##### 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, 2007
 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(State or other Jurisdiction of
Incorporation or Organization)
    
    20-0640002(I.R.S. Employer
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 þ
  o þ




---



##### 



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended September 30, 2007
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007
    
    
    3Condensed Consolidated Statements of Operations and Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2006 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    24EX-10.1: LETTER AGREEMENTEX-10.2: AMENDMENT NO. 1 TO 2004 COMMON STOCK OPTION PLANEX-10.3: FORM OF NON-QUALIFIED STOCK OPTION AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  2




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31, 2006 and September 30, 2007
 (All figures in $000s, except share data)
 (Unaudited)
 December 31,
    
    
    September 30,2006
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,810
    
    
    $
    7,669Accounts receivable (less allowance for doubtful accounts of $2,026 and
$2,986 as of December 31, 2006 and September 30, 2007, respectively)
    
    
    8,028
    
    
    
    12,263Inventory
    
    
    435
    
    
    
    225Prepaid expenses and other current assets
    
    
    14,757
    
    
    
    14,923Total current assets
    
    
    30,030
    
    
    
    35,080Fixed assets, net
    
    
    281,606
    
    
    
    324,389Goodwill
    
    
    50,112
    
    
    
    50,139Intangible assets, net
    
    
    922
    
    
    
    574Deferred tax asset, net
    
    
    32,437
    
    
    
    42,215Deferred membership costs
    
    
    15,703
    
    
    
    17,537Other assets
    
    
    12,717
    
    
    
    12,841Total assets
    
    $
    423,527
    
    
    $
    482,775LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    181
    
    
    $
    1,898Accounts payable
    
    
    9,972
    
    
    
    15,709Accrued expenses
    
    
    33,220
    
    
    
    40,983Accrued interest
    
    
    3,466
    
    
    
    737Corporate income taxes payable
    
    
    2,577
    
    
    
    2,028Deferred revenue
    
    
    38,980
    
    
    
    44,522Total current liabilities
    
    
    88,396
    
    
    
    105,877Long-term debt
    
    
    280,948
    
    
    
    302,394Deferred lease liabilities
    
    
    54,929
    
    
    
    59,086Deferred revenue
    
    
    5,807
    
    
    
    6,868Other liabilities
    
    
    11,276
    
    
    
    14,907Total liabilities
    
    
    441,356
    
    
    
    489,132Commitments and contingencies (Note 9)Stockholders deficit:Common stock, $.001 par value; issued and outstanding 25,975,948 and
26,239,653 shares at December 31, 2006 and September 30, 2007,
respectively
    
    
    26
    
    
    
    26Paid-in capital
    
    
    (21,068
    )
    
    
    (17,396
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    539
    
    
    
    698Retained earnings
    
    
    2,674
    
    
    
    10,315Total stockholders deficit
    
    
    (17,829
    )
    
    
    (6,357
    )Total liabilities and stockholders deficit
    
    $
    423,527
    
    
    $
    482,775
  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, 2006 and 2007
 (All figures in $000s except share and per share data)
 (Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Revenues:Club operations
    
    $
    108,173
    
    
    $
    117,425
    
    
    $
    318,755
    
    
    $
    349,893Fees and other
    
    
    1,245
    
    
    
    1,461
    
    
    
    4,158
    
    
    
    4,148109,418
    
    
    
    118,886
    
    
    
    322,913
    
    
    
    354,041Operating Expenses:Payroll and related
    
    
    39,724
    
    
    
    43,331
    
    
    
    121,211
    
    
    
    132,645Club operating
    
    
    37,677
    
    
    
    42,360
    
    
    
    108,928
    
    
    
    119,662General and administrative
    
    
    6,668
    
    
    
    8,368
    
    
    
    22,635
    
    
    
    25,248Depreciation and amortization
    
    
    10,125
    
    
    
    10,950
    
    
    
    30,911
    
    
    
    33,77294,194
    
    
    
    105,009
    
    
    
    283,685
    
    
    
    311,327Operating income
    
    
    15,224
    
    
    
    13,877
    
    
    
    39,228
    
    
    
    42,714Loss on extinguishment of debt
    
    
    7,446
    
    
    
    
    
    
    
    16,113
    
    
    
    12,521Interest expense
    
    
    7,388
    
    
    
    6,493
    
    
    
    28,471
    
    
    
    19,902Interest income
    
    
    (475
    )
    
    
    (344
    )
    
