##### 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 June 30, 2008
 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 Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company(Do not check if a smaller reporting company)
  o þ




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##### 



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended June 30, 2008
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    3Condensed Consolidated Statements of Operations and Statements of Comprehensive Income for the
three and six months ended June 30, 2008 and 2007
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 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-10.2: FORM OF RESTRICTED STOCK AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  2




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2008 and December 31, 2007
(All figures in $000s, except share data)
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,506
    
    
    $
    5,463Accounts receivable (less allowance for doubtful accounts of $3,291 and
$2,797 as of June 30, 2008 and December 31, 2007, respectively)
    
    
    10,346
    
    
    
    8,815Inventory
    
    
    302
    
    
    
    230Prepaid expenses and other current assets
    
    
    8,084
    
    
    
    11,334Total current assets
    
    
    29,238
    
    
    
    25,842Fixed assets, net
    
    
    345,618
    
    
    
    337,152Goodwill
    
    
    50,262
    
    
    
    50,165Intangible assets, net
    
    
    663
    
    
    
    477Deferred tax asset, net
    
    
    47,945
    
    
    
    44,345Deferred membership costs
    
    
    17,250
    
    
    
    17,974Other assets
    
    
    12,458
    
    
    
    12,808Total assets
    
    $
    503,434
    
    
    $
    488,763LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,902
    
    
    $
    10,898Accounts payable
    
    
    5,666
    
    
    
    10,891Accrued expenses
    
    
    35,650
    
    
    
    34,186Accrued interest
    
    
    458
    
    
    
    738Corporate income taxes payable
    
    
    1,510
    
    
    
    811Deferred revenue
    
    
    47,130
    
    
    
    41,798Total current liabilities
    
    
    92,316
    
    
    
    99,322Long-term debt
    
    
    310,929
    
    
    
    305,124Deferred lease liabilities
    
    
    65,393
    
    
    
    61,221Deferred revenue
    
    
    6,137
    
    
    
    7,300Other liabilities
    
    
    14,548
    
    
    
    15,613Total liabilities
    
    
    489,323
    
    
    
    488,580Commitments and contingencies (Note 8)Stockholders equity:Common stock, $.001 par value; issued and outstanding 26,444,801 and
26,254,773 shares at June 30, 2008 and December 31, 2007, respectively
    
    
    26
    
    
    
    26Paid-in capital
    
    
    (15,118
    )
    
    
    (16,977
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    1,271
    
    
    
    814Retained earnings
    
    
    27,932
    
    
    
    16,320Total stockholders equity
    
    
    14,111
    
    
    
    183Total liabilities and stockholders equity
    
    $
    503,434
    
    
    $
    488,763
  3




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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2008 and 2007
(All figures in $000s except share and per share data)
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Club operations
    
    $
    127,729
    
    
    $
    118,128
    
    
    $
    252,636
    
    
    $
    232,468Fees and other
    
    
    1,664
    
    
    
    1,650
    
    
    
    3,077
    
    
    
    2,687129,393
    
    
    
    119,778
    
    
    
    255,713
    
    
    
    235,155Operating Expenses:Payroll and related
    
    
    48,653
    
    
    
    44,563
    
    
    
    97,057
    
    
    
    89,314Club operating
    
    
    41,521
    
    
    
    37,938
    
    
    
    84,401
    
    
    
    77,302General and administrative
    
    
    8,895
    
    
    
    9,122
    
    
    
    17,201
    
    
    
    16,880Depreciation and amortization
    
    
    13,858
    
    
    
    11,731
    
    
    
    26,507
    
    
    
    22,822112,927
    
    
    
    103,354
    
    
    
    225,166
    
    
    
    206,318Operating income
    
    
    16,466
    
    
    
    16,424
    
    
    
    30,547
    
    
    
    28,837Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,521Interest expense
    
    
    5,633
    
    
    
    6,393
    
    
    
    12,147
    
    
    
    13,409Interest income
    
    
    (74
    )
    
    
    (279
    )
    
    
    (215
    )
    
    
    (538
    )Equity in the earnings of investees and rental income
    
    
    (620
    )
    
    
    (482
    )
    
    
    (1,067
    )
    
    
    (904
    )Income before provision for corporate income taxes
    
    
    11,527
    
    
    
    10,792
    
    
    
    19,682
    
    
    
    4,349Provision for corporate income taxes
    
    
    4,726
    
    
    
    4,426
    
    
    
    8,070
    
    
    
