##### 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, 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
    
    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.)
 888 Seventh Avenue (25 th Floor)  New York, NY 10106  (former address)
 þ o
  o o þ
  o þ




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##### 



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended June 30, 2007
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007
    
    
    3Condensed Consolidated Statements of Operations and Statements of Comprehensive Income (Loss)
for the three and six months ended June 30, 2006 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 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-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
December 31, 2006 and June 30, 2007
 (All figures in $000s, except share data)
 (Unaudited)
 December 31,
    
    
    June 30,2006
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,810
    
    
    $
    16,856Accounts receivable (less allowance for doubtful accounts of $2,026 and
$3,055 as of December 31, 2006 and June 30, 2007, respectively)
    
    
    8,028
    
    
    
    9,329Inventory
    
    
    435
    
    
    
    394Prepaid expenses and other current assets
    
    
    14,757
    
    
    
    14,949Total current assets
    
    
    30,030
    
    
    
    41,528Fixed assets, net
    
    
    281,606
    
    
    
    298,227Goodwill
    
    
    50,112
    
    
    
    50,099Intangible assets, net
    
    
    922
    
    
    
    671Deferred tax asset, net
    
    
    32,437
    
    
    
    38,708Deferred membership costs
    
    
    15,703
    
    
    
    16,754Other assets
    
    
    12,717
    
    
    
    12,820Total assets
    
    $
    423,527
    
    
    $
    458,807LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    181
    
    
    $
    1,967Accounts payable
    
    
    9,972
    
    
    
    9,745Accrued expenses
    
    
    33,220
    
    
    
    32,200Accrued interest
    
    
    3,466
    
    
    
    891Corporate income taxes payable
    
    
    2,577
    
    
    
    3,627Deferred revenue
    
    
    38,980
    
    
    
    44,711Total current liabilities
    
    
    88,396
    
    
    
    93,141Long-term debt
    
    
    280,948
    
    
    
    299,618Deferred lease liabilities
    
    
    54,929
    
    
    
    58,364Deferred revenue
    
    
    5,807
    
    
    
    5,976Other liabilities
    
    
    11,276
    
    
    
    13,853Total liabilities
    
    
    441,356
    
    
    
    470,952Commitments and contingencies (Note 9)Stockholders deficit:Common stock, $.001 par value; issued and outstanding 25,975,948 and
26,208,688 shares at December 31, 2006 and June 30, 2007, respectively
    
    
    26
    
    
    
    26Paid-in capital
    
    
    (21,068
    )
    
    
    (17,937
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    539
    
    
    
    527Retained earnings
    
    
    2,674
    
    
    
    5,239Total stockholders deficit
    
    
    (17,829
    )
    
    
    (12,145
    )Total liabilities and stockholders deficit
    
    $
    423,527
    
    
    $
    458,807
  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, 2006 and 2007
 (All figures in $000s except share and per share data)
 (Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Revenues:Club operations
    
    $
    107,659
    
    
    $
    118,128
    
    
    $
    210,582
    
    
    $
    232,468Fees and other
    
    
    1,810
    
    
    
    1,650
    
    
    
    2,913
    
    
    
    2,687109,469
    
    
    
    119,778
    
    
    
    213,495
    
    
    
    235,155Operating Expenses:Payroll and related
    
    
    40,591
    
    
    
    44,563
    
    
    
    81,487
    
    
    
    89,314Club operating
    
    
    36,781
    
    
    
    37,938
    
    
    
    71,251
    
    
    
    77,302General and administrative
    
    
    8,106
    
    
    
    9,122
    
    
    
    15,967
    
    
    
    16,880Depreciation and amortization
    
    
    10,400
    
    
    
    11,731
    
    
    
    20,786
    
    
    
    22,82295,878
    
    
    
    103,354
    
    
    
    189,491
    
    
    
    206,318Operating income
    
    
    13,591
    
    
    
    16,424
    
    
    
    24,004
    
    
    
    28,837Loss on extinguishment of debt
    
    
    8,667
    
    
    
    
    
    
    
    8,667
    
    
    
