UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

		For the quarterly period ended September 30, 2003


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

		For the Transition period from to .

Commission File Number 333-40907

TOWN SPORTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


New York		13-2749906
(State or other Jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification Number)

888 Seventh Avenue
New York, New York 10106
Telephone: (212) 246-6700
(Address, zip code, and telephone number, including
area code, of registrants principal executive office.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No þ

As of November 4, 2003 date there were 1,176,043 shares of Class A Common Stock of the Company outstanding.

TABLE OF CONTENTS


		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings.
	Item 2. Changes in Securities.
	Item 3. Defaults Upon Senior Securities.
	Item 4. Submission of Matters to a Vote of Security Holders.
	Item 5. Other Information.
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
SECTION 302 CERTIFICATION
SECTION 302 CERTIFICATION
SECTION 302 CERTIFICATION
SECTION 906 CERTIFICATION
SECTION 906 CERTIFICATION

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003

INDEX


			Page

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements (Unaudited)
		a) Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30, 2003		2
		b) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2003		3
		c) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2003		4
		d) Notes to Condensed Consolidated Financial Statements		5
	Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations			17
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
	Item 4. Controls and Procedures			22
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings			23
	Item 2. Change in Securities			23
	Item 3. Defaults upon Senior Securities			23
	Item 4. Submission of Matters to a Vote of Security Holders			23
	Item 5. Other Information			23
	Item 6. Exhibits and Reports on Form-8-K			23
SIGNATURES				24

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

All figures $’000, except share data
December 31, 2002 and September 30, 2003


			December 31,			September 30,
			2002			2003

						(Unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	5,551		$	55,784
	Accounts receivable, net of allowance for doubtful accounts of $120 and $482 at December 31, 2002 and September 30, 2003, respectively			1,333			1,002
	Inventory			1,132			787
	Prepaid corporate income taxes			3,012			1,571
	Prepaid expenses and other current assets			4,430			5,816

		Total current assets		15,458			64,960
Fixed assets, net of accumulated depreciation of $104,488 and $125,429 at December 31, 2002 and September 30, 2003, respectively				210,823			215,098
Goodwill				45,531			45,663
Intangible assets, net of accumulated amortization of $10,478 and $11,193 at December 31, 2002 and September 30, 2003, respectively				1,675			836
Deferred tax asset, net				20,254			18,175
Deferred membership costs				14,408			14,360
Other assets				6,101			10,367

		Total assets	$	314,250		$	369,459

Liabilities, Redeemable Preferred Stock and Stockholders’ Deficit
Current liabilities:
	Current portion of long-term debt and capital lease obligations		$	5,178		$	4,198
	Accounts payable			5,328			3,639
	Accrued interest			2,731			11,264
	Accrued expenses			18,903			21,306
	Deferred revenue			26,510			28,068

		Total current liabilities		58,650			68,475
Long-term debt and capital lease obligations				155,765			259,088
Deferred lease liabilities				23,644			25,365
Deferred revenue				3,435			3,569
Other liabilities				7,530			7,928

		Total liabilities		249,024			364,425

Redeemable preferred stock:
Redeemable senior preferred stock, $1.00 par value; liquidation value $64,512 at December 31, 2002; authorized 100,000 shares; 40,000 shares issued and outstanding at December 31, 2002				62,125			—
Series A preferred stock, at liquidation value 153,637 shares issued and outstanding at December 31, 2002 and September 30, 2003				34,841			38,585

				96,966			38,585

Stockholders’ deficit:
	Series B preferred stock, at liquidation value 3,822 and 109,541 shares issued and outstanding at December 31, 2002 and September 30, 2003, respectively			303			9,636
	Class A voting common stock, $.001 par value; issued and outstanding 1,176,043 shares			1			1
	Paid-in capital			(32,149	)		(41,130	)
	Unearned compensation			(278	)		(248	)
	Accumulated other comprehensive income (currency translation adjustment)			293			400
	Retained earnings (Accumulated deficit)			90			(2,210	)

		Total stockholders’ deficit		(31,740	)		(33,551	)

		Total liabilities, redeemable preferred stock and stockholders’ deficit	$	314,250		$	369,459

See notes to the condensed consolidated financial statements.

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2003
All figures $’000
(Unaudited)


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

		2002			2003			2002			2003

Revenues:
	Club operations	$	80,219		$	84,436		$	235,258		$	254,219
	Fees and other		1,093			2,335			2,935			5,511

			81,312			86,771			238,193			259,730

Operating expenses:
	Payroll and related		32,617			32,647			96,579			98,623
	Club operating		26,189			28,761			74,218			82,115
	General and administrative		4,995			5,677			14,799			15,917
	Depreciation and amortization		7,752			8,782			23,486			25,535

			71,553			75,867			209,082			222,190

	Operating income		9,759			10,904			29,111			37,540
Loss on extinguishment of debt			—			—			—			7,773
Interest expense			4,112			6,760			12,398			17,106
Interest income			(38	)		(179	)		(116	)		(397	)

	Income from continuing operations before provision for corporate income taxes		5,685			4,323			16,829			13,058
Provision for corporate income taxes			2,846			1,989			8,060			6,004

	Income from continuing operations		2,839			2,334			8,769			7,054
Loss on discontinued operations, net of income tax benefit of $478 and $562 for the three and nine months ended September 30, 2002, respectively			(710	)		—			(826	)		—
Cumulative effect of a change in accounting principle, net of income tax benefit of $612			—			—			(689	)		—

	Net income		2,129			2,334			7,254			7,054
Accreted dividends on preferred stock			(2,958	)		(1,631	)		(8,552	)		(9,269	)

	Net income (loss) attributable to common stockholders	$	(829	)	$	703		$	(1,298	)	$	(2,215	)

See notes to the condensed consolidated financial statements.

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2002 and 2003
All figures $’000
(Unaudited)


			Nine Months Ended
			September 30,

			2002			2003

Cash flows from operating activities:
	Net income		$	7,254		$	7,054

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			23,768			25,535
	Goodwill impairment write-off			1,301			—
	Club closure costs			1,095			—
	Compensation expense in connection with stock options			901			207
	Noncash rental expense, net of noncash rental income			1,278			1,311
	Share of net income in affiliated companies			(523	)		(592	)
	Loss on extinguishment of debt			—			7,773
	Amortization of debt issuance costs			1,435			1,300
	Change in certain working capital components			9,804			12,215
	Decrease (increase) in deferred tax asset			(2,485	)		2,079
	Decrease (increase) in deferred membership costs			(418	)		48
	Other			136			542

		Total adjustments		36,292			50,418

		Net cash provided by operating activities		43,546			57,472

Cash flows from investing activities:
	Capital expenditures, net of effects of acquired business in 2002			(34,324	)		(29,131	)
	Proceeds from sale of equipment			—			153
	Acquisition of business			(348	)		—
	Intangible and other assets			287			—
	Landlord contributions			3,467			617

