##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the Transition period from                      to                     .
 Commission File Number 000-52013
 TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    20-0640002(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)
 5 Penn Plaza (4th Floor)
New York, New York 10001
Telephone: (212) 246-6700
 (Address, zip code, and telephone number, including
area code, of registrants principal executive office.)
 þ o
 o o
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
    
    þ Smaller reporting company(Do not check if smaller reporting company)
 o þ




---



##### 



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended September 30, 2010
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations and Statements of Comprehensive (Loss) Income for
the three and nine months ended September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. (Removed and Reserved)
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2010 and December 31, 2009
(All figures in thousands except share data)
(Unaudited)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    37,845
    
    
    $
    10,758Accounts receivable (less allowance for doubtful accounts of $2,428 and $2,410
as of September 30, 2010 and December 31, 2009, respectively)
    
    
    7,415
    
    
    
    4,295Inventory
    
    
    345
    
    
    
    224Prepaid corporate income taxes
    
    
    12,553
    
    
    
    1,274Prepaid expenses and other current assets
    
    
    8,638
    
    
    
    10,264Total current assets
    
    
    66,796
    
    
    
    26,815Fixed assets, net
    
    
    307,581
    
    
    
    340,277Goodwill
    
    
    32,737
    
    
    
    32,636Intangible assets, net
    
    
    61
    
    
    
    149Deferred tax assets, net
    
    
    45,048
    
    
    
    50,581Deferred membership costs
    
    
    5,359
    
    
    
    6,079Other assets
    
    
    9,812
    
    
    
    10,929Total assets
    
    $
    467,394
    
    
    $
    467,466LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    1,850
    
    
    $
    1,850Accounts payable
    
    
    6,464
    
    
    
    6,011Accrued expenses
    
    
    27,323
    
    
    
    23,656Accrued interest
    
    
    2,762
    
    
    
    6,573Deferred revenue
    
    
    40,099
    
    
    
    35,346Total current liabilities
    
    
    78,498
    
    
    
    73,436Long-term debt
    
    
    315,125
    
    
    
    316,513Deferred lease liabilities
    
    
    68,325
    
    
    
    71,438Deferred revenue
    
    
    3,091
    
    
    
    1,488Other liabilities
    
    
    11,076
    
    
    
    12,824Total liabilities
    
    
    476,115
    
    
    
    475,699Contingencies (Note 10)Stockholders deficit:Common stock, $.001 par value; issued and outstanding 22,658,363 and
22,603,199 shares at September 30, 2010 and December 31, 2009, respectively
    
    
    23
    
    
    
    23Paid-in capital
    
    
    (21,877
    )
    
    
    (22,572
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    1,709
    
    
    
    1,327Retained earnings
    
    
    11,424
    
    
    
    12,989Total stockholders deficit
    
    
    (8,721
    )
    
    
    (8,233
    )Total liabilities and stockholders deficit
    
    $
    467,394
    
    
    $
    467,466
  3




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2010 and 2009
(All figures in thousands except share and per share data)
(Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Club operations
    
    $
    111,970
    
    
    $
    119,282
    
    
    $
    344,737
    
    
    $
    367,370Fees and other
    
    
    1,157
    
    
    
    1,167
    
    
    
    3,585
    
    
    
    3,700113,127
    
    
    
    120,449
    
    
    
    348,322
    
    
    
    371,070Operating Expenses:Payroll and related
    
    
    44,409
    
    
    
    47,487
    
    
    
    141,525
    
    
    
    146,480Club operating
    
    
    44,451
    
    
    
    45,589
    
    
    
    131,723
    
    
    
    137,499General and administrative
    
    
    7,049
    
    
    
    8,103
    
    
    
    22,280
    
    
    
    23,938Depreciation and amortization
    
    
    13,151
    
    
    
    14,353
    
    
    
    40,212
    
    
    
    42,995Impairment of fixed assets
    
    
    
    
    
    
    3,473
    
    
    
    3,254
    
    
    
    4,604109,060
    
    
    
    119,005
    
    
    
    338,994
    
    
    
    355,516Operating income
    
    
    4,067
    
    
    
    1,444
    
    
    
    9,328
    
    
    
    15,554Interest expense
    
    
    5,305
    
    
    
    5,378
    
    
    
    15,668
    
    
    
    15,944Interest income
    
    
    (41
    )
    
