UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Transition period from      to     .

TOWN SPORTS INTERNATIONAL HOLDINGS, INC.

Delaware		20-0640002
(State or other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ       No o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in “accelerated filer and large accelerated filer” Exchange Act Rule 12b-2).

o Large accelerated filer      o Accelerated filer       þ Non-accelerated filer

     Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o       No þ

     As of May 1, 2007 there were 26,117,908 shares Common of Stock of the Registrant outstanding, par value $.001 per share.

 

 

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q
For the Quarter Ended March 31, 2007

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets as of December 31, 2006 and March 31, 2007			3
b) Condensed Consolidated Statements of Operations and Statements of Comprehensive Income (Loss) for the three months ended March 31, 2006 and 2007			4
c) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2007			5
d) Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults upon Senior Securities			26
Item 4. Submission of Matters to a Vote of Security Holders			26
Item 5. Other Information			26
Item 6. Exhibits			27
SIGNATURES
Section 302 certification			33
Section 302 certification			34
Section 906 certification			35
Section 906 certification			36
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		December 31,				March 31,
		2006				2007
ASSETS
Current assets:
Cash and cash equivalents		$	6,810			$	9,277
Accounts receivable (less allowance for doubtful accounts of $2,026 and $2,820 as of December 31, 2006 and March 31, 2007, respectively)			8,028				9,976
Inventory			435				415
Prepaid corporate income taxes			—				1,620
Prepaid expenses and other current assets			14,757				13,449
Total current assets			30,030				34,737
Fixed assets, net			281,606				287,274
Goodwill			50,112				50,107
Intangible assets, net			922				769
Deferred tax asset, net			32,437				35,311
Deferred membership costs			15,703				16,538
Other assets			12,717				11,658
Total assets		$	423,527			$	436,394
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt		$	181			$	1,999
Accounts payable			9,972				9,127
Accrued expenses			33,220				29,380
Accrued interest			3,466				1,335
Corporate income taxes payable			2,577				—
Deferred revenue			38,980				44,459
Total current liabilities			88,396				86,300
Long-term debt			280,948				297,013
Deferred lease liabilities			54,929				56,120
Deferred revenue			5,807				5,916
Other liabilities			11,276				11,352
Total liabilities			441,356				456,701
Commitments and contingencies (Note 9)			—				—
Stockholders’ deficit:
Class A voting common stock, $.001 par value; issued and outstanding 25,975,948 and 26,067,508 shares at December 31, 2006 and March 31, 2007, respectively. (See Note 2)			26				26
Paid-in capital			(21,068	)			(19,766	)
Accumulated other comprehensive income (currency translation adjustment)			539				560
Retained earnings (accumulated deficit)			2,674				(1,127	)
Total stockholders’ deficit			(17,829	)			(20,307	)
Total liabilities and stockholders’ deficit		$	423,527			$	436,394

See notes to the condensed consolidated financial statements.

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended March 31,
		2006				2007
Revenues:
Club operations		$	102,923			$	114,340
Fees and other			1,104				1,037
			104,027				115,377
Operating Expenses:
Payroll and related			40,897				44,751
Club operating			34,470				39,364
General and administrative			7,861				7,758
Depreciation and amortization			10,386				11,091
			93,614				102,964
Operating income			10,413				12,413
Loss on extinguishment of debt			—				12,521
Interest expense			10,687				7,016
Interest income			(725	)			(259	)
Equity in the earnings of investees and rental income			(433	)			(422	)
Income (loss) before provision (benefit) for corporate income taxes			884				(6,443	)
Provision (benefit) for corporate income taxes			1,019				(2,642	)
Net loss		$	(135	)		$	(3,801	)
Loss per share:
Basic		$	(0.01	)		$	(0.15	)
Diluted		$	(0.01	)		$	(0.15	)
Weighted average number of shares used in calculating loss per share:
Basic			18,327,722				25,997,253
Diluted			18,327,722				25,997,253
Statements of Comprehensive Income (Loss)
Net loss		$	(135	)		$	(3,801	)
Foreign currency translation adjustments			6				21
Comprehensive loss		$	(129	)		$	(3,780	)

See notes to the condensed consolidated financial statements.