    12,521Interest expense
    
    
    10,395
    
    
    
    6,393
    
    
    
    21,083
    
    
    
    13,409Interest income
    
    
    (662
    )
    
    
    (279
    )
    
    
    (1,387
    )
    
    
    (538
    )Equity in the earnings of investees and rental income
    
    
    (475
    )
    
    
    (482
    )
    
    
    (908
    )
    
    
    (904
    )Income (loss) before provision (benefit) for
corporate income taxes
    
    
    (4,334
    )
    
    
    10,792
    
    
    
    (3,451
    )
    
    
    4,349Provision (benefit) for corporate income taxes
    
    
    (1,682
    )
    
    
    4,426
    
    
    
    (664
    )
    
    
    1,784Net income (loss)
    
    $
    (2,652
    )
    
    $
    6,366
    
    
    $
    (2,787
    )
    
    $
    2,565Earnings (loss) per share:Basic
    
    $
    (0.13
    )
    
    $
    0.24
    
    
    $
    (0.14
    )
    
    $
    0.10Diluted
    
    $
    (0.13
    )
    
    $
    0.24
    
    
    $
    (0.14
    )
    
    $
    0.10Weighted average number of shares used in
calculating earnings (loss) per share:Basic
    
    
    20,660,229
    
    
    
    26,142,383
    
    
    
    19,500,419
    
    
    
    26,070,219Diluted
    
    
    20,660,229
    
    
    
    26,656,341
    
    
    
    19,500,419
    
    
    
    26,572,355Statements of Comprehensive Income (Loss)Net income (loss)
    
    $
    (2,652
    )
    
    $
    6,366
    
    
    $
    (2,787
    )
    
    $
    2,565Foreign currency translation adjustments
    
    
    162
    
    
    
    (33
    )
    
    
    168
    
    
    
    (12
    )Comprehensive income (loss)
    
    $
    (2,490
    )
    
    $
    6,333
    
    
    $
    (2,619
    )
    
    $
    2,553
  4




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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2006 and 2007
 (All figures in $000s)
 (Unaudited)
 Six MonthsEnded June 30,2006
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (2,787
    )
    
    $
    2,565Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    20,786
    
    
    
    22,822Non-cash interest expense on Senior Discount Notes
    
    
    8,398
    
    
    
    6,029Loss on extinguishment of debt
    
    
    8,667
    
    
    
    12,521Amortization of debt issuance costs
    
    
    815
    
    
    
    443Noncash rental expense, net of noncash rental income
    
    
    (42
    )
    
    
    886Compensation expense incurred in connection with stock options
    
    
    574
    
    
    
    355Net changes in certain operating assets and liabilities
    
    
    13,771
    
    
    
    4,860Increase in deferred tax asset
    
    
    (3,782
    )
    
    
    (6,271
    )Landlord contributions to tenant improvements
    
    
    3,271
    
    
    
    3,686Increase in reserve for self-insured liability claims
    
    
    1,551
    
    
    
    1,304Increase in deferred membership costs
    
    
    (2,901
    )
    
    
    (1,051
    )Other
    
    
    86
    
    
    
    10Total adjustments
    
    
    51,194
    
    
    
    45,594Net cash provided by operating activities
    
    
    48,407
    
    
    
    48,159Cash flows from investing activities:Capital expenditures
    
    
    (26,004
    )
    
    
    (42,142
    )Net cash used in investing activities
    
    
    (26,004
    )
    
    
    (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
    
    
    (85,001
    )
    
    
    (169,999
    )Premium paid on extinguishment of debt and related costs
    
    
    (7,072
    )
    
    
    (9,309
    )Proceeds from initial public equity offering, net of underwriting discounts and offering costs
    
    
    91,796
    
    
    
    Repayment of long term borrowings
    
    
    (742
    )
    
    
    (575
    )Change in book overdraft
    
    
    (986
    )
    
    
    (1,230
    )Repurchase of common stock
    
    
    (433
    )
    
    
    Excess tax benefit from stock option exercises
    
    
    
    
    
    
    1,036Proceeds from exercise of stock options
    
    
    85
    
    
    