    
    (1,862
    )
    
    
    (882
    )Equity in the earnings of investees and rental income
    
    
    (463
    )
    
    
    (447
    )
    
    
    (1,371
    )
    
    
    (1,351
    )Income (loss) before provision (benefit) for
corporate income taxes
    
    
    1,328
    
    
    
    8,175
    
    
    
    (2,123
    )
    
    
    12,524Provision (benefit) for corporate income taxes
    
    
    543
    
    
    
    3,100
    
    
    
    (121
    )
    
    
    4,884Net income (loss)
    
    $
    785
    
    
    $
    5,075
    
    
    $
    (2,002
    )
    
    $
    7,640Earnings (loss) per share:Basic
    
    $
    0.03
    
    
    $
    0.19
    
    
    $
    (0.09
    )
    
    $
    0.29Diluted
    
    $
    0.03
    
    
    $
    0.19
    
    
    $
    (0.09
    )
    
    $
    0.29Weighted average number of shares used in
calculating earnings (loss) per share:Basic
    
    
    25,933,506
    
    
    
    26,225,449
    
    
    
    21,669,090
    
    
    
    26,122,531Diluted
    
    
    26,345,601
    
    
    
    26,678,939
    
    
    
    21,669,090
    
    
    
    26,583,782Statements of Comprehensive Income (Loss)Net income (loss)
    
    $
    785
    
    
    $
    5,075
    
    
    $
    (2,002
    )
    
    $
    7,640Foreign currency translation adjustments
    
    
    (53
    )
    
    
    (171
    )
    
    
    115
    
    
    
    (183
    )Comprehensive income (loss)
    
    $
    732
    
    
    $
    4,904
    
    
    $
    (1,887
    )
    
    $
    7,457
  4




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the nine months ended September 30, 2006 and 2007
 (All figures in $000s)
 (Unaudited)
 Nine MonthsEnded September 30,2006
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (2,002
    )
    
    $
    7,640Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    30,911
    
    
    
    33,772Non-cash interest expense on Senior Discount Notes
    
    
    11,480
    
    
    
    9,268Loss on extinguishment of debt
    
    
    16,113
    
    
    
    12,521Payment of interest on Payment-in-Kind Notes
    
    
    (12,961
    )
    
    
    Amortization of debt issuance costs
    
    
    1,117
    
    
    
    630Noncash rental expense, net of noncash rental income
    
    
    65
    
    
    
    495Compensation expense incurred in connection with stock options
    
    
    961
    
    
    
    616Net changes in certain operating assets and liabilities
    
    
    15,228
    
    
    
    3,168Increase in deferred tax asset
    
    
    (5,887
    )
    
    
    (9,778
    )Landlord contributions to tenant improvements
    
    
    6,413
    
    
    
    3,958Change in reserve for self-insured liability claims
    
    
    2,025
    
    
    
    2,085Increase in deferred membership costs
    
    
    (3,752
    )
    
    
    (1,834
    )Other
    
    
    (76
    )
    
    
    215Total adjustments
    
    
    61,637
    
    
    
    55,116Net cash provided by operating activities
    
    
    59,635
    
    
    
    62,756Cash flows from investing activities:Capital expenditures, net of effect of acquired business
    
    
    (41,354
    )
    
    
    (64,580
    )Acquisition of business
    
    
    (819
    )
    
    
    (4,450
    )Net cash used in investing activities
    
    
    (42,173
    )
    
    
    (69,030
    )Cash flows from financing activities:Proceeds from New Credit Facility
    
    
    
    
    
    
    185,000Costs related to issuance of New Credit Facility
    
    
    
    
    
    
    (2,634
    )Repayment of Senior Notes
    
    
    (128,684
    )
    
    
    (169,999
    )Premium paid on extinguishment of debt and related costs
    
    
    (13,273
    )
    
    
    (9,309
    )Proceeds from initial public equity offering, net of underwriting discounts and offering costs
    
    
    91,750
    
    
    
    Repayment of long term borrowings
    
    
    (2,733
    )
    
    
    (1,105
    )Change in book overdraft
    
    
    (986
    )
    
    
    2,122Repurchase of common stock
    
    
    (433
    )
    
    
    Proceeds from exercise of stock options
    
    
    124
    
    
    
    1,997Excess tax benefit from stock option exercises
    
    
    
    
    
    
    1,061Net cash provided by (used in) financing activities
    
    
    (54,235
    )
    
