the Ovox acquisition
had taken place at the beginning of the respective periods. The pro forma
adjustments give effect to amortization of goodwill, interest expense on
acquisition debt, and related income tax effects:
 
<TABLE>
<CAPTION>
                                                                      FOR THE YEARS ENDED
                                                                            MAY 31,
                                                                   --------------------------
                                                                       1997          1998
                                                                   ------------  ------------
<S>                                                                <C>           <C>
                                                                   (UNAUDITED)   (UNAUDITED)
Revenues.........................................................   $   60,898    $   87,158
Pro forma net income (loss) before extraordinary items and
  cumulative effect of change in accounting policy...............         (862)        1,275
Proforma net loss to common stockholders.........................   $   (2,148)   $   (1,982)
</TABLE>
 
    On August 6, 1998 the Company acquired Lifestyle. Lifestyle's operations
consisted of six fitness clubs in New Jersey, which were owned and operated by a
common group of investors. The purchase price totaled $10,752, which included
$10,000 of cash and notes payable of $300. Transaction costs amounted to $452.
The following unaudited pro forma information has been prepared assuming the
Lifestyle Acquisition had taken place at the beginning of the respective periods
reported herein. The pro forma adjustments give effect to amortization of
goodwill, interest expense on acquisition debt, and the related income tax
effects:
 
<TABLE>
<CAPTION>
                                                                                                    FOR THE SEVEN
                                                                                      FOR THE YEAR   MONTHS ENDED
                                                                                         ENDED       DECEMBER 31,
                                                                                      MAY 31, 1998       1998
                                                                                      ------------  --------------
<S>                                                                                   <C>           <C>
                                                                                      (UNAUDITED)    (UNAUDITED)
Revenues............................................................................   $   90,037     $   72,989
Pro forma net income (loss) before extraordinary item cumulative effect of change in
  accounting policy.................................................................        1,130           (575)
Pro forma net income (loss) to common stockholders..................................   $      260     $   (2,240)
</TABLE>
 
    This unaudited proforma financial information is presented for informational
purposes only and may not be indicative of the results of operations as they
would have been if the Company and the acquired clubs had been a single entity
for the respective periods presented, nor is it indicative of the results of
operations which may occur in the future. Anticipated efficiencies from the
consolidation of the
 
                                      F-22
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
10. ASSET ACQUISITIONS: (CONTINUED)
acquired clubs and the Company have been excluded from the amounts included in
the proforma summary presented above.
 
11. REVENUE FROM CLUB OPERATIONS:
 
    Revenues from club operations for the years ended May 31, 1996, 1997, 1998
and the seven months ended December 31, 1997 (unaudited) and 1998 are summarized
below:
 
<TABLE>
<CAPTION>
                                                                                         SEVEN MONTHS ENDED
                                                            YEAR ENDED MAY 31,              DECEMBER 31,
                                                      -------------------------------  -----------------------
                                                        1996       1997       1998         1997        1998
                                                      ---------  ---------  ---------  ------------  ---------
<S>                                                   <C>        <C>        <C>        <C>           <C>
                                                                                       (UNAUDITED)
Membership dues.....................................  $  35,800  $  45,916  $  66,878   $   34,987   $  59,105
Initiation Fees.....................................      1,849      3,308      4,408        2,423       3,374
Other club revenues.................................      3,147      4,940      8,433        4,080       7,485
                                                      ---------  ---------  ---------  ------------  ---------
                                                      $  40,796  $  54,164  $  79,719   $   41,490   $  69,964
                                                      ---------  ---------  ---------  ------------  ---------
                                                      ---------  ---------  ---------  ------------  ---------
</TABLE>
 
12. CORPORATE INCOME TAXES:
 
    The (benefit) provision for income taxes for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998 consists of the
following:
 