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months
		Ended March 31,
		2006				2007
Cash flows from operating activities:
Net loss		$	(135	)		$	(3,801	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			10,386				11,091
Non-cash interest expense on Senior Discount Notes			4,126				2,962
Loss on extinguishment of debt			—				12,521
Amortization of debt issuance costs			417				269
Noncash rental expense, net of noncash rental income			(19	)			508
Compensation expense incurred in connection with stock options			43				169
Net changes in certain operating assets and liabilities			22,331				(2,411	)
Increase in deferred tax asset			(2,315	)			(2,874	)
Landlord contributions to tenant improvements			1,610				1,131
Increase in reserve for self-insured liability claims			495				140
Increase in deferred membership costs			(2,221	)			(835	)
Other			22				21
Total adjustments			34,875				22,692
Net cash provided by operating activities			34,740				18,891
Cash flows from investing activities:
Capital expenditures			(15,023	)			(19,311	)
Net cash used in investing activities			(15,023	)			(19,311	)
Cash flows from financing activities:
Proceeds from New Credit Facility			—				185,000
Costs related to issuance of New Credit Facility			—				(2,631	)
Repayment of Senior Notes			—				(169,999	)
Premium paid on extinguishment of debt and related costs			—				(9,309	)
Repayment of long term borrowings			(311	)			(79	)
Change in book overdraft			(986	)			(1,230	)
Tax benefit from stock option exercises			—				515
Proceeds from exercise of stock options			—				620
Net cash (used in) provided by financing activities			(1,297	)			2,887
Net increase in cash and cash equivalents			18,420				2,467
Cash and cash equivalents at beginning of period			51,304				6,810
Cash and cash equivalents at end of period		$	69,724			$	9,277
Summary of change in certain operating assets and liabilities:
Increase in accounts receivable		$	(2,083	)		$	(2,247	)
(Increase) decrease in inventory			(71	)			20
Decrease in prepaid expenses and other current assets			369				933
Increase (decrease) in accounts payable, accrued expenses and accrued interest			10,110				(2,510	)
Change in prepaid corporate income taxes and corporate income taxes payable			4,518				(4,197	)
Increase in deferred revenue			9,488				5,590
Net changes in certain operating assets and liabilities		$	22,331			$	(2,411	)
Supplemental disclosures of cash flow information:
Cash payments for interest		$	150			$	6,044
Cash payments for income taxes		$	645			$	3,915

See notes to the condensed consolidated financial statements.

TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

     Town Sports International Holdings, Inc. and Subsidiaries (the “Company” or “TSI Holdings”) owns and operates 150 fitness clubs (“clubs”) and partly owns and operates two additional clubs as of March 31, 2007. The Company operates in a single segment. The Company operates 102 clubs in the New York metropolitan market, 21 clubs in the Boston market, 19 clubs in the Washington, D.C. market, seven clubs in the Philadelphia market and three clubs in Switzerland. 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, acts of terrorism and economic down turns.

     Effective June 30, 2006, Town Sports International, Inc., a wholly owned subsidiary of TSI Holdings, merged with and into TSI Club, LLC, a New York limited liability company (the “Merger”). TSI Club, LLC was the surviving entity in the Merger and changed its name to Town Sports International, LLC (“TSI LLC”). TSI Holdings is the sole member of TSI LLC.

     The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements should be read in conjunction with TSI Holdings’ December 31, 2006 consolidated financial statements and notes thereto, included on Form 10-K, as filed on March 13, 2007 with the SEC. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures that are normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods set forth herein. The results for the three months ended March 31, 2007 are not necessarily indicative of the results for the entire year ending December 31, 2007.

2. Initial Public Offering

     The registration statement filed in connection with the Company’s Initial Public Offering (“IPO”), as filed with the SEC, was declared effective on June 1, 2006. The Company’s shares of common stock (“Common Stock”) began trading on the NASDAQ Stock Market on June 2, 2006 under the symbol CLUB. In connection with the IPO, the Board of Directors approved a 14 for 1 common stock split. All share and per share data have been adjusted to reflect this stock split. The Company closed this transaction and received proceeds on June 7, 2006. The IPO consisted of 8,950,000 shares of common stock, including 7,650,000 shares issued by the Company and 1,300,000 shares sold by certain selling stockholders to certain specified purchasers. The Company’s sale of 7,650,000 shares of common stock resulted in net proceeds of $91,750. These proceeds are net of underwriting discounts and commissions and offering costs payable by the Company totaling $7,700. The IPO proceeds were used for the redemption of 35% of the aggregate principal amount of the Company’s outstanding 11% Senior Discount Notes due 2014, and the remainder of the proceeds together with cash on hand was used to consummate the tender offer for $85,001 of TSI LLC’s 9 5/8% Senior Notes due 2011.