    
    7,133Net increase (decrease) in cash and cash equivalents
    
    
    (36,773
    )
    
    
    859Cash and cash equivalents at beginning of period
    
    
    51,304
    
    
    
    6,810Cash and cash equivalents at end of period
    
    $
    14,531
    
    
    $
    7,669Summary of change in certain operating assets and liabilities:Increase in accounts receivable
    
    $
    (4,870
    )
    
    $
    (4,479
    )Decrease (increase) in inventory
    
    
    (70
    )
    
    
    210(Increase) decrease in prepaid expenses and other current assets
    
    
    787
    
    
    
    (1,219
    )Increase in accounts payable, accrued expenses and accrued interest
    
    
    5,358
    
    
    
    2,509Change in prepaid corporate income taxes and corporate income taxes payable
    
    
    2,746
    
    
    
    (456
    )Increase in deferred revenue
    
    
    11,277
    
    
    
    6,603Net changes in certain operating assets and liabilities
    
    $
    15,228
    
    
    $
    3,168Supplemental disclosures of cash flow information:Cash payments for interest1
    
    $
    27,194
    
    
    $
    13,517Cash payments for income taxes
    
    $
    2,758
    
    
    $
    14,054
 
 1
    
    Amount includes payment of interest on Payment-in-Kind Notes of $12,961 for the nine
months ended September 30, 2006.  5




---



##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (All figures $000s except share and per share data)
 (Unaudited)
 1. Basis of Presentation
    2. Initial Public Offering
  6




---



##### Table of Contents



3. Recent Accounting Changes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB No. 115
 4. Long-Term Debt
 December 31,
    
    
    September 30,2006
    
    
    2007($000s)
    
    
    ($000s)Term Loan Facility
    
    $
    
    
    
    $
    184,0759 5/8% Senior Notes
    
    
    169,999
    
    
    
    11% Senior Discount Notes (Payment-in-Kind Notes)
    
    
    110,850
    
    
    
    120,118Notes payable for acquired businesses
    
    
    280
    
    
    
    99281,129
    
    
    
    304,292Less, current portion to be paid within one year
    
    
    181
    
    
    
    1,898Long-term portion
    
    $
    280,948
    
    
    $
    302,394
      Tender premium
    
    $
    8,759Call premium
    
    
    215Write-off of deferred financing costs related to the Senior Credit Facility and 9 5/8% Senior Notes
    
    
    3,212Fees and expenses
    
    
    335Loss on early extinguishment of debt
    
    $
    12,521
 7




---



##### Table of Contents



5. Earnings (Loss) Per Share
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited)
    
    (Unaudited)2006
    
    2007
    
    2006
    
    2007Weighted average number of common shares outstanding  basic
    
    
    25,933,506
    
    
    
    26,225,449
    
    
    
    21,669,090
    
    
    
    26,122,531Effect of diluted stock options
    
    
    412,095
    
    
    
    453,490
    
    
    
    
    
    
    
    461,251Weighted average number of common shares outstanding  diluted
    
    
    26,345,601
    
    
    
    26,678,939
    
    
    
    21,669,090
    
    
    
    26,583,782
 6. Stock-Based Compensation
  8




---



##### Table of Contents



Number of
    
    Exercise
    
    Black Scholes
    
    
    
    
    
    Dividend
    
    Risk Free
    
    ExpectedDate
    
    Options
    
    Price
    
    Valuation
    
    Volatility
    
    Yield
    
    Interest Rate
    
    Term (Years)March 28, 2007
    
    
    3,000
    
    
    $
    21.75
    
    
    $
        10.38
    
    
    
    45.0
    %
    
    
    0.0
    %
    
    
    4.54
    %
    
    
    5.5March 28, 2007
    
    
    5,000
    
    
    $
    21.75
    
    
    $
    11.23
    
    
    
    45.0
    %
    
    
    0.0
    %
    
    
    4.49
    %
    
    
    6.5April 9, 2007
    
    
    5,500
    
    
    $
    22.87
    
    
    $
    12.28
    
    
    
    45.0
    %
    
    
    0.0
    %
    
    
    4.62
    %
    
    
    7.0April 9, 2007
    
    
    5,000
    
    
    $
    22.87
    
    
    $
    11.86
    
    
    
    45.0
    %
    
    
    0.0
    %
    
    
    4.61
    %
    
    
    6.5August 7, 2007
    
    
    444,500
    
    
    $
    17.46
    
    
    $
    7.09
    
    
    