    1,784Net income
    
    $
    6,801
    
    
    $
    6,366
    
    
    $
    11,612
    
    
    $
    2,565Earnings per share:Basic
    
    $
    0.26
    
    
    $
    0.24
    
    
    $
    0.44
    
    
    $
    0.10Diluted
    
    $
    0.26
    
    
    $
    0.24
    
    
    $
    0.44
    
    
    $
    0.10Weighted average number of shares used in
calculating earnings per share:Basic
    
    
    26,417,859
    
    
    
    26,142,383
    
    
    
    26,361,758
    
    
    
    26,070,219Diluted
    
    
    26,488,634
    
    
    
    26,656,341
    
    
    
    26,422,359
    
    
    
    26,572,355Statements of Comprehensive IncomeNet income
    
    $
    6,801
    
    
    $
    6,366
    
    
    $
    11,612
    
    
    $
    2,565Foreign currency translation adjustments
    
    
    (245
    )
    
    
    (33
    )
    
    
    457
    
    
    
    (12
    )Comprehensive income
    
    $
    6,556
    
    
    $
    6,333
    
    
    $
    12,069
    
    
    $
    2,553
  4




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2008 and 2007
(All figures in $000s)
(Unaudited)
 Six MonthsEnded June 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    11,612
    
    
    $
    2,565Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    26,507
    
    
    
    22,822Non-cash interest expense on Senior Discount Notes
    
    
    6,782
    
    
    
    6,029Loss on extinguishment of debt
    
    
    
    
    
    
    12,521Amortization of debt issuance costs
    
    
    387
    
    
    
    443Noncash rental expense, net of noncash rental income
    
    
    741
    
    
    
    886Compensation expense incurred in connection with stock options and common stock grants
    
    
    500
    
    
    
    355Net changes in certain operating assets and liabilities
    
    
    9,363
    
    
    
    4,860Increase in deferred tax asset
    
    
    (3,600
    )
    
    
    (6,271
    )Landlord contributions to tenant improvements
    
    
    3,338
    
    
    
    3,686Change in reserve for self-insured liability claims
    
    
    1,056
    
    
    
    1,304Decrease (increase) in deferred membership costs
    
    
    724
    
    
    
    (1,051
    )Other
    
    
    (97
    )
    
    
    20Total adjustments
    
    
    45,701
    
    
    
    45,604Net cash provided by operating activities
    
    
    57,313
    
    
    
    48,169Cash flows from investing activities:Capital expenditures
    
    
    (44,542
    )
    
    
    (42,142
    )Insurance Proceeds
    
    
    1,074
    
    
    
    Net cash used in investing activities
    
    
    (43,468
    )
    
    
    (42,142
    )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
    
    
    
    
    
    
    (169,999
    )Premium paid on extinguishment of debt and related costs
    
    
    
    
    
    
    (9,309
    )Repayment of long term borrowings
    
    
    (973
    )
    
    
    (575
    )Repayment of borrowings on Revolving Loan Facility
    
    
    (9,000
    )
    
    
    Change in book overdraft
    
    
    (583
    )
    
    
    (1,230
    )Proceeds from exercise of stock options
    
    
    1,187
    
    
    
    1,740Excess tax benefit from stock option exercises
    
    
    173
    
    
    
    1,036Net cash (used in) provided by financing activities
    
    
    (9,196
    )
    
    
    4,029Effect of exchange rate changes on cash
    
    
    394
    
    
    
    (10
    )Net increase in cash and cash equivalents
    
    
    5,043
    
    
    
    10,046Cash and cash equivalents at beginning of period
    
    
    5,463
    
    
    
    6,810Cash and cash equivalents at end of period
    
    $
    10,506
    
    
    $
    16,856Summary of change in certain operating assets and liabilities:(Increase) in accounts receivable
    
    $
    (2,932
    )
    
    $
    (2,322
    )(Increase) decrease in inventory
    
    
    (68
    )
    
    
    41Decrease (increase) in prepaid expenses and other current assets
    
    
    3,486
    
    
    
    (1,207
    )Increase in accounts payable, accrued expenses and accrued interest
    
    
    4,026
    
    
    
    1,396Increase in corporate income taxes payable
    
    
    699
    
    
    
    1,050Increase in deferred revenue
    
    
    4,152
    
    
    
    5,902Net changes in certain operating assets and liabilities
    
    $
    9,363
    
    
    $
    4,860Supplemental disclosures of cash flow information:Cash payments for interest
    