3. Recent Accounting Pronouncements

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective January 1, 2008 for the Company. We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB No. 115 (“SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities separately. SFAS 159 is effective January 1, 2008 for the Company. We are currently evaluating the impact of SFAS 159 on our Consolidated Financial Statements.

4. Long-Term Debt

		December 31,				March 31,
		2006				2007
		($’000s)				($’000s)
Term Loan Facility		$	—			$	185,000
9 5/8% Senior Notes			169,999				—
11.0% Senior Discount Notes due 2014 (Payment-in-Kind Notes)			110,850				113,811
Notes payable for acquired businesses			280				201
			281,129				299,012
Less, current portion to be paid within one year			181				1,999
Long-term portion		$	280,948			$	297,013

     The Company had a senior secured revolving credit facility (the “Senior Credit Facility”) of $75.0 million that was to mature April 15, 2008. On February 27, 2007, the Senior Credit Facility was replaced with a $75,000 revolving credit facility (the “Revolving Loan Facility”) (see below for details).

     On February 27, 2007, the Company entered into a $260,000 senior secured credit facility (“New Senior Credit Facility”). The New Senior Credit Facility consists of a $185,000 term loan facility (the “Term Loan Facility”) and the Revolving Loan Facility and an incremental term loan commitment facility in the maximum amount of $100,000, which borrowing thereunder is subject to compliance with certain conditions precedent and by TSI and agreement upon certain terms and conditions thereof between the participating lenders and TSI. The Revolving Loan Facility replaced the Senior Credit Facility.

     The proceeds of the Term Loan Facility were used to purchase $169,999 aggregate principal amount of TSI LLC’s 9 5/8% Senior Notes outstanding, together with applicable tender or call premiums. The Company incurred $8,759 of tender premium and $215 of call premium together with $335 fees and expenses related to the tender of the 9 5/8% Senior Notes. Net deferred financing costs related to the Senior Credit Facility and the 9 5/8% Senior Notes totaling approximately $3,212 were expensed in the first quarter of 2007. The loss on extinguishment of debt is summarized as follows:

Tender premium		$	8,759
Call premium			215
Write-off of deferred financing costs related to the Senior Credit Facility and 9 5/8% Senior Notes			3,212
Fees and expenses			335
Loss on early extinguishment of debt		$	12,521

     The New Senior Credit Facility contains various covenants including the maintenance of a maximum permitted total leverage ratio, if any loans or letters of credit under the facility are outstanding. As of March 31, 2007, the Company was in compliance with its debt covenants under the related credit agreement. These covenants may limit TSI’s ability to incur additional debt. As of March 31, 2007, permitted borrowing capacity of $75,000 was not restricted by the covenants.

     Borrowings under the Term Loan Facility will, at TSI’s option, bear interest at either the administrative agent’s base rate plus 0.75% or its Eurodollar rate plus 1.75%, each as defined in the related credit agreement. The interest rate was 7.125% as of March 31, 2007. The Term Loan Facility matures on the earlier of February 27, 2014, or August 1, 2013, if the Company’s 11% Senior Discount Notes due 2014 are still outstanding. TSI is required to repay 0.25% of principal, or $463 per quarter beginning on June 30, 2007.

     The Revolving Loan Facility expires on February 27, 2012 and borrowings under the facility currently, at TSI’s option, bear interest at either the administrative agent’s base rate plus 1.25% or the Eurodollar rate plus 2.25% as defined in the related credit agreement. TSI’s applicable base rate and Eurodollar rate margins, and commitment commission percentage vary with the Company’s consolidated secured

leverage ratio, as defined in the related credit agreement. As of March 31, 2007, TSI LLC is required to pay a commitment fee of 0.50% per annum on the daily unutilized amount. The Revolving Loan Facility contains a maximum total leverage covenant ratio, as defined, which covenant is subject to compliance, on a consolidated basis, only during the period in which borrowings and letters of credit are outstanding thereunder. There were no borrowings outstanding at March 31, 2007 and outstanding letters of credit issued totaled $10,937. The unutilized portion of the Revolving Loan Facility as of March 31, 2007 was $64,063.