    32.5
    %
    
    
    0.0
    %
    
    
    4.53
    %
    
    
    6.0Total
    
    
    463,000
   7. Goodwill and Other Intangibles
   Balance as of December 31, 2006
    
    $
    50,112Changes due to foreign currency exchange rate fluctuations
    
    
    27Balance as of September 30, 2007
    
    $
    50,139
 As of December 31, 2006($000s)Gross Carrying
    
    
    AccumulatedAcquired Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    12,146
    
    
    $
    (11,389
    )
    
    $
    757Covenants-not-to-compete
    
    
    1,151
    
    
    
    (1,004
    )
    
    
    147Beneficial lease
    
    
    223
    
    
    
    (205
    )
    
    
    18$
    13,520
    
    
    $
    (12,598
    )
    
    $
    922
 9




---



##### Table of Contents



As of September 30, 2007($000s)Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    12,146
    
    
    $
    (11,687
    )
    
    $
    459Covenants-not-to-compete
    
    
    1,151
    
    
    
    (1,046
    )
    
    
    105Beneficial lease
    
    
    223
    
    
    
    (213
    )
    
    
    10$
    13,520
    
    
    $
    (12,946
    )
    
    $
    574
  Aggregate Amortization Expense for the twelve months ending September 30, ($000s)2008
    
    $
    3892009
    
    
    185$
    574
  8. Income Taxes
 Accounting for
Uncertainty in Income Taxes
   9. Commitments and Contingencies
 Sarah Cruz, et al v. Town Sports
International, dba New York Sports Club
 Carlos Urbina et ano v. 26 Court Street Associates, LLC et al.,
 10




---



##### Table of Contents



10. Investments in Affiliated Companies
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,($000s)
    
    ($000s)2006
    
    2007
    
    2006
    
    2007Revenue
    
    $
    881
    
    
    $
    907
    
    
    $
    2,667
    
    
    $
    2,738Income from operations
    
    
    391
    
    
    
    331
    
    
    
    1,186
    
    
    
    1,111Net income
    
    
    334
    
    
    
    307
    
    
    
    1,093
    
    
    
    1,030
 11. Subsequent Event
  11




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
     
    
    Our largest sources of revenue are dues and initiation fees paid by our members. These
comprised 81.3% of our total revenue for the nine months ended September 30, 2007. We
recognize revenue from membership dues in the month when the services are rendered.
Approximately 93.0% 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.
    
    For the nine months ended September 30, 2007, we generated 12.0% of our revenue from
personal training and 5.5% of our revenue from other ancillary programs and services
consisting of programming for children, group fitness training and other member activities,
as well as sales of miscellaneous sports products.
  12




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Membership dues
    
    $
    87,257
    
    
    
    79.7
    %
    
    $
    93,735
    
    
    
    78.8
    %
    
    $
    257,160
    
    
    
    79.6
    %
    
    $
    278,537
    
    
    
    78.7
    %Initiation fees
    
    
    2,586
    
    
    
    2.4
    %
    
    
    3,202
    
    
    
    2.7
    %
    
    
    6,839
    
    
    
    2.1
    %
    
    
    9,181
    
    
    
    2.6
    %Membership revenue
    
    
    89,843
    
    
    
    82.1
    %
    
    
    96,937
    
    
    
    81.5
    %
    
    
    263,999
    
    
    
    81.7
    %
    
    
    287,718
    
    
    
    81.3
    %Personal training revenue
    
    
    11,564
    
    
    
    10.6
    %
    
    
    13,243
    
    
    
    11.2
    %
    
    
    36,915
    
    
    
    11.5
    %
    
    
    42,646
    
    
    
    12.0
    %Other ancillary club revenue
    
    
    6,766
    
    
    
    6.2
    %
    
    
    7,245
    
    
    
    6.1
    %
    
    
    17,841
    
    
    
    5.5
    %
    
    
    19,529
    
    
    
    5.5
    %Ancillary club revenue
    
    
    18,330
    
    
    
    16.8
    %
    
    
    20,488
    
    
    
    17.3
    %
    
    
    54,756
    
    
    
    17.0
    %
    
    
    62,175
    
    
    
    17.5
    %Fees and other revenue
    
    
    1,245
    
    
    
    1.1
    %
    
    
    1,461
    
    
    
    1.2
    %
    
    
    4,158
    
    
    