<TABLE>
<CAPTION>
                                                                                            MAY 31, 1996
                                                                                  ---------------------------------
                                                                                                STATE
                                                                                   FEDERAL    AND LOCAL     TOTAL
                                                                                  ---------  -----------  ---------
<S>                                                                               <C>        <C>          <C>
Current.........................................................................  $   1,256   $     911   $   2,167
Deferred........................................................................       (964)       (575)     (1,539)
                                                                                  ---------  -----------  ---------
                                                                                  $     292   $     336   $     628
                                                                                  ---------  -----------  ---------
                                                                                  ---------  -----------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                            MAY 31, 1997
                                                                                  ---------------------------------
                                                                                                STATE
                                                                                   FEDERAL    AND LOCAL     TOTAL
                                                                                  ---------  -----------  ---------
<S>                                                                               <C>        <C>          <C>
Current.........................................................................  $   1,053   $     762   $   1,815
Deferred........................................................................     (1,226)       (832)     (2,058)
                                                                                  ---------  -----------  ---------
                                                                                  $    (173)  $     (70)  $    (243)
                                                                                  ---------  -----------  ---------
                                                                                  ---------  -----------  ---------
</TABLE>
 







<TABLE>
<CAPTION>
                                                                                            MAY 31, 1998
                                                                                  ---------------------------------
                                                                                                STATE
                                                                                   FEDERAL    AND LOCAL     TOTAL
                                                                                  ---------  -----------  ---------
<S>                                                                               <C>        <C>          <C>
Current.........................................................................  $   1,383   $     935   $   2,318
Deferred........................................................................       (751)       (436)     (1,187)
                                                                                  ---------  -----------  ---------
                                                                                  ---------  -----------  ---------
                                                                                  $     632   $     499   $   1,131
                                                                                  ---------  -----------  ---------
                                                                                  ---------  -----------  ---------
</TABLE>
 
                                      F-23
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
12. CORPORATE INCOME TAXES: (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                          DECEMBER 31, 1998
                                                                                  ---------------------------------
                                                                                                STATE
                                                                                   FEDERAL    AND LOCAL     TOTAL
                                                                                  ---------  -----------  ---------
<S>                                                                               <C>        <C>          <C>
Current.........................................................................  $     588         425   $   1,012
Deferred........................................................................       (952)       (460)     (1,411)
                                                                                  ---------  -----------  ---------
                                                                                  $    (364)  $     (35)  $    (399)
                                                                                  ---------  -----------  ---------
                                                                                  ---------  -----------  ---------
</TABLE>
 
    The components of the net deferred tax asset as of May 31, 1997, 1998 and
December 31, 1998 are summarized below:
 
<TABLE>
<CAPTION>
                                                                                     MAY 31,          DECEMBER 31,
                                                                               --------------------  --------------
                                                                                 1997       1998          1998
                                                                               ---------  ---------  --------------
<S>                                                                            <C>        <C>        <C>
Deferred tax assets:
  Deferred lease liabilities.................................................  $   2,966  $   4,106    $    4,750
  Compensation expense incurred in connection with stock options.............      1,846      2,445         2,611
  Fixed assets and intangible assets.........................................      1,153        358         1,176
  State net operating loss carry-forwards....................................        100        214           286
  Deferred revenue...........................................................      1,835      2,349         2,964
  Other......................................................................         33         56           162
                                                                               ---------  ---------       -------
                                                                                   7,933      9,528        11,949
                                                                               ---------  ---------       -------
Deferred tax liabilities:
  Accrued expenses...........................................................       (153)      (150)         (149)
  Deferred costs.............................................................     (1,624)    (2,035)       (2,946)
                                                                               ---------  ---------       -------
                                                                                  (1,777)    (2,185)       (3,095)
                                                                               ---------  ---------       -------
    Net deferred tax asset, prior to valuation allowance.....................      6,156      7,343         8,854
Valuation allowance..........................................................       (184)      (184)         (284)
                                                                               ---------  ---------       -------
    Net deferred tax asset...................................................  $   5,972  $   7,159    $    8,570
                                                                               ---------  ---------       -------
                                                                               ---------  ---------       -------
</TABLE>
 
    As of December 31, 1998, the Company has state net operating loss
carry-forwards of approximately $2,900. Such amounts expire between December 31,
1999 and December 31, 2005.
 