5. Earnings (Loss) Per Share

     Basic earnings (loss) per share is computed by dividing net income (loss) applicable to common shareholders by the weighted average numbers of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share, except that the denominator is increased for the assumed exercise of dilutive stock options using the treasury stock method. The effect of the shares issuable upon the exercise of stock options were not included in the calculation of diluted EPS for the three months ended March 31, 2006 and 2007, respectively, as they were antidilutive. The number of equivalent shares excluded totaled 231,588 and 546,226 for the three months ended March 31, 2006 and 2007, respectively.

6. Stock-Based Compensation

     On May 30, 2006, the Board of Directors of the Company approved the 2006 Stock Incentive Plan. The 2006 Stock Incentive Plan authorizes the Company to issue up to 1,300,000 shares of Common Stock to employees, non-employee directors and consultants pursuant to awards of stock options, stock appreciation rights, restricted stock, in payment of performance shares or other stock-based awards. Under the 2006 Stock Incentive Plan, stock options must be granted at a price at least equal to the fair market value of the stock on the date the option is granted, generally are not subject to re-pricing, and will not be exercisable more than ten years after the date of grant.

     Options granted under the 2004 Common Stock Option Plan generally qualify as “incentive stock options” under the U.S. Internal Revenue Code. Options granted under the 2006 Stock Option Plan generally qualify as “non-qualified stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option is not less than the fair market value of the Company’s common stock on the option grant date.

     On March 28, 2007, the Company issued 8,000 stock options under the 2006 Stock Incentive Plan to certain members of the Board of Directors of the Company. These stock options were issued at an exercise price of $21.75, the fair market value on the grant date. The value of each option was $10.38 calculated using the Black-Scholes option pricing model with an expected volatility of 45.0%, dividend yield of 0.0%, a risk free interest rate of 4.54% and an expected term of 5.5 years.

     At March 31, 2007, the Company has 866,280 and 473,160 stock options outstanding under its 2004 Common Stock Option Plan and 2006 Stock Incentive Plan, respectively. The total compensation expense, classified within Payroll and related on the condensed statements of operations, related to these plans was $43 and $169 for the three months ended March 31, 2006 and 2007, respectively.

As of March 31, 2007, a total of $2,501 unrecognized compensation cost related to stock options is expected to be recognized, depending upon the likelihood that accelerated vesting targets are met in future periods, over a weighted-average period of 3.6 years.

7. Goodwill and Other Intangibles

     Goodwill has been allocated to reporting units that closely reflect the regions served by our four trade names; New York Sports Clubs, Boston Sports Clubs, Washington Sports Clubs and Philadelphia Sports Clubs, with certain more remote clubs that do not benefit from a regional cluster being considered single reporting units.

     In each of the quarters ended March 31, 2006 and 2007, the Company performed its annual impairment test. Goodwill impairment testing requires a comparison between the carrying value and fair value of reportable goodwill. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of the impairment loss is measured as the difference between the carrying value and the implied fair value of goodwill, which is determined using discounted cash flows. The 2006 and 2007 impairment tests supported the recorded goodwill balances and as such no impairment of goodwill was required. The change in the carrying amount of goodwill from December 31, 2006 through March 31, 2007 is as follows:

Balance as of December 31, 2006		$	50,112
Changes due to foreign currency exchange rate fluctuations			(5	)
Balance as of March 31, 2007		$	50,107

		As of December 31, 2006
		($’000s)
		Gross Carrying				Accumulated
Acquired Intangible Assets		Amount				Amortization				Net Intangibles
Membership lists		$	12,146			$	(11,389	)		$	757
Covenants-not-to-compete			1,151				(1,004	)			147
Beneficial lease			223				(205	)			18
		$	13,520			$	(12,598	)		$	922

		As of March 31, 2007
		($’000s)
		Gross Carrying				Accumulated
		Amount				Amortization				Net Intangibles
Membership lists		$	12,146			$	(11,525	)		$	621
Covenants-not-to-compete			1,151				(1,018	)			133
Beneficial lease			223				(208	)			15
		$	13,520			$	(12,751	)		$	769

     The amortization expense of the above acquired intangible assets for each of the three years ending March 31, 2010 is as follows:

Aggregate Amortization Expense for the twelve months ending March 31, ($’000s)
2008		$	390
2009			356
2010			23
		$	769

     Amortization expense for the three months ended March 31, 2006 and 2007 amounted to $172 and $153, respectively.