    1.3
    %
    
    
    4,148
    
    
    
    1.2
    %Total revenue
    
    $
    109,418
    
    
    
    100.0
    %
    
    $
    118,886
    
    
    
    100.0
    %
    
    $
    322,913
    
    
    
    100.0
    %
    
    $
    354,041
    
    
    
    100.0
    %
      Historical Club Growth
  2006
    
    2007Q1
    
    Q2
    
    Q3
    
    Q4
    
    Total
    
    Q1
    
    Q2
    
    Q3Wholly
owned clubsoperated at beginning of period
    
    
    139
    
    
    
    143
    
    
    
    142
    
    
    
    145
    
    
    
    139
    
    
    
    147
    
    
    
    150
    
    
    
    150New clubs opened
    
    
    5
    
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    10
    
    
    
    3
    
    
    
    1
    
    
    
    2Clubs acquired
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Clubs closed, relocated, merged or sold (1)
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (3
    )
    
    
    
    
    
    
    (1
    )
    
    
    Wholly owned clubs at end of period
    
    
    143
    
    
    
    142
    
    
    
    145
    
    
    
    147
    
    
    
    147
    
    
    
    150
    
    
    
    150
    
    
    
    152Total clubs operated at end of period (2)
    
    
    145
    
    
    
    144
    
    
    
    147
    
    
    
    149
    
    
    
    149
    
    
    
    152
    
    
    
    152
    
    
    
    154
 
 (1)
    
    In 2005, we temporarily closed a club for a renovation and expansion.
This club reopened in February 2006 and is included with new clubs
opened in the first quarter of 2006.(2)
    
    Includes wholly owned and partly owned clubs. In addition to the
above, as of December 31, 2006 and September 30, 2007, we managed five
university fitness clubs in which we did not have an equity interest. 13




---



##### Table of Contents



Existing Club Revenue
   Results of Operations
  Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302006
    
    
    2007
    
    
    2006
    
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    36.3
    
    
    
    36.5
    
    
    
    37.5
    
    
    
    37.5Club operating
    
    
    34.4
    
    
    
    35.6
    
    
    
    33.7
    
    
    
    33.8General and administrative
    
    
    6.1
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.1Depreciation and amortization
    
    
    9.3
    
    
    
    9.2
    
    
    
    9.6
    
    
    
    9.586.1
    
    
    
    88.3
    
    
    
    87.8
    
    
    
    87.9Operating income
    
    
    13.9
    
    
    
    11.7
    
    
    
    12.2
    
    
    
    12.1Loss on extinguishment of debt
    
    
    6.8
    
    
    
    
    
    
    
    5.0
    
    
    
    3.5Interest expense
    
    
    6.7
    
    
    
    5.5
    
    
    
    8.8
    
    
    
    5.6Interest income
    
    
    (0.4
    )
    
    
    (0.3
    )
    
    
    (0.6
    )
    
    
    (0.2
    )Equity in the earnings of investees and rental income
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )Income (loss) before provision (benefit) for corporate income taxes
    
    
    1.2
    
    
    
    6.9
    
    
    
    (0.6
    )
    
    
    3.6Provision (benefit) for corporate income taxes
    
    
    0.5
    
    
    
    2.6
    
    
    
    0.0
    
    
    
    1.4Net income (loss)
    
    
    0.7
    %
    
    
    4.3
    %
    
    
    (0.6
    )%
    
    
    2.2
    %
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Revenues.
  14




---



##### Table of Contents



Operating Expenses.
   
    
    Rent and occupancy expenses increased $1.6 million. Rent and occupancy
costs at clubs that opened after July 1, 2006, or that are currently
under construction, increased $1.1 million. The remaining $500,000
increase in rent and occupancy expenses relates to rent at our clubs
that were open prior to July 1, 2006.
    
    Advertising and marketing expenses increased $930,000, as we expended
$3.8 million during the three months ended September 30, 2007 compared
to $2.9 million during the same period in 2006, primarily due to a
shift in the timing of our advertising plans.
    
    As part of a customer service initiative, we had outsourced towel
laundry service in 52 clubs as of September 30, 2007 as compared to 27
clubs as of September 30, 2006. As our clubs have become more
intensely clustered in our markets, and member cross usage becomes
more prevalent, we have found it increasingly necessary to offer towel
laundry services at more of our clubs. We have experienced a $610,000
increase in laundry expenses during the three months ended September
30, 2007 when compared to the three months ended September 30, 2006.
   Loss on Extinguishment of Debt.
 Interest Expense.
 Interest Income.
 Provision for Corporate Income Taxes.
 15




---



##### Table of Contents



Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Revenues.
  Operating Expenses.
  