    
    (1
    )
    
    
    (76
    )
    
    
    (2
    )Equity in the earnings of investees and rental income
    
    
    (499
    )
    
    
    (444
    )
    
    
    (1,553
    )
    
    
    (1,452
    )(Loss) income before benefit for corporate income
taxes
    
    
    (698
    )
    
    
    (3,489
    )
    
    
    (4,711
    )
    
    
    1,064Benefit for corporate income taxes
    
    
    (680
    )
    
    
    (2,004
    )
    
    
    (3,146
    )
    
    
    (614
    )Net (loss) income
    
    $
    (18
    )
    
    $
    (1,485
    )
    
    $
    (1,565
    )
    
    $
    1,678(Loss) earnings per share:Basic
    
    $
    (0.00
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    0.07Diluted
    
    $
    (0.00
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    0.07Weighted average number of shares used in
calculating (loss) earnings per share:Basic
    
    
    22,646,470
    
    
    
    22,565,564
    
    
    
    22,625,765
    
    
    
    22,770,792Diluted
    
    
    22,646,470
    
    
    
    22,565,564
    
    
    
    22,625,765
    
    
    
    22,790,102Statements of Comprehensive (Loss) IncomeNet (loss) income
    
    $
    (18
    )
    
    $
    (1,485
    )
    
    $
    (1,565
    )
    
    $
    1,678Foreign currency translation adjustments
    
    
    596
    
    
    
    259
    
    
    
    382
    
    
    
    182Comprehensive (loss) income
    
    $
    578
    
    
    $
    (1,226
    )
    
    $
    (1,183
    )
    
    $
    1,860
  4




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the nine months ended September 30, 2010 and 2009
 (All figures in thousands)
 (Unaudited)
 Nine Months Ended September 30,2010
    
    
    2009Cash flows from operating activities:Net (loss) income
    
    $
    (1,565
    )
    
    $
    1,678Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    40,212
    
    
    
    42,995Impairment of fixed assets
    
    
    3,254
    
    
    
    4,604Write-off of deferred financing costs
    
    
    
    
    
    
    100Non-cash interest expense on Senior Discount Notes
    
    
    
    
    
    
    1,203Amortization of debt issuance costs
    
    
    759
    
    
    
    643Non-cash rental expense, net of non-cash rental income
    
    
    (3,518
    )
    
    
    (1,686
    )Compensation expense incurred in connection with stock options and common
stock grants
    
    
    1,139
    
    
    
    1,257Decrease (increase) in deferred tax asset
    
    
    5,533
    
    
    
    (3,474
    )Net change in certain operating assets and liabilities
    
    
    (7,174
    )
    
    
    2,156Decrease in deferred membership costs
    
    
    720
    
    
    
    4,345Landlord contributions to tenant improvements
    
    
    100
    
    
    
    4,664(Decrease) increase in insurance reserves
    
    
    (1,053
    )
    
    
    430Other
    
    
    (368
    )
    
    
    (133
    )Total adjustments
    
    
    39,604
    
    
    
    57,104Net cash provided by operating activities
    
    
    38,039
    
    
    
    58,782Cash flows from investing activities:Capital expenditures
    
    
    (9,976
    )
    
    
    (39,805
    )Net cash used in investing activities
    
    
    (9,976
    )
    
    
    (39,805
    )Cash flows from financing activities:Proceeds from borrowings on Revolving Loan Facility
    
    
    
    
    
    
    82,800Repayment of borrowings on Revolving Loan Facility
    
    
    
    
    
    
    (93,000
    )Repayment of long term borrowings
    
    
    (1,388
    )
    
    
    (1,388
    )Costs related to deferred financing
    
    
    
    
    
    
    (615
    )Repurchase of common stock
    
    
    
    
    
    
    (5,355
    )Proceeds from exercise of stock options
    
    
    81
    
    
    
    36Tax benefit from stock option exercises
    
    
    
    
    
    
    21Net cash used in financing activities
    
    
    (1,307
    )
    
    
    (17,501
    )Effect of exchange rate changes on cash
    
    
    331
    
    
    
    146Net increase in cash and cash equivalents
    
    
    27,087
    
    
    
    1,622Cash and cash equivalents beginning of period
    
    
    10,758
    
    
    
    10,399Cash and cash equivalents end of period
    
    $
    37,845
    
    
    $
    12,021Summary of the change in certain operating assets and liabilities:Increase in accounts receivable
    