8. Income Taxes

     The Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. FIN 48 requires that a Company recognize in their consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company did not have a change to the liability for unrecognized tax benefits as a result of the implementation. At the adoption date of January 1, 2007, the Company had $1,155 of unrecognized tax benefits. Of this total, $751 represents the amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate in any future periods. The Company does not anticipate the total amount of unrecognized benefits will significantly change by December 31, 2007.

     The Company recognizes both interest accrued related to unrecognized tax benefits and penalties in income tax expenses. This policy is upon adoption of FIN 48. The Company has no accruals for interest or penalties as of January 1, 2007.

          The Company files Federal income tax returns, foreign jurisdiction return and multiple state and local jurisdiction tax returns. The state of New York is currently examining years 2003, 2004 and 2005. The Company is no longer subject to examinations of its Federal income tax returns by the Internal Revenue Service for years 2000 and prior.

9. Commitments and Contingencies

     On March 1, 2005, in an action styled Sarah Cruz, et ano v. Town Sports International, Inc., plaintiffs commenced a purported class action against the Company in the Supreme Court, New York County, seeking unpaid wages and alleging that TSI LLC violated various overtime provisions of the New York State Labor Law with respect to the payment of wages to certain trainers and assistant fitness managers. On or about November 2, 2005, the complaint and the lawsuit was stayed upon agreement of the parties pending mediation. On or about November 28, 2006, the plaintiffs gave notice that they wished to lift the stay. On or about February 7, 2007, the plaintiffs made a motion requesting leave to file a Second Amended Complaint which seeks to add to the purported class all New York hourly employees and additional alleged violations of the provisions of the New York State Labor Law with respect to the payment of wages. TSI LLC has opposed that motion and has agreed to mediate with respect to such employees. While we are unable to determine the ultimate outcome of the above actions, we intend to contest the case vigorously. Depending upon the ultimate outcome, this matter may have a material effect on TSI LLC’s consolidated financial position, results of operations or cash flows.

     TSI LLC and several other third parties have been named as defendants in an action styled Carlos Urbina et ano v. 26 Court Street Associates, LLC et al., filed in the Supreme Court, New York County, on June 12, 2001, seeking damages for personal injuries. Following a trial, TSI LLC received a directed verdict for indemnification against one of TSI LLC’s contractors and the plaintiffs received a jury verdict

of approximately $8.9 million in their favor. Both of those verdicts are being appealed and TSI LLC has filed an appeal bond in the amount of $1.8 million in connection with those appeals. TSI LLC is vigorously opposing the appeal of the directed verdict and prosecuting the appeal of the jury verdict, which appeals were argued on May 16, 2006. Depending on the ultimate outcome, this matter may have a material effect on TSI LLC’s consolidated financial position, results of operations or cash flows.

     We are engaged in other legal actions arising in the ordinary course of business and believe that the ultimate outcome of these actions will not have a material effect on the TSI LLC’s consolidated financial position, results of operations or cash flows.

10. Investments in Affiliated Companies

     The Company has investments in Capitol Hill Squash Club Associates (“CHSCA”) and Kalorama Sports Managements Associates (“KSMA”) (collectively referred to as the “Affiliates”). The Company has a limited partnership interest in CHSCA, which provides the Company with approximately 20% of the CHSCA profits, as defined. The Company has a co-general partnership and limited partnership interests in KSMA, which entitles it to receive approximately 45% of KSMA’s profits, as defined. The Affiliates have operations, that are similar, and related to, those of the Company. The Company accounts for these Affiliates in accordance with the equity method. The assets, liabilities, equity and operating results of CHSCA and the Company’s pro rata share of CHSCA’s net assets and operating results were not material for all periods presented. KSMA’s balance sheets for the periods presented are not material to the Company’s balance sheets for these respective periods. Total revenue, income from operations and net income of KSMA for the three months ending March 31, 2006 and 2007 are as follows:

		Three months ended
		March 31,
		($’000s)
		2006				2007
Revenue		$	906			$	900
Income from operations			367				373
Net income			347				348

11. Guarantors

     All of TSI LLC’s domestic subsidiaries have unconditionally guaranteed the New Senior Credit Facility discussed in Note 4, however, TSI LLC’s foreign subsidiary has not provided guarantees for the credit facility.