		Net cash used in investing activities		(30,918	)		(28,361	)

Cash flows from financing activities:
	Proceeds from 9 5/8% Senior Note Offering			—			255,000
	Repayment of 9 3/4% Senior Notes			—			(125,000	)
	Premium paid on extinguishment of debt and other costs			—			(4,064	)
	Redemption of redeemable senior preferred stock			—			(66,977	)
	Transaction costs related to 9 5/8% Senior Notes			—			(9,597	)
	Net line of credit repayment			(12,000	)		(14,500	)
	Net subordinated credit (repayments) borrowings			2,810			(9,000	)
	Repurchase of Series B preferred stock			—			(583	)
	Repayments of borrowings			(3,833	)		(4,157	)

		Net cash provided by (used in) financing activities		(13,023	)		21,122

		Net increase (decrease) in cash and cash equivalents		(395	)		50,233
Cash and cash equivalents at beginning of period				5,458			5,551

		Cash and cash equivalents at end of period	$	5,063			55,784

Summary of change in certain working capital components, net of effects of acquired businesses:
	Decrease in accounts receivable			384			331
	Decrease (increase) in inventory			(117	)		345
	Decrease (increase) in prepaid expenses, prepaid income taxes, and other current assets			(999	)		647
	Increase in accounts payable and accrued expenses			6,159			9,200
	Increase in deferred revenue			4,377			1,692

		Net changes in working capital	$	9,804		$	12,215


Supplemental Disclosures of cash flow information:
	Noncash investing and financing activities:
		The Company assumed $445 of long term debt in connection with a club acquisition during the nine month period ended September 30, 2002.
		The Company acquired $1,889 of club equipment financed by lessors during the nine month period ended September 30, 2002.
See also Note 7 for stock option exercises in 2003.

See notes to the condensed consolidated financial statements.

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and September 30, 2003
(Unaudited)

1. Basis of Presentation

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 the Company’s December 31, 2002 consolidated financial statements and notes thereto, included in Form 10-K. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. The information reflects all adjustments which, in the opinion of Management, are necessary for a fair presentation of the financial position and results of operations for the interim periods set forth herein. All such adjustments, except for the cumulative effect of a change in accounting principle, discontinued operations, and loss on extinguishment of debt are of a normal and recurring nature. The results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2003.

2. Long-Term Debt and Capital Lease Obligations


	December 31,		September 30,
	2002		2003

	($000’s)		($000’s)
9 3/4% Senior Notes, due 2004	$	125,000	$	—
9 5/8% Senior Notes, due 2011		—		255,000
Line of Credit borrowings		14,500		—
Subordinated credit borrowings		9,000		—
Notes payable for acquired businesses		6,230		4,992
Capital lease obligations		6,213		3,294

		160,943		263,286
Less, Current portion due within one year		5,178		4,198

Long-term portion	$	155,765	$	259,088

On April 16, 2003 the Company successfully completed a refinancing of its debt. This refinancing included an offering of $255.0 million of 9 5/8% Senior Notes (“Notes”) that will mature April 15, 2011, and the entering into of a new $50.0 million senior secured revolving credit facility (the “Senior Credit Facility”) that will expire April 15, 2008. The Notes accrue interest at 9 5/8% per annum and interest is payable semiannually on April 15, and October 15. The Company has effected a registration statement with the Securities and Exchange Commission for notes having substantially identical terms as the Notes as part of an offer to exchange freely tradable exchange notes for the Notes. In connection with this refinancing, the Company wrote-off $3.7 million of deferred financing costs related to extinguished debt, paid a call premium of $3.0 million and incurred $1.0 million of interest on the 9 3/4% Notes representing the interest incurred during the 30 day redemption notification period. The uses of proceeds from the 9 5/8% Note offering were as follows:


	($000’s)

Redemption of existing 9 3/4% Senior Notes, principal and interest	$	126,049
Call premium on existing 9 3/4% Senior Notes		3,048
Redemption of senior preferred stock, at liquidation value		66,977
Repayment of line of credit principal borrowings and interest		4,013
Repayment of subordinated credit principal borrowings and interest		9,060
Underwriting fees and other closing costs		9,597
Available for general corporate purposes		36,256

Total use of funds	$	255,000

The Senior Credit Facility contains various covenants including limits on capital expenditures, the maintenance of a consolidated interest coverage ratio of not less than 2.25:1.00 during 2003, and a maximum permitted total leverage ratio of 4.00:1.00 during 2003. Loans under the Senior Credit Facility will, at our option, bear interest at either the bank’s prime rate plus 3.0% or the Eurodollar rate plus 4.0%, as defined. There were no borrowings outstanding at September 30, 2003 and outstanding letters of credit issued totaled $1.8 million. The unutilized portion of the Senior Credit Facility as of September 30, 2003 was $48.2 million.

3. September 11, 2001 Events

The terrorist attacks of September 11, 2001 (“the September 11 events”), resulted in a tremendous loss of life and property. Secondarily, those events have interrupted the operations at four clubs located in downtown Manhattan. Three of the affected four clubs were back in operation by October 2001, while the fourth club reopened in September 2002.

The Company carries business interruption insurance to mitigate certain lost revenue and profits experienced with the September 11 events. In this regard, the Company received $350,000 in the first quarter of 2002, of which $175,000 represented reimbursement for costs incurred and $175,000 represented an on-account payment towards the interruption claim. In the third and fourth quarters of 2002, on-account payments of $250,000 and $600,000 were received. In the first quarter of 2003, an on-account payment of $1.3 million was received, and in July 2003, the Company entered into a settlement agreement with its insurer resulting in a final settlement payment of $1.5 million. These on-account and final payments have been classified with fees and other revenues when received.

4. Goodwill and Other Intangibles

Effective January 1, 2002 the Company implemented the Financial Accounting Standards Board (“FASB”) Statement No. 141 Business Combinations and Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). In connection with the SFAS 142 transition impairment test the Company recorded a $1.3 million write-off of goodwill in the quarter ended March 31, 2002. A deferred tax benefit of $612,000 was recorded with this goodwill write-off, resulting in a net cumulative effect of change in accounting principle of $689,000, in the first quarter of 2002. The write-off of goodwill related to four, remote underperforming clubs. The impairment test was performed with discounted estimated future cash flows as the criteria for determining fair market value. Goodwill has been allocated to reporting units that closely reflect the regions served by the four trade names; New York Sports Club, Boston Sports Club, Washington Sports Club and Philadelphia Sports Club, with certain more remote clubs that do not benefit from a regional cluster each being considered a single reporting unit. The Company performed an impairment test in the quarter ended March 31, 2003 and determined that goodwill was not impaired.