    $
    (3,120
    )
    
    $
    (1,618
    )(Increase) decrease in inventory
    
    
    (119
    )
    
    
    6Decrease in prepaid expenses and other current assets
    
    
    1,386
    
    
    
    1,018Increase in accounts payable, accrued expenses and accrued interest
    
    
    3,181
    
    
    
    651(Decrease) increase in accrued interest on Senior Discount Notes
    
    
    (3,807
    )
    
    
    2,538Change in prepaid corporate income taxes and corporate income taxes payable
    
    
    (11,279
    )
    
    
    4,545Increase (decrease) in deferred revenue
    
    
    6,584
    
    
    
    (4,984
    )Net change in certain working capital components
    
    $
    (7,174
    )
    
    $
    2,156Supplemental disclosures of cash flow information:Cash payments for interest
    
    $
    19,472
    
    
    $
    12,924Cash payments for income taxes
    
    $
    3,066
    
    
    $
    581
  5




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
(Unaudited)
 1. Basis of Presentation
    Correction of an Accounting Error
  Change in Estimated Average Membership Life
  6




---



##### Table of Contents



Date
    
    2010
    
    2009Three months ended March 31
    
    28 months
    
    30 monthsThree months ended June 30
    
    25 months
    
    28 monthsThree months ended September 30
    
    27 months
    
    28 months
 2. Recent Accounting Pronouncements
    3. Long-Term Debt
 September 30,
    
    
    December 31,2010
    
    
    2009Term Loan Facility
    
    $
    178,525
    
    
    $
    179,91311% Senior Discount Notes
    
    
    138,450
    
    
    
    138,450316,975
    
    
    
    318,363Less: Current portion due within one year
    
    
    1,850
    
    
    
    1,850Long-term portion
    
    $
    315,125
    
    
    $
    316,513
   7




---



##### Table of Contents



Fair Market Value
  4. Concentration of Credit Risk
  8




---



##### Table of Contents



5. (Loss) Earnings Per Share
  Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Weighted average number of shares of
Common Stock outstanding  basic
    
    
    22,646,470
    
    
    
    22,565,564
    
    
    
    22,625,765
    
    
    
    22,770,792Effect of dilutive stock options and restricted
Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,310Weighted average number of shares of
Common Stock outstanding  diluted
    
    
    22,646,470
    
    
    
    22,565,564
    
    
    
    22,625,765
    
    
    
    22,790,102(Loss) earnings per share:Basic
    
    $
    (0.00
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    0.07Diluted
    
    $
    (0.00
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    0.07
   6. Common Stock and Stock-Based Compensation
   9




---



##### Table of Contents



Option Grants
  Risk Free
    
    
    ExpectedNumber of
    
    
    Exercise
    
    
    Black-Scholes
    
    
    
    
    
    
    Dividend
    
    
    Interest
    
    
    TermDate
    
    Options
    
    
    Price
    
    
    Valuation
    
    
    Volatility
    
    
    Yield
    
    
    Rate
    
    
    (Years)January 4, 2010
    
    
    7,000
    
    
    $
    2.47
    
    
    $
    1.73
    
    
    
    83.99
    %
    
    
    0.00
    %
    
    
    2.83
    %
    
    
    5.5January 4, 2010
    
    
    7,500
    
    
    $
    2.47
    
    
    $
    1.81
    
    
    
    83.99
    %
    
    
    0.00
    %
    
    
    3.18
    %
    
    
    6.25August 2, 2010
    
    
    260,000
    
    
    $
    2.77
    
    
    $
    1.96
    
    
    
    80.54
    %
    
    
    0.00
    %
    
    
    2.17
    %
    
    
    6.25274,500
   Restricted Stock Awards
   Stock Grants
  Number of
    
    
    Price Per
    
    
    Grant Date FairDate
    
    Shares
    
    
    Share
    
    
    ValueMarch 25, 2010
    
    
    3,049
    
    
    $
    4.10
    
    
    $
    13June 24, 2010
    
    
    5,252
    
    
    $
    2.38
    
    
    
    12September 24, 2010
    
    
    10,870
    
    
    $
    2.76
    
    
    
    30Total
    
    
    19,171
    
    
    
    
    