                                      F-24
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                      ALL FIGURES $'000, EXCEPT SHARE DATA
 
12. CORPORATE INCOME TAXES: (CONTINUED)
    The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income (loss) before provision (benefit) for corporate
income taxes:
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED MAY 31,
                                                                             -------------------------------------
                                                                                1996         1997         1998
                                                                                -----        -----        -----
<S>                                                                          <C>          <C>          <C>
Federal statutory tax rate.................................................          34%         (34)%         34%
State and local income taxes, net of federal tax benefit, Change of
  valuation allowance and tax rates........................................          19          (14)          15
Adjustment of prior year's tax refund......................................          --           25           --
Non-taxable interest income................................................          --           --           --
Other......................................................................          --            2            1
                                                                                     --           --           --
                                                                                     53%         (21)%         50%
                                                                                     --           --           --
                                                                                     --           --           --
 
<CAPTION>
                                                                               SEVEN MONTHS
                                                                                   ENDED
                                                                               DECEMBER 31,
                                                                             -----------------
                                                                                   1998
                                                                             -----------------
<S>                                                                          <C>
Federal statutory tax rate.................................................            (34)%
State and local income taxes, net of federal tax benefit, Change of
  valuation allowance and tax rates........................................              1
Adjustment of prior year's tax refund......................................             --
Non-taxable interest income................................................            (11)
Other......................................................................              2
                                                                                        --
                                                                                       (42)%
                                                                                        --
                                                                                        --
</TABLE>
 
13. CONTINGENCIES:
 
    A claim had been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal Court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. A further claim was filed in New York State Supreme Court in April
1998 and was dismissed in December 1998.
 
    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.
 
14. EMPLOYEE BENEFIT PLAN:
 
    The Company maintains a 401(k) defined contribution plan and is subject to
the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
The Plan provides for the Company to make discretionary contributions; however,
the Company elected not to make contributions for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998.
 
15. EXTRAORDINARY ITEM:
 
    During the year ended May 31, 1998, the Company completed a $85,000
financing. As part of this financing, an existing term loan, a line of credit
and a subordinated note were repaid. Accordingly, previously capitalized fees
and expenses relating to obtaining such financing of $1,406 were written off,
net of taxes of $624.
 
16. SUBSEQUENT EVENT:
 
    Subsequent to December 31, 1998, the Company acquired two fitness clubs.
These acquisitions will be accounted for in accordance with the purchase method.
The aggregate purchase price totaled $1,709 which included $1,000 payable at
closing and the issuance of notes payable totaling $709.
 
                                      F-25
<PAGE>
       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
 
                                          New York, New York
                                          February 16, 1999
 
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
 
    Our audits on the consolidated financial statements referred to in our
report dated February 16, 1999 appearing in this Form 10-K on page F-1 also
included in an audit of the financial statement schedule which appears on page
F-27 of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therin when
read in conjunction with the related consolidated financial statements.
 
                                          PRICEWATERHOUSECOOPERS LLP
 
                                      F-26
<PAGE>
                TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
 
                 SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
 
                                 (IN THOUSANDS)
 
    For each of the years ended May 31, 1996, 1997, 1998 and the seven month
period ended December 31, 1998.
 
<TABLE>
<CAPTION>
                                                    COL. B                 COL. C                               COL. E
                                                 -------------  ----------------------------                 -------------
                                                  BALANCE AT    CHARGED TO     CHARGED TO        COL. D       BALANCE AT
                                                   BEGINNING     COSTS AND        OTHER       -------------       END
DESCRIPTION                                         OF YEAR      EXPENSES       ACCOUNTS       DEDUCTIONS       OF YEAR
-----------------------------------------------  -------------  -----------  ---------------  -------------  -------------
<S>                                              <C>            <C>          <C>              <C>            <C>
Deferred tax asset valuation allowance:........    $     284                                                   $     284
1996...........................................
1997...........................................          284                                    $    (100)(1)         184
The year ended May 31, 1998....................          184                                                         184
The seven months ended December 31, 1998.......          184     $   100(2)                                          284
</TABLE>
 
------------------------
 
(1) Reduction of valuation allowance from the utilization of state net operating
    loss carryfowards which were no longer required.
 
(2) Increase in valuation allowance required for state net operating loss
    carryforwards.
 
                                      F-27