The change in the carrying amount of goodwill from December 31, 2002 through September 30, 2003 is as follows:


Balance December 31, 2002	$	45,531
Currency translation adjustment		132

Balance September 30, 2003	$	45,663

Below is a summary of the Company’s acquired intangible assets as of December 31, 2002 and September 30, 2003.


	As of December 31, 2002
	($000’s)

Acquired Intangible Assets	Gross Carrying Amount		Accumulated Amortization			Net Intangibles

Membership Lists	$	11,054	$	(9,605	)	$	1,449
Covenants-not-to-compete		876		(711	)		165
Beneficial Lease		223		(162	)		61

	$	12,153	$	(10,478	)	$	1,675


	As of September 30, 2003
	($’000’s)

	Gross Carrying Amount		Accumulated Amortization			Net Intangibles

Membership Lists	$	10,930	$	(10,188	)	$	742
Covenants-not-to-compete		876		(835	)		41
Beneficial Lease		223		(170	)		53

	$	12,029	$	(11,193	)	$	836

The amortization expense of the above acquired intangible assets for each of the five years ended December 31, 2007 is as follows:


Aggregate Amortization Expense	($000’s)

For the year ended 12/31/03(a)	$	933
For the year ended 12/31/04		591
For the year ended 12/31/05		11
For the year ended 12/31/06		11
For the year ended 12/31/07		11

	$	1,557

(a)

Amortization expense for the three and nine months ended September 30, 2003 amounted to $225,000 and $721,000 respectively.

5. Stock-Based Employee Compensation

For financial reporting purposes, the Company accounts for stock-based compensation in accordance with the intrinsic value method (“APB No. 25”). In accordance with this method, no compensation expense is recognized in the accompanying financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award are fixed and the fair value of the Company’s stock is not greater than the amount an employee must pay to acquire the stock as defined; however, to the extent that stock options are granted to employees with variable terms or if the fair value of the Company’s stock as of the measurement date is greater than the amount an employee must pay to acquire the stock, then the Company will recognize compensation expense. The fair value of warrants granted to nonemployees for the provision financing are recorded as deferred financing costs and amortized into interest expense using the interest method.

The following table illustrates the effect on net income (loss) attributed to common stockholders if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board issued Statement No. 123, (“SFAS 123”) Accounting for Stock-Based Compensation, to stock-based employee compensation.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		($’000’s)						($’000’s)

		2002			2003			2002			2003

Net income (loss) attributed to common stockholders, as reported		$	(829	)	$	703		$	(1,298	)	$	2,215
Add:
	Stock-based employee compensation expense included in reported net income (loss) attributed to common stockholders, net of related tax effects		6			5			31			16
Deduct:
	Total stock-based employee compensation expense determined under fair value based method for all stock option awards net of related tax effects		(68	)		(67	)		(117	)		(88	)

Pro forma net income (loss) attributed to common stockholders		$	(891	)	$	641		$	(1,384	)	$	2,143

Since option grants vest over several years and additional grants are expected in the future, the pro forma results noted above are not likely to be representative of the effects on future years of the application of the fair value based method.

In July 2003 44,400 common stock options were granted to certain employees under the Town Sports International Stock Option Plan. The options have an exercise price of $144.00, which has been determined by a third party appraiser to be in excess of the fair value of the underlying common stock on the grant date. The options fully vest in 10 years and vesting can be accelerated if certain financial targets, as defined are met.

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 ended December 31, 2000, 2001, and the July 2003 grant, the weighted-average fair value of the option grants were approximately $47.11, $111.89, and $14.50, respectively. The following weighted-average assumptions were used in computing the fair value of options grants: expected volatility of 69% for the year ended December 31, 2000, 72% for the year ended December 31, 2001, and 55.2% for the July 2003 grants, risk-free interest rate of approximately 6.6%, 4.6%, and 3.8% for December 31, 2000, 2001 and the July 2003 grants respectively, expected lives of five years for December 31, 2000 and 2001, and six years for the July 2003 grant, and a zero divided yield for all periods.

6. Discontinued Operations

In the fourth quarter of 2002, the Company sold or closed two remote underperforming, wholly-owned clubs. The Company has accounted for these two clubs as discontinued operations and, accordingly, the results of their operations have been classified as discontinued in the condensed consolidated statement of operations, and prior periods have been reclassified in accordance with the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. Revenues and pre-tax losses for these discontinued clubs were $459,000 and $1.2 million respectively for the three months ended September 30, 2002 and $1.3 million and $1.4 million respectively for the nine months ended September 30, 2002. Included in the pre-tax losses are $1.1 million of fixed asset write-offs related to these club closures.

7. Exercise of Stock Options

In January 2003, an executive officer of the Company exercised 9,530 Series B preferred stock options, and in turn these newly issues shares were repurchased by the Company for $540,000 and were retired. In addition, the same officer sold 548 previously held shares of Series B preferred stock back to the Company for $43,000 which were also retired. In February 2003, several executives of the Company exercised and converted 148,775 Series B preferred stock options into 106,267 shares of Series B preferred stock. The difference between the 148,775 options exercised and the 106,267 shares issued is due to the remittance of these shares to the Company to cover the purchase price of the stock. The remitted shares were subsequently retired by the Company. The executives sold all of Series B preferred stock issued in connection with these February exercises to an affiliate of Rosewood Capital L.P., a stockholder of the Company.

8. Contingencies

On February 13, 2003, an individual filed suit against the Company in the Supreme Court, New York County, alleging that on January 14, 2003, he sustained an injury at one of the Company’s club locations resulting in serious bodily injury. His complaint seeks $250.0 million in damages for personal injuries, in addition to $250.0 million of punitive damages. The Company has in force $51.0 million of insurance coverage to cover claims of this nature. The Company intends to vigorously contest this lawsuit and presently anticipates that these matters will be covered by insurance.

In addition, the Company is a party to various 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.

9. Recent Accounting Pronouncements

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity (“SFAS 150”), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As of September 30, 2003 the Company does not have financial instruments within the scope of this pronouncement.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual return or both. Interpretation No. 46 also provides criteria for determining whether an entity is a variable interest entity subject to consolidation. Interpretation No.46 requires immediate consolidation of variable interest entities created after January 31, 2003. For variable interest entities created prior to February 1, 2003, consolidation is required on October 1, 2003. The Company does not believe the adoption of Interpretation No. 46 will have a material effect on the consolidated financial statements.

10. Guarantors

The Company and all of its domestic subsidiaries have unconditionally guaranteed the $255.0 million 9 5/8% Senior Notes. However the Company’s foreign subsidiaries have not provided guarantees for these Senior Notes.

The following schedules set forth condensed consolidating financial information as required by Rule 3-10 of Securities and Exchange Commission Regulation S-X for the three and nine month periods ending September 30, 2002 and 2003. The financial information illustrates the composition of the combined guarantors.