    1,740Net cash provided by (used in) financing activities
    
    
    (2,353
    )
    
    
    4,029Net increase in cash and cash equivalents
    
    
    20,050
    
    
    
    10,046Cash and cash equivalents at beginning of period
    
    
    51,304
    
    
    
    6,810Cash and cash equivalents at end of period
    
    $
    71,354
    
    
    $
    16,856Summary of change in certain operating assets and liabilities:Increase in accounts receivable
    
    $
    (877
    )
    
    $
    (2,322
    )Decrease (increase) in inventory
    
    
    (123
    )
    
    
    41(Increase) decrease in prepaid expenses and other current assets
    
    
    650
    
    
    
    (1,207
    )Increase in accounts payable, accrued expenses and accrued interest
    
    
    1,779
    
    
    
    1,396Change in prepaid corporate income taxes and corporate income taxes payable
    
    
    3,015
    
    
    
    1,050Increase in deferred revenue
    
    
    9,327
    
    
    
    5,902Net changes in certain operating assets and liabilities
    
    $
    13,771
    
    
    $
    4,860Supplemental disclosures of cash flow information:Cash payments for interest
    
    $
    13,811
    
    
    $
    9,924Cash payments for income taxes
    
    $
    2,612
    
    
    $
    5,830
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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. Initial Public Offering
  6




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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,
    
    
    June 30,2006
    
    
    2007($000s)
    
    
    ($000s)Term Loan Facility
    
    $
    
    
    
    $
    184,5389 5/8% Senior Notes
    
    
    169,999
    
    
    
    11.0% Senior Discount Notes (Payment-in-Kind Notes)
    
    
    110,850
    
    
    
    116,879Notes payable for acquired businesses
    
    
    280
    
    
    
    168281,129
    
    
    
    301,585Less, current portion to be paid within one year
    
    
    181
    
    
    
    1,967Long-term portion
    
    $
    280,948
    
    
    $
    299,618
      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




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##### Table of Contents



5. Earnings (Loss) Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Unaudited)
    
    
    (Unaudited)2006
    
    
    2007
    
    
    2006
    
    
    2007Weighted average number of common share outstanding  basic
    
    
    20,660,229
    
    
    
    26,142,383
    
    
    
    19,500,419
    
    
    
    26,070,219Effect of diluted stock options
    
    
    
    
    
    
    513,958
    
    
    
    
    
    
    
    502,136Weighted average number of common shares outstanding  diluted
    
    
    20,660,229
    
    
    
    26,656,341
    
    
    
    19,500,419
    
    
    
    26,572,355
 6. Stock-Based Compensation
  8




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Number of
    
    Exercise
    
    Black Scholes
    
    
    
    
    
    Dividend
    
    Risk free
    
    ExpectedDate
    
    Options
    
    Price
    
    Value
    
    Volatility
    
    Yield
    
    Interest Rate
    
    TermMarch 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
    %
    
    
    6.5Total revenue
    
    
    18,500
   7. Goodwill and Other Intangibles
   Balance as of December 31, 2006
    
    $
    50,112Changes due to foreign currency exchange rate fluctuations
    
    
    (13
    )Balance as of June 30, 2007
    
    $
    50,099
 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




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##### Table of Contents



As of June 30, 2007($000s)Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    12,146
    
    
    $
    (11,606
    )
    
    $
    540Covenants-not-to-compete
    
    
    1,151
    
    
    
    (1,032
    )
    
    
    119Beneficial lease
    
    
    223
    
    
    
    (211
    )
    
    
    12$
    13,520
    
    
    $
    (12,849
    )
    
    $
    671
  Aggregate Amortization Expense for the twelve months ending June 30, ($000s)2008
    
    $
    3902009
    
    
    2722010
    
    
    9$
    671
  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
 10




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##### Table of Contents



Carlos Urbina et ano v. 26 Court Street Associates, LLC et al.,
  10. Investments in Affiliated Companies
  Three months ended
    
    Six months endedJune 30,
    
    June 30,($000s)
    
    ($000s)2006
    
    2007
    
    2006
    
    2007Revenue
    
    $
    880
    
    
    $
    931
    
    
    $
    1,786
    
    
    $
    1,831Income from operations
    
    
    428
    
    
    
    406
    
    
    
    795
    
    
    
    779Net income
    
    
    412
    
    
    
    374
    
    
    
    759
    
    
    
    722
 11




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##### 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. This
comprises 81.1% of our total revenue for the six months ended June 30, 2007. 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.
    