     Each guarantor of the New Senior Credit Facility is a wholly owned subsidiary of TSI LLC. The guarantees are full and unconditional and joint and several. The following schedules set forth condensed consolidating financial information as required by Rule 3-10(d) of Securities and Exchange Commission Regulation S-X at December 31, 2006 and March 31, 2007, and for the three months ended March 31, 2006 and 2007.

Condensed Consolidating Balance Sheet
December 31, 2006
(All figures in $’000s)
(Unaudited)

														Non-
		TSI								Subsidiary				Guarantor
		Holdings				TSI LLC				Guarantors				Subsidiary				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	437				1,226			$	3,027			$	2,120			$	—			$	6,810
Accounts receivable, net			—				4,422				3,459				147				—				8,028
Inventory			—				—				409				26				—				435
Prepaid corporate income taxes			5,813				(5,812	)			(1	)			—				—				—
Inter-company receivable (payable)			840				(840	)			—				—				—				—
Prepaid expenses and other current assets			—				5,265				9,492				—				—				14,757
Total current assets			7,090				4,261				16,386				2,293				—				30,030
Investment in subsidiaries			67,592				230,359				—				—				(297,951	)			—
Fixed assets, net			—				9,901				271,034				671				—				281,606
Goodwill			—				—				49,305				807				—				50,112
Intangible assets, net			—				—				922				—				—				922
Deferred tax assets, net			16,092				16,888				(491	)			(52	)			—				32,437
Deferred membership costs			—				—				15,703				—				—				15,703
Other assets			2,247				9,264				1,206				—				—				12,717
Total assets		$	93,021			$	270,673			$	354,065			$	3,719			$	(297,951	)		$	423,527
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt		$	—			$	—			$	181			$	—			$	—			$	181
Accounts payable			—				—				9,972				—				—				9,972
Accrued expenses			—				14,263				21,107				427				—				35,797
Accrued interest			—				3,464				2				—				—				3,466
Deferred revenue			—				267				38,622				91				—				38,980
Total current liabilities			—				17,994				69,884				518				—				88,396
Long-term debt			110,850				173,571				(3,473	)			—				—				280,948
Deferred lease liabilities			—				482				54,447				—				—				54,929
Deferred revenue			—				—				5,807				—				—				5,807
Other liabilities			—				11,034				242				—				—				11,276
Total liabilities			110,850				203,081				126,907				518				—				441,356
Stockholder’s deficit:
Common stockholders’ deficit			(18,368	)			67,592				227,158				3,201				(297,951	)			(18,368	)
Accumulated other comprehensive income			539				—				—				—				—				539
Total stockholders’ deficit			(17,829	)			67,592				227,158				3,201				(297,951	)			(17,829	)
Total liabilities and stockholders’ deficit:		$	93,021			$	270,673			$	354,065			$	3,719			$	(297,951	)		$	423,527

Condensed Consolidating Balance Sheet
March 31, 2007
(All figures in $’000s)
(Unaudited)