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

All figures in $’000
December 31, 2002
(Unaudited)


									Non-
						Subsidiary			Guarantor
			Parent			Guarantors			Subsidiaries			Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	1,575		$	3,635		$	341		$	—		$	5,551
	Accounts receivable, net			1,840			1,173			99			(1,779	)		1,333
	Inventory			—			1,106			26			—			1,132
	Prepaid corporate income taxes			3,012			—			—			—			3,012
	Intercompany receivable (payable)			(18,996	)		20,469			(1,473	)		—			—
	Prepaid expenses and other current assets			5,837			2,093			—			(3,500	)		4,430

		Total current assets		(6,732	)		28,476			(1,007	)		(5,279	)		15,458
Investment in subsidiaries				206,413			—			—			(206,413	)		—
Fixed assets, net				11,273			198,050			1,500			—			210,823
Goodwill, net				—			44,927			604			—			45,531
Intangible assets, net				—			1,569			106			—			1,675
Deferred tax assets, net				20,866			(490	)		(122	)		—			20,254
Deferred membership costs				—			14,408			—			—			14,408
Other assets				5,038			1,063			—			—			6,101

		Total assets	$	236,858		$	288,003		$	1,081		$	(211,692	)	$	314,250

Liabilities, Redeemable Preferred Stock, and Stockholders’ Deficit
Current liabilities:
	Current portion of long-term debt and capital lease obligations		$	5,178		$	—		$	—		$	—		$	5,178
	Accounts payable			214			5,114			—			—			5,328
	Accrued expenses and accrued interest			9,470			13,398			545			(1,779	)		21,634
	Deferred revenue			—			26,510			—			—			26,510

		Total current liabilities		14,862			45,022			545			(1,779	)		58,650
Long-term debt and capital lease obligations				155,765			3,500			—			(3,500	)		155,765
Deferred lease liabilities				625			23,019			—			—			23,644
Deferred revenue				7			3,345			83			—			3,435
Other liabilities				373			7,157			—			—			7,530

		Total liabilities		171,632			82,043			628			(5,279	)		249,024

Redeemable Preferred Stock:
Redeemable senior preferred stock				62,125			—			—			—			62,125
Series A preferred stock				34,841			—			—			—			34,841

				96,966			—			—			—			96,966

Stockholders’ deficit:
	Series B preferred stock			303			—			—			—			303
	Common stockholders’ deficit			(32,336	)		205,960			160			(206,120	)		(32,336	)
	Accumulated other comprehensive income			293			—			293			(293	)		293

		Total stockholder’s deficit		(31,740	)		205,960			453			(206,413	)		(31,740	)

		Total liabilities, redeemable preferred stock and stockholder’s deficit:	$	236,858		$	288,003		$	1,081		$	(211,692	)	$	314,250

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

All figures in $’000
September 30, 2003
(Unaudited)


									Non-
						Subsidiary			Guarantor
			Parent			Guarantors			Subsidiaries			Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	1,051		$	53,687		$	1,046		$	—		$	55,784
	Accounts receivable, net			2,089			849			106			(2,042	)		1,002
	Inventory			—			760			27			—			787
	Prepaid corporate income taxes			1,571			—			—			—			1,571
	Intercompany receivable (payable)			16,632			(14,908	)		(1,724	)		—			—
	Prepaid expenses and other current assets			6,585			2,731			—			(3,500	)		5,816

		Total current assets		27,928			43,119			(545	)		(5,542	)		64,960
Investment in subsidiaries				232,109			—			—			(232,109	)		—
Fixed assets, net				12,125			201,574			1,399			—			215,098
Goodwill, net				—			44,907			756			—			45,663
Intangible assets, net				—			849			(13	)		—			836
Deferred tax assets, net				18,794			(491	)		(128	)		—			18,175
Deferred membership costs				—			14,360			—			—			14,360
Other assets				9,389			978			—			—			10,367

		Total assets	$	300,345		$	305,296		$	1,469		$	(237,651	)	$	369,459

Liabilities, Redeemable Preferred Stock, and Stockholders’ Deficit
Current liabilities:
	Current portion of long-term debt and capital lease obligations		$	4,198		$	—		$	—		$	—		$	4,198
	Accounts payable			185			3,454			—			—			3,639
	Accrued interest			11,253			2,053			—			(2,042	)		11,264
	Accrued expenses			5,994			14,867			445			—			21,306
	Deferred revenue			—			28,068			—			—			28,068

		Total current liabilities		21,630			48,442			445			(2,042	)		68,475
Long-term debt and capital lease obligations				272,760			(10,172	)		—			(3,500	)		259,088
Deferred lease liabilities				579			24,786			—			—			25,365
Deferred revenue				(14	)		3,496			87			—			3,569
Other liabilities				356			7,572			—			—			7,928

		Total liabilities		295,311			74,124			532			(5,542	)		364,425

Redeemable Preferred Stock:
Series A preferred stock				38,585			—			—			—			38,585

Stockholders’ deficit:
	Series B preferred stock			9,636			—			—			—			9,636
	Common stockholders’ deficit			(43,587	)		231,172			537			(231,709	)		(43,587	)
	Accumulated other comprehensive income			400			—			400			(400	)		400

		Total stockholder’s deficit		(33,551	)		231,172			937			(232,109	)		(33,551	)

		Total liabilities, redeemable preferred stock and stockholder’s deficit:	$	300,345		$	305,296		$	1,469		$	(237,651	)	$	369,459

TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $’000
For the three months ended September 30, 2003
(Unaudited)


							Non-
					Subsidiary		Guarantor
		Parent			Guarantors		Subsidiaries		Eliminations			Consolidated

Revenues:
	Club operations	$	44		$	83,319	$	1,073	$	—		$	84,436
	Fees and other		1,825			1,521		—		(1,011	)		2,335

		$	1,869		$	84,840	$	1,073	$	(1,011	)	$	86,771

Operating expenses:
	Payroll and related		5,553			26,666		428		—			32,647
	Club operating		448			28,926		258		(871	)		28,761
	General and administrative		—			5,714		103		(140	)		5,677
	Depreciation and amortization		1,098			7,596		88		—			8,782

		$	7,099		$	68,902	$	877	$	(1,011	)	$	75,867

	Operating income		(5,230	)		15,938		196		—			10,904
Interest expense			6,672			88		—		—			6,760
Interest income			(179	)		—		—		—			(179	)

	Income before provision for corporate income taxes		(11,723	)		15,850		196		—			4,323
Provision for corporate income taxes			(5,919	)		7,850		58		—			1,989

	Income before Equity earnings	$	(5,804	)	$	8,000	$	138	$	—		$	2,334
Equity earnings from subsidiaries			8,138			—		—		(8,138	)		—