    
    Payroll costs directly related to our personal training, group fitness
training, and programming for children increased $3.7 million or
13.6%, due to an increase in demand for these programs.
    
    In the nine months ended September 30, 2006, we incurred a charge
relating to severance agreements with our former Chairman and certain
employees totaling $1.6 million. The total costs of these severance
packages were recorded in the nine months ended September 30, 2006
while no such costs were incurred in the nine months ended September
30, 2007.
  
    
    Rent and occupancy expenses increased $5.8 million. Rent and occupancy
costs at clubs that opened after January 1, 2006, or that are
currently under construction, increased $4.6 million. The remaining
$1.1 million increase in rent and occupancy expenses relates to rent
at our clubs that were open prior to January 1, 2006.
    
    Advertising and marketing expenses for the nine months ended September
30, 2007 were in-line with the nine months ended September 30, 2006,
increasing only $180,000.
    
    As part of a customer service initiative, we had outsourced towel
laundry service in 52 clubs as of September 30, 2007 as compared to 27
clubs as of September 30, 2006. As our clubs have become more
intensely clustered in our markets, and member cross usage becomes
more prevalent, we have found it increasingly necessary to offer towel
laundry services at more of our clubs. Accordingly, we have
experienced a $1.7 million increase in laundry expenses during the
nine months ended September 30, 2007 when compared to the nine months
ended September 30, 2006.
  16




---



##### Table of Contents



Loss on Extinguishment of Debt.
  Interest Expense.
 Interest Income.
 Provision for Corporate Income Taxes
 Liquidity and Capital Resources
  Operating Activities.
  17




---



##### Table of Contents



Investing Activities.
 Financing Activities.
   
    
    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 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.
   18




---



##### Table of Contents



Payments Due by Period (in $000s)Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual
Obligations(3)
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsLong-Term Debt(1)
    
    $
    398,772
    
    
    $
    1,898
    
    
    $
    25,327
    
    
    $
    34,159
    
    
    $
    337,388Operating Lease Obligations(2)
    
    
    918,609
    
    
    
    72,643
    
    
    
    159,001
    
    
    
    150,358
    
    
    
    536,607Total Contractual Cash Obligations
    
    $
    1,317,381
    
    
    $
    74,541
    
    
    $
    184,328
    
    
    $
    184,517
    
    
    $
    873,995
 Notes:
 
 (1)
    
    The long-term debt contractual cash obligations include principal and interest payment
requirements on the 11% Senior Discount Notes. These amounts do not include interest on the
Term Loan Facility, as this interest rate is variable. The interest rate as of September 30,
2007 was 7.5% or $13.8 million on an annualized basis.(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.(3)
    
    Excluded from the table above, as of September 30, 2007, we had $751,000 of unrecognized tax
benefits plus $93,000 of interest and penalties that, if recognized, would affect our effective tax
rate in any future periods. 19




---



##### Table of Contents



Recent Changes in or Recently Issued Accounting Pronouncements
   Forward-Looking Statements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures.
  20




---



##### Table of Contents



21




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
 Sarah Cruz, et al v. Town Sports
International, dba New York Sports Club
 Carlos Urbina et ano v. 26 Court Street Associates, LLC et al.,
  
 Item 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities.
  
 ITEM 4. Submission of Matters to a Vote of Security Holders.
  
 ITEM 5. Other Information.
  22




---



##### Table of Contents



Item 6. Exhibits
  23




---



##### Table of Contents



SIGNATURES
  TOWN SPORTS INTERNATIONAL
HOLDINGS, INC.DATE: November 1, 2007By:
    /s/ Richard PyleRichard PyleChief Financial Officer
(principal financial, accounting officer) 24




---



##### Table of Contents



INDEX TO EXHIBITS
  Exhibit No.
    
    Description of Exhibit10.1
    
    Letter Agreement, dated October 4, 2007, between the Registrant and Robert Giardina.10.2
    
    Amendment No. 1 to the Registrants 2004 Common Stock Option Plan.10.3
    
    Form of Non-Qualified Stock Option Agreement pursuant to the Registrants 2006
Stock Incentive Plan.31.1
    
    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.
 25