    
    $
    55
 10




---



##### Table of Contents



7. Fixed Asset Impairment and Club Closures
    8. Goodwill and Other Intangibles
    11




---



##### Table of Contents



NYSC
    
    
    BSC
    
    
    SSC
    
    

Outlier Clubs
    
    
    TotalBalance as of January 1, 2009Goodwill
    
    $
    31,403
    
    
    $
    15,766
    
    
    $
    1,070
    
    
    $
    3,982
    
    
    $
    52,221Accumulated impairment of goodwill
    
    
    
    
    
    
    (15,766
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    (19,611
    )31,403
    
    
    
    
    
    
    
    1,070
    
    
    
    137
    
    
    
    32,610Changes due to foreign currency
exchange rate
fluctuations
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Balance as of December 31, 2009Goodwill
    
    
    31,403
    
    
    
    15,766
    
    
    
    1,096
    
    
    
    3,982
    
    
    
    52,247Accumulated impairment of goodwill
    
    
    
    
    
    
    (15,766
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    (19,611
    )31,403
    
    
    
    
    
    
    
    1,096
    
    
    
    137
    
    
    
    32,636Changes due to foreign currency
exchange rate
fluctuations
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    101Balance as of September 30, 2010Goodwill
    
    
    31,403
    
    
    
    15,766
    
    
    
    1,197
    
    
    
    3,982
    
    
    
    52,348Accumulated impairment of goodwill
    
    
    
    
    
    
    (15,766
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    (19,611
    )$
    31,403
    
    
    $
    
    
    
    $
    1,197
    
    
    $
    137
    
    
    $
    32,737
  September 30,
    
    
    December 31,2010
    
    
    2009Covenants-not-to-compete
    
    $
    1,508
    
    
    $
    1,508Accumulated amortization
    
    
    (1,447
    )
    
    
    (1,359
    )$
    61
    
    
    $
    149
 9. Income Taxes
     12




---



##### Table of Contents



10. Contingencies
 Sarah Cruz, et al v. Town Sports International,
d/b/a New York Sports Club
  Town Sports International, LLC v. Ajilon Solutions
 13




---



##### Table of Contents



14




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition & Results of Operations
 Introduction
    Revenue and operating expenses
  
    
    Membership revenue:Our largest sources of revenue are dues and initiation fees paid
by our members. These dues and fees comprised 80.3% of our total revenue for the nine
months ended September 30, 2010. We recognize revenue from membership dues in the month
when the services are rendered. Approximately 96% of our members pay their monthly dues
by Electronic Funds Transfer, or EFT, while the balance is paid annually in advance. We
recognize revenue from initiation fees over the expected average life of the membership.
    
    Ancillary club revenue:For the nine months ended September 30, 2010, we generated
12.7% of our revenue from personal training and 6.0% of our revenue from other ancillary
programs and services consisting of programming for children, group fitness training and
other member activities, as well as sales of miscellaneous sports products.
    15




---



##### Table of Contents



Student Membership
  Historical Club Count
  2009
    
    
    2010Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Full-Year
    
    
    Q1
    
    
    Q2
    
    
    Q3Wholly owned clubs operated
 at beginning
of period
    
    
    164
    
    
    
    165
    
    
    
    164
    
    
    
    163
    
    
    
    164
    
    
    
    159
    
    
    
    159
    
    
    
    159New clubs opened
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Clubs closed, relocated or merged
    
    
    (3
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Wholly owned clubs at end of period
    
    
    165
    
    
    
    164
    
    
    
    163
    
    
    
    159
    
    
    
    159
    
    
    
    159
    
    
    
    159
    
    
    
    158Total clubs operated at end of period (1)
    
    
    167
    
    
    
    166
    
    
    
    165
    
    
    
    161
    
    
    
    161
    
    
    
    161
    
    
    
    161
    
    
    
    160
 
 (1)
    
    Includes wholly-owned and partly-owned clubs. In addition to the above, during all periods
presented, we managed four university fitness clubs in which we did not have an equity interest. 16




---



##### Table of Contents



Comparable Club Revenue
   2009Three months ended March 31, 2009
    
    
    (2.1
    )%Three months ended June 30, 2009
    
    
    (6.3
    )%Three months ended September 30, 2009
    
    
    (7.0
    )%Three months ended December 31, 2009
    
    
    (7.1
    )%2010Three months ended March 31, 2010
    
    
    (6.0
    )%Three months ended June 30, 2010
    
    
    (4.2
    )%Three months ended September 30, 2010
    
    
    (5.0
    )%
  17




---



##### Table of Contents



Results of Operations
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    

Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    39.3
    
    
    