	Net Income	$	2,334		$	8,000	$	138	$	(8,138	)	$	2,334

TOWN SPORTS INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $’000
For the three months ended September 30, 2002
(Unaudited)


								Non-
					Subsidiary			Guarantor
		Parent			Guarantors			Subsidiaries		Eliminations			Consolidated

Revenues:
	Club operations	$	161		$	79,086		$	972	$	—		$	80,219
	Fees and other		536			1,649			—		(1,092	)		1,093

			697			80,735			972		(1,092	)		81,312

Operating expenses:
	Payroll and related		5,439			26,790			388		—			32,617
	Club operating		102			26,793			245		(951	)		26,189
	General and administrative		(320	)		5,369			87		(141	)		4,995
	Depreciation and amortization		759			6,910			83		—			7,752

			5,980			65,862			803		(1,092	)		71,553

	Operating income		(5,283	)		14,873			169		—			9,759
Interest expense			4,109			91			—		(88	)		4,112
Interest income			(126	)		—			—		88			(38	)

	Income from continuing operations before provision for corporate income taxes		(9,266	)		14,782			169		—			5,685
Provision for corporate income taxes			(4,648	)		7,458			36		—			2,846

	Income from continuing operations		(4,618	)		7,324			133		—			2,839
Equity earnings from subsidiaries			7,457						—		(7,457	)		—
	Loss on discontinued operations, net of income tax benefit		(710	)		(710	)		—		710			(710	)

	Net Income	$	2,129		$	6,614		$	133	$	(6,747	)	$	2,129

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $’000
For the nine months ended September 30, 2003
(Unaudited)


							Non-
					Subsidiary		Guarantor
		Parent			Guarantors		Subsidiaries		Eliminations			Consolidated

Revenues:
	Club operations	$	98		$	250,707	$	3,414	$	—		$	254,219
	Fees and other		3,691			4,908		—		(3,088	)		5,511

			3,789			255,615		3,414		(3,088	)		259,730

Operating expenses:
	Payroll and related		16,718			80,628		1,277		—			98,623
	Club operating		(1,058	)		85,048		793		(2,668	)		82,115
	General and administrative		(679	)		16,717		299		(420	)		15,917
	Depreciation and amortization		2,862			22,404		269		—			25,535

			17,843			204,797		2,638		(3,088	)		222,190

	Operating income		(14,054	)		50,818		776		—			37,540
Loss on extinguishment of debt			7,773			—		—		—			7,773
Interest expense			17,117			164		—		(175	)		17,106
Interest income			(572	)		—		—		175			(397	)

	Income before provision for corporate income taxes		(38,372	)		50,654		776		—			13,058
Provision for corporate income taxes			(18,982	)		24,782		204		—			6,004

	Income from operations before equity earnings		(19,390	)		25,872		572		—			7,054
	Equity earnings from subsidiaries		26,444			—		—		(26,444	)		—

	Net income	$	7,054		$	25,872	$	572	$	(26,444	)	$	7,054

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

All figures in $’000
For the nine months ended September 30, 2002
(Unaudited)


								Non-
					Subsidiary			Guarantor
		Parent			Guarantors			Subsidiaries		Eliminations			Consolidated

Revenues:
	Club operations	$	207		$	232,299		$	2,752	$	—		$	235,258
	Fees and other		1,294			4,642			—		(3,001	)		2,935

			1,501			236,941			2,752		(3,001	)		238,193

Operating expenses:
	Payroll and related		16,179			79,310			1,090		—			96,579
	Club operating		374			75,736			688		(2,580	)		74,218
	General and administrative		(755	)		15,718			257		(421	)		14,799
	Depreciation and amortization		2,053			21,134			299		—			23,486

			17,851			191,898			2,334		(3,001	)		209,082

	Operating income		(16,350	)		45,043			418		—			29,111
Interest expense			12,388			266			7		(263	)		12,398
Interest income			(379	)		—			—		263			(116	)

	Income from continuing operations before provision for corporate income taxes		(28,359	)		44,777			411		—			16,829
Provision for corporate income taxes			(13,582	)		21,550			92		—			8,060

	Income from continuing operations		(14,777	)		23,227			319		—			8,769
Equity earnings from subsidiaries			23,546			—			—		(23,546	)		—
Loss on discontinued operations, net of income tax benefit of $48			(826	)		(826	)		—		826			(826	)
Cumulative effect of a change in accounting principle, net of income tax benefit of $612			(689	)		(689	)		—		689			(689	)

	Net income	$	7,254		$	21,712		$	319	$	(22,031	)	$	7,254

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

All figures in $’000
For the nine months ended September 30, 2003
(Unaudited)


									Non-
						Subsidiary			Guarantor
			Parent			Guarantors			Subsidiaries			Eliminations			Consolidated

Cash flows from operating activities:
	Net income		$	7,054		$	25,872		$	572		$	(26,444	)	$	7,054

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			2,862			22,404			269			—			25,535
	Compensation expense in connection with stock options			207			—			—			—			207
	Noncash rental expense, net of noncash rental income			(62	)		1,373			—			—			1,311
	Loss on extinguishment of debt			7,773			—			—			—			7,773
	Share of net income in affiliated companies			(592	)		—			—			—			(592	)
	Amortization of debt issuance costs			1,300			—			—			—			1,300
	Changes in operating assets and liabilities			10,840			3,604			(102	)		—			14,342
	Other (including equity earnings)			(26,431	)		421			108			26,444			542

		Total adjustments		(4,103	)		27,802			275			26,444			50,418

Net cash provided by operating activities				2,951			53,674			847			—			57,472
Net cash used in investing activities				(3,713	)		(24,480	)		(168	)		—			(28,361	)
Net cash provided by financing activities				238			20,858			26			—			21,122

Net change in cash and cash equivalents				(524	)		50,052			705			—			50,233
Cash and cash equivalents at beginning of period				1,575			3,635			341			—			5,551

Cash and cash equivalents at end of period			$	1,051		$	53,687		$	1,046		$	—		$	55,784

TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

All figures in $’000
For the nine months ended September 30, 2002
(Unaudited)


									Non-
						Subsidiary			Guarantor
			Parent			Guarantors			Subsidiaries			Eliminations			Consolidated

Cash flows from operating activities:
	Net income		$	7,254		$	21,712		$	319		$	(22,031	)	$	7,254

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			2,053			21,416			299			—			23,768
	Goodwill impairment write-off and club closure costs			—			2,396			—			—			2,396
	Compensation expense in connection with stock options			901			—			—			—			901
	Noncash rental expense, net of noncash rental income			(45	)		1,323			—			—			1,278
	Share of net income in affiliated companies			(523	)		—			—			—			(523	)
	Amortization of debt issuance costs			1,435			—			—			—			1,435
	Change in operating assets and liabilities			778			6,020			103			—			6,901
	Other (including equity earnings)			(22,061	)		(3	)		169			22,031			136