    $
    5,587
    
    
    $
    9,924Cash payments for income taxes
    
    $
    10,809
    
    
    $
    5,830
  5




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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. Recent Accounting Changes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB No. 115
 6




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Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  An amendment of ARB No. 51
 Share-Based
Payment
 3. Long-Term Debt
 June 30,
    
    
    December 31,2008
    
    
    2007($000s)
    
    
    ($000s)Term Loan Facility
    
    $
    182,687
    
    
    $
    183,613Revolving Loan Facility borrowings
    
    
    
    
    
    
    9,00011% Senior Discount Notes (Payment-in-Kind Notes)
    
    
    130,092
    
    
    
    123,310Notes payable for acquired businesses
    
    
    52
    
    
    
    99312,831
    
    
    
    316,022Less current portion to be paid within one year
    
    
    1,902
    
    
    
    10,898Long-term portion
    
    $
    310,929
    
    
    $
    305,124
  7




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##### Table of Contents



4. Earnings Per Share
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited)
    
    (Unaudited)2008
    
    2007
    
    2008
    
    2007Weighted average number of shares of Common Stock
outstanding  basic
    
    
    26,417,859
    
    
    
    26,142,383
    
    
    
    26,361,758
    
    
    
    26,070,219Effect of diluted stock options and restricted Common Stock
    
    
    70,775
    
    
    
    513,958
    
    
    
    60,601
    
    
    
    502,136Weighted average number of shares of Common Stock
outstanding  diluted
    
    
    26,488,634
    
    
    
    26,656,341
    
    
    
    26,422,359
    
    
    
    26,572,355
 5. Common Stock and Stock-Based Compensation
  8




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##### Table of Contents



Option Grants
  Number of
    
    Exercise
    
    Black Scholes
    
    
    
    
    
    Dividend
    
    Risk Free
    
    ExpectedDate
    
    Options
    
    Price
    
    Valuation
    
    Volatility
    
    Yield
    
    Interest Rate
    
    Term (Years)January 2, 2008
    
    
    5,000
    
    
    $
    9.35
    
    
    $
    4.24
    
    
    
    45.9
    %
    
    
    0.0
    %
    
    
    2.71
    %
    
    
    5.50March 4, 2008
    
    
    100,000
    
    
    $
    7.73
    
    
    $
    3.83
    
    
    
    47.0
    %
    
    
    0.0
    %
    
    
    3.00
    %
    
    
    6.25May 6, 2008
    
    
    100,000
    
    
    $
    9.54
    
    
    $
    4.97
    
    
    
    49.8
    %
    
    
    0.0
    %
    
    
    3.30
    %
    
    
    6.25June 13, 2008
    
    
    120,000
    
    
    $
    9.83
    
    
    $
    5.15
    
    
    
    50.2
    %
    
    
    0.0
    %
    
    
    3.30
    %
    
    
    6.25Total
    
    
    325,000
   Restricted Stock Grants
  Stock Repurchase Plan
  6. Goodwill and Other Intangibles
  9




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##### Table of Contents



Balance as of December 31, 2007
    
    $
    50,165Changes due to foreign currency exchange rate fluctuations
    
    
    97Balance as of June 30, 2008
    
    $
    50,262
 As of June 30, 2008($000s)Gross Carrying
    
    
    AccumulatedAcquired Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    11,267
    
    
    $
    (11,051
    )
    
    $
    216Covenants-not-to-compete
    
    
    1,687
    
    
    
    (1,242
    )
    
    
    445Beneficial lease
    
    
    223
    
    
    
    (221
    )
    
    
    2$
    13,177
    
    
    $
    (12,514
    )
    
    $
    663
 As of December 31, 2007($000s)Gross Carrying
    
    
    AccumulatedAcquired Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    11,678
    
    
    $
    (11,300
    )
    
    $
    378Covenants-not-to-compete
    
    
    1,151
    
    
    
    (1,059
    )
    
    
    92Beneficial lease
    
    
    223
    
    
    
    (216
    )
    
    
    7$
    13,052
    
    
    $
    (12,575
    )
    
    $
    477
  Aggregate Amortization Expense for the twelve months ending June 30, ($000s)2009
    
    $
    5142010
    
    
    622011
    
    
    622012
    
    
    25$
    663
  7. Income Taxes
 Accounting for
Uncertainty in Income Taxes
  10




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##### Table of Contents



8. Commitments and Contingencies
 Sarah Cruz, et al v. Town Sports International,
dba New York Sports Club
  9. Investments in Affiliated Companies
  Three months ended
    