														Non-
		TSI								Subsidiary				Guarantor
		Holdings				TSI LLC				Guarantors				Subsidiary				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	1,084			$	377			$	5,575			$	2,241			$	—			$	9,277
Accounts receivable			—				5,059				4,633				284				—				9,976
Inventory			—				—				389				26				—				415
Prepaid corporate income taxes			5,813				(4,200	)			7				—				—				1,620
Intercompany receivable (payable)			—				—				—				—				—				—
Prepaid expenses and other current assets			683				6,415				7,951				(1,600	)			—				13,449
Total current assets			7,580				7,651				18,555				951				—				34,737
Investment in subsidiaries			66,371				228,286				—				—				(294,657	)			—
Fixed assets, net			—				9,643				277,006				625				—				287,274
Goodwill			—				—				49,296				811				—				50,107
Intangible assets, net			—				—				769				—				—				769
Deferred tax assets, net			17,397				18,458				(491	)			(53	)			—				35,311
Deferred membership costs			—				—				16,538				—				—				16,538
Other assets			2,189				8,405				1,064				—				—				11,658
Total assets		$	93,537			$	272,443			$	362,737			$	2,334			$	(294,657	)		$	436,394
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt		$	—			$	1,850			$	149			$	—			$	—			$	1,999
Accounts payable			—				—				9,127				—				—				9,127
Accrued expenses and corporate income taxes payable			33				7,526				21,378				443				—				29,380
Accrued interest			—				1,335				—				—				—				1,335
Deferred revenue			—				413				43,954				92				—				44,459
Total current liabilities			33				11,124				74,608				535				—				86,300
Long-term debt			113,811				183,150				52				—				—				297,013
Deferred lease liabilities			—				695				55,425				—				—				56,120
Deferred revenue			—				—				5,916				—				—				5,916
Other Liabilities			—				11,103				249				—				—				11,352
Total liabilities			113,844				206,072				136,250				535				—				456,701
Stockholders’ Deficit:
Common Stockholders’ deficit			(20,867	)			66,371				226,487				1,799				(294,657	)			(20,867	)
Accumulated other comprehensive income			560				—				—				—				—				560
Total stockholders’ deficit			(20,307	)			66,371				226,487				1,799				(294,657	)			(20,307	)
Total liabilities and stockholders’ deficit		$	93,537			$	272,443			$	362,737			$	2,334			$	(294,657	)		$	436,394

Condensed Consolidating Statements of Operations
For the three months ended March 31, 2006
(All figures in $’000s)
(Unaudited)

														Non-
										Subsidiary				Guarantor
		TSI Holdings				TSI LLC				Guarantors				Subsidiary				Eliminations				Consolidated
Revenues:
Club operations		$	—			$	—			$	101,673			$	1,250			$	—			$	102,923
Fees and other			—				261				843				—				—				1,104
			—				261				102,516				1,250				—				104,027
Operating expenses:
Payroll and related			—				8,043				32,372				482				—				40,897
Club operating			—				438				33,724				308				—				34,470
General and administrative			—				1,420				6,302				139				—				7,861
Depreciation and amortization			—				1,281				9,010				95				—				10,386
			—				11,182				81,408				1,024				—				93,614
Operating income (loss)			—				(10,921	)			21,108				226				—				10,413
Interest expense			4,224				5,267				1,196				—				—				10,687
Interest income			—				(725	)			—				—				—				(725	)
Equity in the earnings on investees and rental income			—				(261	)			(172	)			—				—				(433	)
Income(loss) from operations before provision for corporate income taxes			(4,224	)			(15,202	)			20,084				226				—				884
Provision (benefit) for corporate income taxes			(1,858	)			(4,554	)			7,431				—				—				1,019
Equity earnings from subsidiaries			2,231				12,879				—				—				(15,110	)			—
Net income (loss)		$	(135	)		$	2,231			$	12,653			$	226			$	(15,110	)		$	(135	)

Condensed Consolidating Statements of Operations
For the three months ended March 31, 2007
(All figures in $’000s)
(Unaudited)

		TSI								Subsidiary				Non-Guarantor
		Holdings				TSI  LLC				Guarantors				Subsidiary				Eliminations				Consolidated
Revenues:
Club operations		$	—			$	197			$	112,966			$	1,177			$	—			$	114,340
Fees and other			—				221				816				—				—				1,037
			—				418				113,782				1,177				—				115,377
Operating expenses:
Payroll and related			—				6,057				38,239				455				—				44,751
Club operating			5				386				38,685				288				—				39,364
General and administrative			155				1,007				6,483				113				—				7,758
Depreciation and amortization			—				1,003				10,033				55				—				11,091
			160				8,453				93,440				911				—				102,964
Operating income (loss)			(160	)			(8,035	)			20,342				266				—				12,413
Loss on extinguishment of debt			—				12,521				—				—				—				12,521
Interest expense			3,020				2,378				1,627				(9	)			—				7,016
Interest income			—				(254	)			(5	)			—				—				(259	)
Equity in the income of investees and rental income			—				(259	)			(163	)			—				—				(422	)
Income (loss) before provision (benefit) for corporate income taxes			(3,180	)			(22,421	)			18,883				275				—				(6,443	)
Provision (benefit) for corporate income taxes			(1,305	)			(8,391	)			6,987				67				—				(2,642	)
Income (loss) before equity earnings			(1,875	)			(14,030	)			11,896				208				—				(3,801	)
Equity earnings from subsidiaries			(1,926	)			12,104				—				—				(10,178	)			—
Net income (loss)		$	(3,801	)		$	(1,926	)		$	11,896			$	208			$	(10,178	)		$	(3,801	)

Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2006
(All figures in $’000s)
(Unaudited)

										Subsidiary				Non- Guarantor
		TSI Holdings				TSI  LLC				Guarantors				Subsidiary				Eliminations				Consolidated
Cash flows from operating activities:
Net income (loss)		$	(135	)		$	2,231			$	12,653			$	226			$	(15,110	)		$	(135	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			—				1,281				9,010				95				—				10,386
Compensation expense in connection with stock options			—				43				—				—				—				43
Noncash rental expense, net of noncash rental income			—				(40	)			21				—				—				(19	)
Noncash interest expense on Senior Discount Notes			4,126				—				—				—				—				4,126
Amortization of debt issuance costs			89				328				—				—				—				417
Increase in Insurance Reserve			—				495				—				—				—				495
Landlord Contributions			—				(5	)			1,615				—				—				1,610
Changes in operating assets and liabilities			8				22,323				—				—				—				22,331
Other			(4,089	)			(11,159	)			(4,104	)			(272	)			15,110				(4,514	)
Total adjustments			134				13,266				6,542				(177	)			15,110				34,875
Net cash (used in) provided by operating activities			(1	)			15,497				19,195				49				—				34,740
Net cash used in investing activities			—				(15,023	)			—				—				—				(15,023	)
Net cash used in financing activities			—				(1,297	)			—				—				—				(1,297	)
Net increase (decrease) in cash and cash equivalents			(1	)			(823	)			19,195				49				—				18,420
Cash and cash equivalents at beginning of period			1				1,359				48,682				1,262				—				51,304
Cash and cash equivalents at end of period		$	—			$	536			$	67,877			$	1,311			$	—			$	69,724

Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2007
(All figures in $’000s)
(Unaudited)

														Non-
		TSI								Subsidiary				Guarantor
		Holdings				TSI LLC				Guarantors				Subsidiary				Eliminations				Consolidated
Cash flows from Operating Activities:
Net income (loss)		$	(3,801	)		$	(1,926	)		$	11,896			$	208			$	(10,178	)		$	(3,801	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			—				1,003				10,033				55				—				11,091
Compensation expense in connection with stock options			—				169				—				—				—				169
Non-cash rental expense, net of noncash rental income			—				213				295				—				—				508
Non-cash interest expense on Senior Discount Notes			2,962				—				—				—				—				2,962
Loss on extinguishment of debt			—				12,521				—				—				—				12,521
Amortization of debt issuance costs			57				212				—				—				—				269
Increase in reserve for self-insured liability claims			—				140				—				—				—				140
Landlord contributions to tenant improvements			—				—				1,131				—				—				1,131
Changes in operating assets and liabilities			188				(2,599	)			—				—				—				(2,411	)
Other			621				(9,396	)			(4,962	)			(129	)			10,178				(3,688	)
Total adjustments			3,828				2,263				6,497				(74	)			10,178				22,692
Net cash provided by operating activities			27				337				18,393				134				—				18,891
Net cash used in investing activities			—				(3,453	)			(15,845	)			(13	)			—				(19,311	)
Net cash provided by financing activities			620				2,267				—				—				—				2,887
Net increase (decrease) in cash and cash equivalents			647				(849	)			2,548				121				—				2,467
Cash and cash equivalents at beginning of period			437				1,226				3,027				2,120				—				6,810
Cash and cash equivalents at end of period		$	1,084			$	377			$	5,575			$	2,241			$	—			$	9,277