		Total adjustments		(17,462	)		31,152			571			22,031			36,292

Net cash provided by operating activities				(10,208	)		52,864			890			—			43,546
Net cash used in investing activities				(2,516	)		(28,067	)		(335	)		—			(30,918	)
Net cash used in financing activities				12,591			(25,262	)		(352	)		—			(13,023	)

Net decrease in cash and cash equivalents				(133	)		(465	)		203			—			(395	)
Cash and cash equivalents at beginning of period				190			5,192			76			—			5,458

Cash and cash equivalents at end of period			$	57		$	4,727		$	279		$	—		$	5,063

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are one of the two leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States. As of September 30, 2003, we operated 129 clubs that collectively served approximately 353,000 members. We develop clusters of clubs to serve densely populated major metropolitan regions in which a high percentage of the population commutes to work. We service such populations by clustering clubs near the highest concentrations of our target customers’ areas of both employment and residence. Our target customer is college-educated, typically between the ages of 21 and 50 and earns an annual income of between $50,000 and $150,000.

Our goal is to develop the premier health club network in each of the major metropolitan regions we enter. We believe that clustering clubs allows us to achieve strategic operating advantages that enhance our ability to achieve this goal. In entering new regions, we develop these clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburban commuter communities. Capitalizing on this clustering of clubs, as of September 30, 2003, approximately 50% of our members participated in a membership plan that allows unlimited access to all of our clubs for a higher membership fee.

We have executed this strategy successfully in the New York region through the network of clubs we operate under our New York Sports Club (“NYSC”) brand name. We are the largest fitness club operator in Manhattan with 36 locations and operate a total of 86 clubs under the NYSC name within a defined radius of New York City. We operate 19 clubs in the Boston region and 15 clubs in the Washington, DC region under our Boston Sports Club (“BSC”) and Washington Sports Club (“WSC”) brand names, respectively and have begun establishing a similar cluster in the Philadelphia region with six clubs under our Philadelphia Sports Club (“PSC”) brand name. In addition we operate three clubs in Switzerland. We employ localized brand names for our clubs to create an image and atmosphere consistent with the local community, and to foster the recognition as a local network of quality fitness clubs rather than a national chain.

Our 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, personal training fees, 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.

Historical Club Growth

The following table sets forth our club growth during each of the quarters in 2002 and the first three quarters of 2003.


	2002												2003

	Q1		Q2		Q3		Q4			Total			Q1		Q2		Q3

Clubs at beginning of period		119		126		127		128			119			129		129		129
Greenfield clubs(a)		6		1		1		—			8			—		—		3
Acquired clubs		1		—		—		3			4			—		—		—
Sold, closed or relocated clubs		—		—		—		(2	)		(2	)		—		—		(3	)

Clubs at end of period(b)		126		127		128		129			129			129		129		129

Number of partly-owned clubs included at the end of the period(c)		2		2		2		2			2			2		2		2

(a)		A “Greenfield club” is a new location constructed by us.

(b)		As described in the September 11, 2001 Events discussion, a single club was closed from September 2001 through August 2002 due to its proximity to the World Trade Center. This club is included in the total clubs at end of period for all periods presented.

(c)		We include in the club count wholly and partly-owned clubs. In addition to the above count, as of the periods presented we managed two additional clubs, in which we did not have an equity stake.

Results of Operations

The following table sets forth certain operating data as a percentage of revenue for the periods indicated:


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

		2002			2003			2002			2003

Revenue			100.0	%		100.0	%		100.0	%		100.0	%

Operating expenses:
	Payroll and related		40.1			37.7			40.5			38.0
	Club operating		32.3			33.1			31.2			31.6
	General and administrative		6.1			6.5			6.2			6.1
	Depreciation and amortization		9.5			10.1			9.9			9.8

	Operating income		12.0			12.6			12.2			14.5
Loss on extinguishment of debt			—			—			—			3.0
Interest expense			5.1			7.8			5.2			6.6
Interest income			—			(0.2	)		—			(0.1	)

	Income from continuing operations before provision for corporate income taxes		7.0			5.0			7.0			5.0
Provision for corporate income taxes			3.5			2.3			3.3			2.3

	Income from continuing operations		3.5			2.7			3.7			2.7
Loss on discontinued operations, net of income tax benefit			0.9			—			(0.3	)		—
Cumulative effect of a change in accounting principle, net of income tax benefit			—			—			(0.3	)		—

	Net income		2.6			2.7			3.1			2.7
Accreted dividend on preferred stock			(3.6	)		(1.9	)		(3.6	)		(3.6	)

	Net income attributable to common stockholders		(1.0	)%		(0. 8	)%		(0.5	)%		(0. 9	)%

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

Revenues. Revenues increased approximately $5.5 million, or 6.7%, to $86.8 million during the quarter ended September 30, 2003 from $81.3 million in the quarter ended September 30, 2002. This increase resulted from the seven clubs opened or acquired during the last quarter of 2001 (approximately $921,000), and eleven opened or acquired during 2002 (approximately $3.4 million). Increases in revenues at three clubs opened during the third quarter of 2003 were offset by decreases in revenues at the three clubs relocated in the quarter. Revenues decreased during the quarter by approximately $339,000 or 0.5% at the Company’s mature clubs (clubs owned and operated for at least 24 months). Revenue also increased $1.3 million due to on-account business interruption insurance payments received in 2003 when compared to the same period in 2002.

Operating Expenses. Operating expenses increased $4.3 million, or 6.0%, to $75.9 million in the quarter ended September 30, 2003, from $71.6 million in the quarter ended September 30, 2002. The increase was primarily due to a 3.4% increase in total months of club operations (the aggregate number of full months of operation during a given period for the clubs open at the end of such period) to 385 in the quarter ended September 30, 2003 from 372 in the quarter ended September 30, 2002, in addition to the following factors:

Payroll and related totaled $32.6 million in the quarters ended September 30, 2002 and 2003. A $320,000 or 1.0% increase in payroll and related was offset by a decrease in non-cash compensation expense. Non-cash compensation expense decreased $290,000 from the quarter ended September 30, 2002 when compared to the quarter ended September 30, 2003. The non-cash compensation expense incurred during the 2002 period principally related to outstanding Series B stock options, and such stock options were exercised during the first quarter of 2003.


	Club operating increased by $2.6 million, or 9.8%, to $28.8 million in the quarter ended September 30, 2003, from $26.2 million in the quarter ended September 30, 2002. This increase is primarily attributable to the acquisition or opening of eleven clubs in 2002.


	General and administrative increased by $682,000 or 13.6% to $5.7 million in the quarter ended September 30, 2003. This increase is primarily due to increased information technology and related costs as well as increases in liability insurance.