    For the six months ended June 30, 2007, we generated 12.5% of our revenue from personal
training and 5.2% 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



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Membership dues
    
    $
    86,764
    
    
    
    79.3
    %
    
    $
    93,818
    
    
    
    78.3
    %
    
    $
    169,903
    
    
    
    79.6
    %
    
    $
    184,802
    
    
    
    78.6
    %Initiation fees
    
    
    2,321
    
    
    
    2.1
    %
    
    
    3,096
    
    
    
    2.6
    %
    
    
    4,252
    
    
    
    2.0
    %
    
    
    5,979
    
    
    
    2.5
    %Membership revenue
    
    
    89,085
    
    
    
    81.4
    %
    
    
    96,914
    
    
    
    80.9
    %
    
    
    174,155
    
    
    
    81.6
    %
    
    
    190,781
    
    
    
    81.1
    %Personal training revenue
    
    
    13,084
    
    
    
    11.9
    %
    
    
    15,482
    
    
    
    12.9
    %
    
    
    25,352
    
    
    
    11.9
    %
    
    
    29,403
    
    
    
    12.5
    %Other ancillary club revenue
    
    
    5,490
    
    
    
    5.0
    %
    
    
    5,732
    
    
    
    4.8
    %
    
    
    11,075
    
    
    
    5.2
    %
    
    
    12,284
    
    
    
    5.2
    %Ancillary club revenue
    
    
    18,574
    
    
    
    16.9
    %
    
    
    21,214
    
    
    
    17.7
    %
    
    
    36,427
    
    
    
    17.1
    %
    
    
    41,687
    
    
    
    17.7
    %Fees and other revenue
    
    
    1,810
    
    
    
    1.7
    %
    
    
    1,650
    
    
    
    1.4
    %
    
    
    2,913
    
    
    
    1.3
    %
    
    
    2,687
    
    
    
    1.2
    %Total revenue
    
    $
    109,469
    
    
    
    100.0
    %
    
    $
    119,778
    
    
    
    100.0
    %
    
    $
    213,495
    
    
    
    100.0
    %
    
    $
    235,155
    
    
    
    100.0
    %
      Historical Club Growth
  2006
    
    2007Q1
    
    Q2
    
    Q3
    
    Q4
    
    Total
    
    Q1
    
    Q2Wholly owned clubs operated at beginning of period
    
    
    139
    
    
    
    143
    
    
    
    142
    
    
    
    145
    
    
    
    139
    
    
    
    147
    
    
    
    150New clubs opened
    
    
    5
    
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    10
    
    
    
    3
    
    
    
    1Clubs 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
    
    
    
    150Total clubs operated at end of period (2)
    
    
    145
    
    
    
    144
    
    
    
    147
    
    
    
    149
    
    
    
    149
    
    
    
    152
    
    
    
    152
 
 (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 June 30, 2007, we managed five
university fitness clubs in which we did not have an equity interest. 13




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##### Table of Contents



Existing Club Revenue
   Results of Operations
  Three Months
    
    Six MonthsEnded June 30
    
    Ended June 302006
    
    2007
    
    2006
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    37.1
    
    
    
    37.2
    
    
    
    38.2
    
    
    
    38.0Club operating
    
    
    33.6
    
    
    
    31.7
    
    
    
    33.4
    
    
    
    32.9General and administrative
    
    
    7.4
    
    
    
    7.6
    
    
    
    7.5
    
    
    
    7.2Depreciation and amortization
    
    
    9.5
    
    
    
    9.8
    
    
    
    9.7
    
    
    
    9.787.6
    
    
    
    86.3
    
    
    
    88.8
    
    
    