    39.4
    
    
    
    40.6
    
    
    
    39.5Club operating
    
    
    39.3
    
    
    
    37.9
    
    
    
    37.8
    
    
    
    37.1General and administrative
    
    
    6.2
    
    
    
    6.7
    
    
    
    6.4
    
    
    
    6.4Depreciation and amortization
    
    
    11.6
    
    
    
    11.9
    
    
    
    11.5
    
    
    
    11.6Impairment of fixed assets
    
    
    
    
    
    
    2.9
    
    
    
    1.0
    
    
    
    1.296.4
    
    
    
    98.8
    
    
    
    97.3
    
    
    
    95.8Operating income
    
    
    3.6
    
    
    
    1.2
    
    
    
    2.7
    
    
    
    4.2Interest expense
    
    
    4.7
    
    
    
    4.5
    
    
    
    4.5
    
    
    
    4.3Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in the earnings of investees and rental
income
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )(Loss) income before benefit for corporate income
taxes
    
    
    (0.7
    )
    
    
    (2.9
    )
    
    
    (1.4
    )
    
    
    0.3Benefit for corporate income taxes
    
    
    (0.6
    )
    
    
    (1.7
    )
    
    
    (0.9
    )
    
    
    (0.2
    )Net (loss) income
    
    
    (0.1
    )%
    
    
    (1.2
    )%
    
    
    (0.5
    )%
    
    
    0.5
    %
 Revenue (in thousands) was comprised of the following for the periods indicated:
 Three Months Ended September 30,2010
    
    
    2009Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % VarianceMembership dues
    
    $
    89,075
    
    
    
    78.8
    %
    
    $
    95,400
    
    
    
    79.2
    %
    
    
    (6.6
    )%Initiation fees
    
    
    1,239
    
    
    
    1.0
    %
    
    
    3,113
    
    
    
    2.6
    %
    
    
    (60.2
    )%Membership revenue
    
    
    90,314
    
    
    
    79.8
    %
    
    
    98,513
    
    
    
    81.8
    %
    
    
    (8.3
    )%Personal training revenue
    
    
    13,837
    
    
    
    12.2
    %
    
    
    13,526
    
    
    
    11.2
    %
    
    
    2.3
    %Other ancillary club revenue
    
    
    7,819
    
    
    
    7.0
    %
    
    
    7,243
    
    
    
    6.0
    %
    
    
    8.0
    %Ancillary club
revenue
    
    
    21,656
    
    
    
    19.2
    %
    
    
    20,769
    
    
    
    17.2
    %
    
    
    4.3
    %Fees and other revenue
    
    
    1,157
    
    
    
    1.0
    %
    
    
    1,167
    
    
    
    1.0
    %
    
    
    (0.9
    )%Total revenue
    
    $
    113,127
    
    
    
    100.0
    %
    
    $
    120,449
    
    
    
    100.0
    %
    
    
    (6.1
    )%
   18




---



##### Table of Contents



Operating expenses (in thousands) were comprised of the following for the periods indicated:
 Three Months Ended September 30,2010
    
    
    2009
    
    
    % VariancePayroll and related
    
    $
    44,409
    
    
    $
    47,487
    
    
    
    (6.5
    )%Club operating
    
    
    44,451
    
    
    
    45,589
    
    
    
    (2.5
    )%General and administrative
    
    
    7,049
    
    
    
    8,103
    
    
    
    (13.0
    )%Depreciation and amortization
    
    
    13,151
    
    
    
    14,353
    
    
    
    (8.4
    )%Impairment of fixed assets
    
    
    
    
    
    
    3,473
    
    
    NA
    %Operating expenses
    
    $
    109,060
    
    
    $
    119,005
    
    
    
    (8.4
    )%
  Payroll and related
 
    
    Payroll related to our membership consultants decreased $2.8 million. The
amount of membership consultant payroll deferred over the past two years has been declining
with our decline in initiation fees collected. Our payroll costs that we defer are limited
to the amount of these fees. This has resulted in a decrease in membership consultant
payroll previously deferred but recognized in the three months ended September 30, 2010.
Also contributing to this decrease is the increase in the amount of payroll costs deferred
in the three months ended September 30, 2010 as initiation fees collected have increased
from $1.1 million to $3.3 million. The aforementioned decrease in payroll includes $230,000
reflecting the changes in the estimated average membership life from 25
months to 27 months effective July 1, 2010.
    