	Depreciation and amortization increased by $1.0 million, or 13.3% to $8.8 million in the quarter ended September 30, 2003, from $7.8 million in the quarter ended September 30, 2002. This increase is principally due to a full period of depreciation and amortization for fixed asset additions, acquisitions or club openings in 2002.

Interest Expense. Interest expense increased $2.6 million to $6.8 million during the quarter ended September 30, 2003, from $4.1 million in the quarter ended September 30, 2002. Interest expense increased $3.1 million due to the increase in Senior Notes outstanding from $125.0 million to $255.0 million. This increase was partially offset by decreases in interest on credit line and subordinated credit borrowings, which were outstanding in 2002 but repaid on April 16, 2003 in connection with the refinancing.

Interest Income. Interest income increased $141,000 to $179,000 during the quarter ended September 30, 2003 from $38,000 in the quarter ended September 30, 2002. This increase is due to an increase in cash and cash equivalents on hand. Cash and cash equivalents on hand increased from $5.1 million in September 2002 to $55.8 million in September 2003 subsequent to the April 2003 refinancing.

Provision (benefit) for Income Tax. The income tax provision for the quarter ended September 30, 2003 was $2.0 million compared with $2.8 million for the same period in 2002.

Loss on Discontinued Operations. In the fourth quarter of 2002, we closed two remote underperforming, wholly-owned clubs. We have accounted for these two clubs as discontinued operations and, accordingly, the results of their operations have been classified as discontinued in the consolidated statement of operations and prior periods have been reclassified in accordance with the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. The net loss related to these two clubs was $710,000 for the quarter ended September 30, 2002. Revenues and pre-tax losses for these discontinued clubs were $459,000 and $1.2 million respectively in the third quarter ended September 30, 2002. Included in the pre-tax losses are $1.1 million of fixed asset write-offs related to these club closures.

Accreted Dividends on Preferred Stock. Accreted dividends on preferred stock decreased $1.3 million to $1.6 million during the quarter ended September 30, 2003, from $3.0 million in the quarter ended September 30, 2002. This decrease is principally due to the redeemable senior preferred stock redemption as part of the April 16, 2003 refinancing transactions.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Revenues. Revenues increased approximately $21.5 million, or 9.0%, to $259.7 million for the nine months ended September 30, 2003 from $238.2 for the nine months ended September 30, 2002. This increase resulted from the seven clubs opened or acquired during the last quarter of 2001 (approximately $3.4 million), twelve opened or acquired during 2002 (approximately $14.1 million). The three clubs that opened during the third quarter of 2003 contributed revenue of $291,000 while revenue at the three clubs relocated during the quarter decreased $718,000. In addition, revenues increased during the period by approximately $2.1 million or 0.9% at the Company’s mature clubs (clubs owned and operated for at least 24 months). Revenue also increased $2.4 million due to on-account business interruption insurance payments received in 2003 when compared to the same period in 2002.

Operating Expenses. Operating expenses increased $13.1 million, or 6.3%, to $222.2 million for the nine months ended September 30, 2003, from $209.1 million for the nine months ended September 30, 2002. This increase was primarily due to a 4.2% increase in total months of club operations (the aggregate number of full months of operation during a given period for the clubs open at the end of such period) to 1,147 for the nine months ended September 30, 2003 from 1,100 for the nine months ended September 30, 2002, in addition to the following factors:

Payroll and related increased by $2.0 million, or 2.1% to $98.6 million for the nine months ended September 30, 2003, from $96.6 million for the nine months ended September 30, 2002. This increase was partially offset by a $694,000 decrease in non-cash compensation expense. The non-cash compensation expense incurred during the 2002 period principally related to outstanding Series B stock options, and such options were exercised during the first quarter of 2003.


	Club operating increased by $7.9 million or 10.6% to $82.1 million for the nine months ended September 30, 2003, from $74.2 million for the nine months ended September 30, 2002. This increase was primarily attributable to the opening or acquisition of twelve clubs in 2002.


	General and administrative increased by $1.1 million, or 7.6% to $15.9 million for the nine months ended September 30, 2003 from $14.8 million for the nine months ended September 30, 2002. This increase is due to increased information technology and related costs as well as increases in liability insurance.


	Depreciation and amortization increased by $2.0 million, or 8.7% to $25.5 million for the nine months ended September 30, 2003, from $23.5 million for the nine months ended September 30, 2002. This increase is principally due to a full period of depreciation and amortization for fixed asset additions, acquisitions or club openings in 2002.

Loss on extinguishment of debt. The $7.8 million loss on extinguishment of debt is a result of the refinancing of our debt on April 16, 2003. In connection with this refinancing, we wrote-off $3.7 million of deferred financing costs related to extinguished debt, paid a $3.0 million call premium, and incurred $1.0 million of additional interest on the 9 3/4% Notes representing interest incurred during the 30 day redemption notification period.

Interest Expense. Interest expense increased $4.7 million to $17.1 million for the nine months ended September 30, 2003, from $12.4 million for the nine months ended September 30, 2002. Interest increased $4.7 million due to the increase in Senior Notes outstanding from $125.0 million to $255.0 million. This increase was partially offset by decreases in interest on credit line and subordinated credit borrowings, which were repaid on April 16, 2003 in connection with the refinancing.

Interest Income. Interest income increased $281,000 to $397,000 for the nine months ended September 30, 2003 from $116,000 for the nine months ended September 30, 2002. This increase is due to an increase in cash and cash equivalents during the nine months ended September 30, 2003 subsequent to the April 2003 refinancing, when compared to 2002.

Provision for Income Tax. The income tax provision for the nine months ended September 30, 2003 was $6.0 million compared to $8.1 million for the nine months ended September 30, 2002.

Loss on Discontinued Operations. In the fourth quarter of 2002, we closed two remote underperforming, wholly-owned clubs. We have accounted for these two clubs as discontinued operations and, accordingly, the results of their operations have been classified as discontinued in the consolidated statement of operations and prior periods have been reclassified in accordance with the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. The net loss related to these two clubs was $826,000 for the nine months ended September 30, 2002. Revenues and pre-tax losses for these discontinued clubs were $1.3 million and $1.4 million respectively for the nine months ended September 30, 2002. Included in the pre-tax losses are $1.1 million of fixed asset write-offs related to these club closures.

Cumulative Effect of Change in Accounting Principle. In connection with the January 2002 implementation of SFAS 142 we recorded a goodwill write-off of $1.3 million. A deferred tax benefit of $612,000 was recorded in connection with this goodwill write-off resulting in a net cumulative effect of change in Accounting Principle of $689,000 during the nine months ended September 30, 2002.

Accreted Dividends on Preferred Stock. Accreted dividends on preferred stock increased $717,000 to $9.3 million during the nine months ended September 30, 2003, from $8.6 million in the nine months ended September 30, 2002. This increase is principally due to the acceleration of the accretion to liquidation value of the redeemable senior preferred stock in connection with its redemption as part of the April 16, 2003 refinancing transactions.