    Six months endedJune 30,
    
    June 30,($000s)
    
    ($000s)2008
    
    2007
    
    2008
    
    2007Revenue
    
    $
    874
    
    
    $
    931
    
    
    $
    1,774
    
    
    $
    1,831Income from operations
    
    
    353
    
    
    
    406
    
    
    
    732
    
    
    
    779Net income
    
    
    315
    
    
    
    374
    
    
    
    661
    
    
    
    722
 11




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operation
 Introduction
      
    
    Membership revenue:Our largest sources of revenue are dues and initiation fees paid by
our members. These comprised 81.2% of our total revenue for the six months ended June 30,
2008. We recognize revenue from membership dues in the month when the services are rendered.
Approximately 92.0% 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.
    
    Ancillary club revenue:For the six months ended June 30, 2008, we generated 12.8% of
our revenue from personal training and 4.8% 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




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##### Table of Contents



Historical Club Growth
  2007
    
    2008Q1
    
    Q2
    
    Q3
    
    Q4
    
    Total
    
    Q1
    
    Q2Wholly owned clubs operated at beginning of period
    
    
    147
    
    
    
    150
    
    
    
    150
    
    
    
    152
    
    
    
    147
    
    
    
    159
    
    
    
    160New clubs opened
    
    
    3
    
    
    
    1
    
    
    
    2
    
    
    
    8
    
    
    
    14
    
    
    
    2
    
    
    
    3Clubs acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Clubs closed, relocated or merged
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    (2
    )Wholly owned clubs at end of period
    
    
    150
    
    
    
    150
    
    
    
    152
    
    
    
    159
    
    
    
    159
    
    
    
    160
    
    
    
    161Total clubs operated at end of period (1)
    
    
    152
    
    
    
    152
    
    
    
    154
    
    
    
    161
    
    
    
    161
    
    
    
    162
    
    
    
    163
 
 (1)
    
    Includes wholly owned and partly owned clubs. In addition to the
above, as of June 30, 2008 and December 31, 2007, we managed four and
five university fitness clubs, respectively, in which we did not have
an equity interest. Comparable Club Revenue
  13




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##### Table of Contents



Results of Operations
  Three Months
    
    Six MonthsEnded June 30,
    

Ended June 30,2008
    
    2007
    
    2008
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    37.6
    
    
    
    37.2
    
    
    
    38.0
    
    
    
    38.0Club operating
    
    
    32.1
    
    
    
    31.7
    
    
    
    33.0
    
    
    
    32.9General and administrative
    
    
    6.9
    
    
    
    7.6
    
    
    
    6.7
    
    
    
    7.2Depreciation and amortization
    
    
    10.7
    
    
    
    9.8
    
    
    
    10.4
    
    
    
    9.787.3
    
    
    
    86.3
    
    
    
    88.1
    
    
    
    87.8Operating income
    
    
    12.7
    
    
    
    13.7
    
    
    
    12.0
    
    
    
    12.2Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.3Interest expense
    
    
    4.4
    
    
    
    5.3
    
    
    
    4.8
    
    
    
    5.7Interest income
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Equity in the earnings of investees and rental income
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )Income before provision for corporate income taxes
    
    
    8.9
    
    
    
    9.0
    
    
    
    7.7
    
    
    
    1.8Provision for corporate income taxes
    
    
    3.7
    
    
    
    3.7
    
    
    
    3.2
    
    
    
    0.7Net income
    
    
    5.2
    %
    
    
    5.3
    %
    
    
    4.5
    %
    
    
    1.1
    %
 Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Revenue (in $000s) was comprised of the following:
 Three
Months Ended June 30,2008
    
    
    2007Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % GrowthMembership dues
    
    $
    101,489
    
    
    
    78.4
    %
    
    $
    93,818
    
    
    
    78.3
    %
    
    
    8.2
    %Initiation fees
    
    
    3,486
    
    
    
    2.7
    %
    
    
    3,096
    
    
    
    2.6
    %
    
    
    12.6
    %Membership revenue
    
    
    104,975
    
    
    
    81.1
    %
    
    
    96,914
    
    
    
    80.9
    %
    
    
    8.3
    %Personal training revenue
    
    
    16,700
    
    
    
    12.9
    %
    
    
    15,482
    
    
    