    Payroll related to club staffing, excluding membership consultants, decreased $934,000
from staffing efficiencies realized in the three months ended September 30, 2010 compared
to the same period in 2009.
    
    Payroll related to our management incentive bonuses was $286,000 higher in
the three months ended September 30, 2010 compared to the same period in 2009. We were
forecasting our management incentive bonus payout at 100% of target for the three months
ended September 30, 2010 compared to 50% in the same period in 2009.
  Club operating
 
    
    Operating expenses related to marketing decreased $783,000 in the three months ended
September 30, 2010 compared to the three months ended September 30, 2009 due to our efforts
in 2010 to spend more productively in this area and adjusting our focus toward media
advertising.
  19




---



##### Table of Contents



General and administrative
  Depreciation and amortization
  Impairment of fixed assets
 Benefit for Corporate Income Taxes
   Revenue (in thousands) was comprised of the following for the periods indicated:
 Nine Months Ended September 30,2010
    
    
    2009Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % VarianceMembership dues
    
    $
    273,871
    
    
    
    78.6
    %
    
    $
    294,465
    
    
    
    79.4
    %
    
    
    (7.0
    )%Initiation fees
    
    
    5,695
    
    
    
    1.7
    %
    
    
    9,622
    
    
    
    2.6
    %
    
    
    (40.8
    )%Membership revenue
    
    
    279,566
    
    
    
    80.3
    %
    
    
    304,087
    
    
    
    82.0
    %
    
    
    (8.1
    )%Personal training revenue
    
    
    44,218
    
    
    
    12.7
    %
    
    
    43,696
    
    
    
    11.7
    %
    
    
    1.2
    %Other ancillary club revenue
    
    
    20,953
    
    
    
    6.0
    %
    
    
    19,587
    
    
    
    5.3
    %
    
    
    7.0
    %Ancillary club revenue
    
    
    65,171
    
    
    
    18.7
    %
    
    
    63,283
    
    
    
    17.0
    %
    
    
    3.0
    %Fees and other revenue
    
    
    3,585
    
    
    
    1.0
    %
    
    
    3,700
    
    
    
    1.0
    %
    
    
    (3.1
    )%Total revenue
    
    $
    348,322
    
    
    
    100.0
    %
    
    $
    371,070
    
    
    
    100.0
    %
    
    
    (6.1
    )%
  20




---



##### Table of Contents



Operating expenses (in thousands) were comprised of the following for the periods indicated:
 Nine Months Ended September 30,2010
    
    
    2009
    
    
    % VariancePayroll and related
    
    $
    141,525
    
    
    $
    146,480
    
    
    
    (3.4
    )%Club operating
    
    
    131,723
    
    
    
    137,499
    
    
    
    (4.2
    )%General and administrative
    
    
    22,280
    
    
    
    23,938
    
    
    
    (6.9
    )%Depreciation and amortization
    
    
    40,212
    
    
    
    42,995
    
    
    
    (6.5
    )%Impairment of fixed assets
    
    
    3,254
    
    
    
    4,604
    
    
    
    (29.3
    )%Operating expenses
    
    $
    338,994
    
    
    $
    355,516
    
    
    
    (4.6
    )%
  Payroll and related
 
    
    Payroll related to our membership consultants decreased $6.7 million. The
amount of membership consultant payroll deferred over the past two years has been declining
with our decline in initiation and processing fees collected. Our payroll costs that we
defer are limited to the amount of these fees. This has resulted in a decrease in
membership consultant payroll previously deferred but recognized in the nine months ended
September 30, 2010. Also contributing to this decrease is the increase in the amount of
payroll costs deferred in the nine months ended September 30, 2010 as initiation fees
collected have increased from $2.9 million to $6.2 million.
    
    Payroll related to club staffing, excluding membership consultants, decreased $763,000
from staffing efficiencies realized in the nine months ended September 30, 2010 to the same
period in 2009.
    
    Payroll related to our management incentive bonuses was $1.0 million higher
in the nine months ended September 30, 2010 compared to the same period in 2009. We were
forecasting our management incentive bonus payout at 100% of target for the nine months
ended September 30, 2010 compared to 50% in the same period in 2009.
    