Liquidity and Capital Resources

Historically, we have satisfied our liquidity needs through cash from operations and various borrowing arrangements. Principal liquidity needs have included the acquisition and development of new clubs, debt service requirements and other capital expenditures necessary to maintain existing clubs.

Operating Activities. Net cash provided by operating activities for the nine months ended September 30, 2003 was $57.4 million compared to $43.5 million for the nine months ended September 30, 2002. Cash flows from operations have improved with our increase in operating income, and in addition, because of the favorable impact of management’s exercise of stock options in 2003, which provided us with a current tax deduction of approximately $8.6 million.

Investing Activities. We invested $29.1 million in capital expenditures during the nine months ended September 30, 2003. We currently estimate total capital expenditure and asset acquisition requirements for the fourth quarter of 2003 to approximate $16.6 million, which includes $7.3 million to renovate and expand certain existing clubs, $2.5 million to equip and maintain certain existing clubs, $6.4 million to commence or complete the construction of new clubs and $400,000 to further upgrade our management information systems.

Financing Activities. On April 16, 2003 we successfully completed a refinancing of our debt. This refinancing included an offering of $255.0 million of 9 5/8% Senior Notes (“Notes”) that will mature April 15, 2011, and the entering into of a new $50.0 million senior secured revolving credit facility (the “Senior Credit Facility”) that will expire April 15, 2008. The Notes accrue interest

at 9 5/8% per annum and interest is payable semiannually on April 15, and October 15. In connection with this refinancing, we wrote-off $3.7 million of deferred financing costs related to extinguished debt, paid a call premium of $3.0 million and incurred $1.0 million of interest on the 9 ¾% Notes representing the interest incurred during the 30 day redemption notification period. The uses of proceeds from the Note offering were as follows:


	($000’s)

Redemption of existing 9 ¾% Senior Notes, principal and interest	$	126,049
Call premium on existing 9 ¾% Senior Notes		3,048
Redemption of senior preferred stock, at liquidation value		66,977
Repayment of line of credit principal borrowings and interest		4,013
Repayment of subordinated credit principal borrowings and interest		9,060
Underwriting fees and other closing costs		9,597
Available for general corporate purposes		36,256

Total use of funds	$	255,000

Management believes that the Company has sufficient funds to finance the Company’s current operating and growth plans through the end of 2004 and for the foreseeable future.

We currently have a substantial amount of debt. As of September 30, 2003, our total consolidated debt is $263.3 million. Our substantial debt could have significant consequences, including:

	•		Making it more difficult to satisfy our obligations;

	•		Increasing our vulnerability to general adverse economic and industry conditions;

	•		Limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and other general corporate requirements;

	•		Requiring a substantial portion of our cash flow from operations for the payment of interest on our debt and reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions of new clubs and general corporate requirements; and

	•		Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.

Contractual and Commercial Commitments Summary. The aggregate long-term debt, capital lease and operating lease obligations as of September 30, 2003 are as follows:


	Payments Due by Period

			Less than						After
Contractual Obligations	Total		1 year		2-3 years		4-5 years		5 years

Long-term debt (1)	$	259,992	$	1,350	$	1,777	$	954	$	255,911
Capital lease obligations (2)		3,294		2,847		447		—		—
Operating lease obligations (3)		595,680		50,298		100,572		94,497		350,313
Redeemable preferred stock (4)		38,585		—		—		—		38,585

Total contractual cash obligations	$	897,551	$	54,495	$	102,796	$	95,451	$	644,809

     (1) The long-term debt contractual cash obligations include principal payment requirements only. Interest on our 9 5/8% Senior Notes amounts to $24.5 million annually.

     (2) Capital lease obligations represent principal and interest payments.

     (3) Operating lease obligations include base rent only. Certain leases provide for additional rent based on increases in real estate tax indexation, utilities, and defined amounts based on the operating results of the lessee.

     (4) The redeemable preferred stock is not redeemable on a specific date, but rather at our option or possibly upon sale of the company. For purposes of this schedule we consider this to be redeemable after five years.

Recent Accounting Pronouncements

Forward-Looking Statements

Certain statements in this report on Form 10-Q of the Company for the three and nine month period ended September 30, 2003 are forward-looking statements, including, without limitation, statements regarding future financial results and performance, capital expenditures, and potential sales revenue. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including the level of market demand for the Company’s services, competitive pressures, the ability to maintain current operating margins and to continue to integrate acquisitions, the application of Federal and state tax laws and regulations, and other specific factors discussed herein and in other Securities and Exchange Commission filings by the Company. The information contained herein represents management’s best judgment as of the date hereof based on information currently available; however, the Company does not intend to update this information, except as required by law to reflect development or information obtained after the date hereof and disclaims any legal obligation to the contrary.

Item 3. Quantitative and Qualitative Disclosures About Market Risk


	Not applicable.

Item 4. Controls and Procedures

(a) The Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chairman, Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the report that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission rules and forms. The Company continuously considers opportunities to enhance controls and procedures. In the second quarter of 2003 the Company began the rollout of a new point-of-sale club management system. This system provides for operating and accounting efficiencies and enhances the Company’s ability to bill members electronically as well as monitor usage and revenue at the member level. The Company expects this rollout to be substantially complete in the fourth quarter of 2003.

(b) There have been no significant changes in the Company’s internal control over financial reporting identified in connection with the evaluation described in paragraph (a) above that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On February 13, 2003, an individual filed suit against the Company in the Supreme Court, New York County, alleging that on January 14, 2003, he sustained an injury at one of our club locations resulting in serious bodily injury. His complaint seeks $250.0 million in damages for personal injuries, in addition to $250.0 million of punitive damages. The Company has in force $51.0 million of insurance coverage to cover claims of this nature. The Company intends to vigorously contest this lawsuit and presently anticipates that these matters will be covered by insurance.

In addition, the Company is party to various lawsuits arising in the normal course of business. Management believes that the ultimate outcome of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 2. Changes in Securities.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

	(a)		Exhibits

			Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

			Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

			Exhibit 31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

			Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to section 906 of the Sarbanes-Oxley Act of 2002

			Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	(b)		Reports on Form 8-K

			No reports on Form 8-K were filed during the third quarter of 2003

SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TOWN SPORTS INTERNATIONAL, INC. (Registrant)

DATE: November 4, 2003		By: /s/ RICHARD PYLE
		Richard Pyle
		Chief Financial Officer, Office of the President
		(principal financial, accounting officer)

DATE: November 4, 2003		By: /s/ ROBERT GIARDINA
		Robert Giardina
		Chief Executive Officer
		(principal executive officer)

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TOWN SPORTS INTERNATIONAL INC 10-Q