    12.9
    %
    
    
    7.9
    %Other ancillary club revenue
    
    
    6,054
    
    
    
    4.7
    %
    
    
    5,732
    
    
    
    4.8
    %
    
    
    5.6
    %Ancillary club revenue
    
    
    22,754
    
    
    
    17.6
    %
    
    
    21,214
    
    
    
    17.7
    %
    
    
    7.3
    %Fees and other revenue
    
    
    1,664
    
    
    
    1.3
    %
    
    
    1,650
    
    
    
    1.4
    %
    
    
    0.8
    %Total revenue
    
    $
    129,393
    
    
    
    100.0
    %
    
    $
    119,778
    
    
    
    100.0
    %
    
    
    8.0
    %
   14




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##### Table of Contents



Operating expenses (in $000s) were comprised of the following:
 Three Months Ended June 30,2008
    
    2007
    
    % VariancePayroll and related
    
    $
    48,653
    
    
    $
    44,563
    
    
    
    9.2
    %Club operating
    
    
    41,521
    
    
    
    37,938
    
    
    
    9.4
    %General and administrative
    
    
    8,895
    
    
    
    9,122
    
    
    
    (2.5
    %)Depreciation and amortization
    
    
    13,858
    
    
    
    11,731
    
    
    
    18.1
    %Operating expenses
    
    $
    112,927
    
    
    $
    103,354
    
    
    
    9.3
    %
  Payroll and related
 Club operating
 
    
    Rent and occupancy expenses increased $2.4 million. Rent
and occupancy costs increased $1.9 million at clubs that opened
after April 1, 2007, or that are currently under construction
and increased $736,000 at our clubs opened prior to April 1,
2007. Rent and occupancy expenses decreased $291,000 at our clubs
closed and/or relocated after April 1, 2007.
    
    Cleaning, laundry and towel expenses increased $968,000 due to new
club openings, an increase in the number of clubs that used an
outsourced laundry service as well as overall increased club usage of
12.2%.
    
    Advertising and marketing expenses decreased $782,000 to $879,000 from
$1.7 million, primarily due to a reduction in general awareness
advertising in 2008.
 Depreciation and amortization
 Interest Expense
  Interest Income
  Provision for Corporate Income Taxes
  15




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##### Table of Contents



Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Revenue (in $000s) was comprised of the following:
 Six Months Ended June 30,2008
    
    
    2007Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % GrowthMembership dues
    
    $
    200,672
    
    
    
    78.5
    %
    
    $
    184,802
    
    
    
    78.6
    %
    
    
    8.6
    %Initiation fees
    
    
    6,888
    
    
    
    2.7
    %
    
    
    5,979
    
    
    
    2.5
    %
    
    
    15.2
    %Membership revenue
    
    
    207,560
    
    
    
    81.2
    %
    
    
    190,781
    
    
    
    81.1
    %
    
    
    8.8
    %Personal training revenue
    
    
    32,841
    
    
    
    12.8
    %
    
    
    29,403
    
    
    
    12.5
    %
    
    
    11.7
    %Other ancillary club revenue
    
    
    12,236
    
    
    
    4.8
    %
    
    
    12,284
    
    
    
    5.2
    %
    
    
    (0.4
    )%Ancillary club revenue
    
    
    45,077
    
    
    
    17.6
    %
    
    
    41,687
    
    
    
    17.7
    %
    
    
    8.1
    %Fees and other revenue
    
    
    3,076
    
    
    
    1.2
    %
    
    
    2,687
    
    
    
    1.2
    %
    
    
    14.5
    %Total revenue
    
    $
    255,713
    
    
    
    100.0
    %
    
    $
    235,155
    
    
    
    100.0
    %
    
    
    8.7
    %
   Operating expenses (in $000s) were comprised of the following:
 Six Months Ended June 30,2008
    
    2007
    
    % VariancePayroll and related
    
    $
    97,057
    
    
    $
    89,314
    
    
    
    8.7
    %Club operating
    
    
    84,401
    
    
    
    77,302
    
    
    
    9.2
    %General and administrative
    
    
    17,201
    
    
    
    16,880
    
    
    
    1.9
    %Depreciation and amortization
    
    
    26,507
    
    
    
    22,822
    
    
    
    16.1
    %Operating expenses
    
    $
    225,166
    
    
    $
    206,318
    
    
    
    9.1
    %
  Payroll and related
 Club operating
 
    
    Rent and occupancy expenses increased $4.7 million. Rent
and occupancy costs increased $4.0 million at clubs that opened
after April 1, 2007, or that are currently under construction
and increased $928,000 at our clubs opened prior to April 1,
2007. Rent and occupancy expenses decreased $275,000 at our clubs
closed and/or relocated after April 1, 2007.
    