    Personal training payroll increased $1.4 million due to the increase in
personal training revenue as well as an increase in payroll related to personal training
promotions geared at attracting additional private training clientele.
  21




---



##### Table of Contents



Club operating
 
    
    Rent and occupancy expenses decreased $631,000. Rent and occupancy costs increased
$242,000 at clubs that opened after January 1, 2009 and $2.2 million at our clubs that
opened prior to January 1, 2009 and decreased $1.6 million at our clubs that were closed
after January 1, 2009. In addition, we recorded early lease termination costs of $811,000
in the nine months ended September 30, 2009 at three clubs that were closed prior to the
lease expiration dates. We also recorded $700,000 in damages in June 2009 paid to a
landlord of one of TSI LLCs former health clubs.
    
    Operating expenses relating to laundry and towels decreased approximately $1.5 million
primarily related to the opening of our laundry facility in Elmsford, NY in January 2009.
    
    Utilities decreased $712,000 in the nine months ended September 30, 2010 compared with
the same period last year.
  General and administrative
  Depreciation and amortization
  Impairment of fixed assets
 Benefit for Corporate Income Taxes
    22




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities.
 Investing Activities.
 Financing Activities.
 23




---



##### Table of Contents




    
    making it more difficult to satisfy our obligations;
    
    increasing our vulnerability to general adverse economic conditions;
    
    limiting our ability to obtain additional financing to fund future working capital,
capital expenditures, acquisitions of new clubs and other general corporate requirements;
    
    requiring cash flow from operations for the payment of interest on our credit facility
and our 11% Senior Discount Notes and reducing our ability to use our cash flow to fund
working capital, capital expenditures, acquisitions of new clubs and general corporate
requirements; and
    
    limiting our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate.
        24




---



##### Table of Contents



25




---



##### Table of Contents



Payments Due by Period (in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsLong-term debt
    
    $
    316,975
    
    
    $
    1,850
    
    
    $
    176,675
    
    
    $
    138,450
    
    
    $
    Interest payments on long-term
debt (1)
    
    
    63,543
    
    
    
    19,017
    
    
    
    37,916
    
    
    
    6,610
    
    
    
    Operating lease obligations (2)
    
    
    791,638
    
    
    
    81,858
    
    
    
    156,486
    
    
    
    142,967
    
    
    
    410,327Total contractual cash obligations
    
    $
    1,172,156
    
    
    $
    102,725
    
    
    $
    371,077
    
    
    $
    288,027
    
    
    $
    410,327
 Notes:
 
 (1)
    
    Includes 11% annual interest on the Senior Discount Notes and variable interest on the
2007 Term Loan Facility using the rate of as of September 30, 2010 of 2.13%.(2)
    
    Operating lease obligations include base rent only. Certain leases provide for
additional rent based on real estate taxes, common area maintenance and defined amounts
based on the operating results of the lessee.   Recent Changes in or Recently Issued Accounting Pronouncements
  26




---



##### Table of Contents



Forward-Looking Statements
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures:
  Changes in Internal Control Over Financial Reporting:
 27




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
 Sarah Cruz, et al v. Town Sports International,
d/b/a New York Sports Club
  Town Sports International, LLC v. Ajilon Solutions
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  28




---



##### Table of Contents



ITEM 3. Defaults Upon Senior Securities.
  
 ITEM 4. (Removed and Reserved)
 
 ITEM 5. Other Information
 Not applicable.
 
 ITEM 6. Exhibits
  http://investor.mysportsclubs.com http://investor.mysportsclubs.com
  29




---



##### Table of Contents



SIGNATURES
  TOWN SPORTS INTERNATIONALHOLDINGS, INC.DATE: October 27, 2010By:
    /s/ Daniel GallagherDaniel GallagherChief Financial Officer
(principal financial and accounting officer) 30




---



##### Table of Contents



INDEX TO EXHIBITS
  Exhibit No.
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of Town
Sports International Holdings, Inc. (incorporated by reference
to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2006).3.2
    
    Second Amended and Restated By-laws of the Company
(incorporated by reference to Exhibit 3.1 of the Companys
Current Report on Form 8-K, filed on May 19, 2008).10.1
    
    Amended Non-Employee Director Compensation Plan31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a
 14(a) and Rule 15d  14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a
 14(a) and Rule 15d  14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 31