    Cleaning, laundry and towel expenses increased $1.3 million due to new
club openings, an increase in the number of clubs that used an
outsourced laundry service as well as overall increased club usage of
12.1%.
    
    Advertising and marketing expenses decreased $1.1 million to $3.9
million from $5.0 million primarily due to a reduction in general
awareness advertising in 2008.
 16




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##### Table of Contents



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




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##### 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




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##### Table of Contents



Payments Due by Period (in $000s)Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-Term Debt(1)
    
    $
    397,336
    
    
    $
    1,902
    
    
    $
    32,889
    
    
    $
    34,159
    
    
    $
    328,386Operating Lease Obligations(2)
    
    
    920,799
    
    
    
    78,060
    
    
    
    163,586
    
    
    
    152,296
    
    
    
    526,857Total Contractual Cash Obligations
    
    $
    1,318,135
    
    
    $
    79,962
    
    
    $
    196,475
    
    
    $
    186,455
    
    
    $
    855,243
 
 Notes:(1)
    
    The long-term debt contractual cash obligations include principal and interest payment
requirements.(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.    19




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##### 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.
 Evaluation of Disclosure Controls and Procedures:
 Changes in Internal Control Over Financial Reporting:
 20




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
 Sarah Cruz, et al v. Town Sports International,
dba New York Sports Club
  
 Item 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities.
  21




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##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders.
 (a)
    
    The Company held its 2008 Annual Meeting of Shareholders on May 15, 2008.(b)
    
    The following matters were voted upon at the annual meeting:
 (i)
    
    The first item considered was the election of nine directors of the Company to serve until
the 2009 annual meeting of stockholders, and the results of such voting were as follows:
 Nominee
    
    For
    
    WithheldAlexander A. Alimanestianu
    
    
    23,138,523
    
    
    
    363,487Keith E. Alessi
    
    
    22,866,059
    
    
    
    635,952Paul N. Arnold
    
    
    23,140,205
    
    
    
    361,805Bruce C. Bruckmann
    
    
    23,102,856
    
    
    
    399,154J. Rice Edmonds
    
    
    23,120,162
    
    
    
    381,848Jason M. Fish
    
    
    23,075,824
    
    
    
    426,186Thomas J. Galligan III
    
    
    23,142,601
    
    
    
    359,409Robert J. Giardina
    
    
    23,138,473
    
    
    
    363,537Kevin McCall
    
    
    23,142,551
    
    
    
    359,459
 (ii)
    
    The second item was a proposal to ratify PricewaterhouseCoopers LLP
as the Companys independent auditor for the year ending December 31, 2008, which
was approved with 23,489,295 shares voted in favor of such proposal and 12,715
shares voted against such proposal.(iii)
    
    The third item was a proposal to approve the amendment and
restatement of the Companys 2006 Stock Incentive Plan and Section 162(m)
performance goals thereunder, which was approved with 21,142,600 shares voted in
favor of such proposal, 308,723 shares voted against such proposal and holders of
4,650 shares abstaining.
 
 ITEM 5. Other Information.
 By-Laws Second
Amended and Restated By-Laws
   22




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##### Table of Contents



Item 6. Exhibits
  23




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##### Table of Contents



SIGNATURES
  TOWN SPORTS INTERNATIONAL
HOLDINGS, INC.DATE: July 31, 2008By:
    
    /s/ Daniel Gallagher

Daniel GallagherChief Financial Officer(principal financial, accounting officer)
 24




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##### Table of Contents



INDEX TO EXHIBITS
  Exhibit No.
    
    Description of Exhibit3.1
    
    Second Amended and Restated By-Laws of Town Sports International Holdings, Inc. (incorporated
by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on May 19,
2008).10.1
    
    Amended and Restated 2006 Stock Incentive Plan (as amended and restated effective as of March
26, 2008) (the 2006 Stock Incentive Plan) (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on May 19, 2008).10.2
    
    Form of Restricted Stock Agreement pursuant to the 2006 Stock Incentive Plan (filed herewith).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 2002.99.1
    
    Amended and Restated By-Laws of Town Sports International Holdings, Inc. (incorporated by
reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on May 19,
2008.)
 25