    87.8Operating income
    
    
    12.4
    
    
    
    13.7
    
    
    
    11.2
    
    
    
    12.2Loss on extinguishment of debt
    
    
    7.9
    
    
    
    0.0
    
    
    
    4.0
    
    
    
    5.3Interest expense
    
    
    9.5
    
    
    
    5.3
    
    
    
    9.8
    
    
    
    5.7Interest income
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    (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
    
    
    (4.0
    )
    
    
    9.0
    
    
    
    (1.6
    )
    
    
    1.8Provision (benefit) for corporate income taxes
    
    
    (1.6
    )
    
    
    3.7
    
    
    
    (0.3
    )
    
    
    0.7Net income (loss)
    
    
    (2.4
    )%
    
    
    5.3
    %
    
    
    (1.3
    )%
    
    
    1.1
    %
 Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
 Revenues.
  14




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##### Table of Contents



Operating Expenses.
  
    
    Payroll costs directly related to our personal training, group fitness
training, and programming for children increased $1.4 million or
14.7%, due to an increase in demand for these programs.
  
    
    Rent and occupancy expenses increased $1.9 million. Rent
and occupancy costs at clubs that opened after April
1, 2006, or that are currently under construction,
increased $1.6 million. The remaining $300,000 increase in
rent and occupancy expenses relates to our clubs that were
open prior to April 1, 2006.
    
    Advertising and marketing expenses decreased $1.8 million,
as we expended $1.7 million during the three months ended
June 30, 2007 compared to $3.5 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 have
outsourced towel laundry service in 42 clubs as of June 30,
2007 as compared to 20 clubs as of June 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 $492,000 increase in laundry expenses during
the three months ended June 30, 2007 when compared to the
three months ended June 30, 2006.
   Loss on Extinguishment of Debt.
 Interest Expense.
 Interest Income.
 Provision for Corporate Income Taxes.
 15




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##### Table of Contents



Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 Revenues.
  Operating Expenses.
  
    
    Payroll costs directly related to our personal training,
group fitness training, and programming for children
increased $2.3 million or 12.4%, due to an increase in
demand for these programs.
    
    In addition, in the six months ended June 30, 2006, the
Company 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 six months ended June 30, 2006 while
no such costs were incurred in the six months ended June
30, 2007.
  
    
    Rent and occupancy expenses increased $4.2 million. Rent
and occupancy costs at clubs that opened after January
1, 2006, or that are currently under construction,
increased $3.5 million. The remaining $700,000 increase in
rent and occupancy expenses relates to our clubs that were
open prior to January 1, 2006.
    
    Advertising and marketing expenses decreased $750,000, as
we expended $5.0 million in the six months ended June 30,
2007 compared to $5.7 million in the six months ended June
30, 2006, primarily due to a shift in the timing of our
advertising plans.
    
    As part of a customer service initiative, we have
outsourced towel laundry service in 42 clubs as of June 30,
2007 as compared to 20 clubs as of June 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 $1.1 million increase in laundry expenses
during the six months ended June 30, 2007 when compared to
the six months ended June 30, 2006.
   16




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##### Table of Contents



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




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##### Table of Contents



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(3)
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsLong-Term Debt(1)
    
    $
    399,303
    
    
    $
    1,967
    
    
    $
    25,327
    
    
    $
    34,159
    
    
    $
    337,850Operating Lease Obligations(2)
    
    
    879,788
    
    
    
    71,709
    
    
    
    153,658
    
    
    
    145,272
    
    
    
    509,149Total Contractual Cash Obligations
    
    $
    1,279,091
    
    
    $
    73,676
    
    
    $
    178,985
    
    
    $
    179,431
    
    
    $
    846,999
 
 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 June 30, 2007
was 7.125% or $13.2 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 June 30, 2007, the Company had $751,000 of unrecognized
tax benefits that, if recognized, would affect the Companys effective tax rate in any future
periods. Recent Changes in or Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB No. 115
 Forward-Looking Statements
  19




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures.
   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
 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.
  21




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##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders.
 (a)
    
    The Company held its 2007 Annual Meeting of Shareholders on May 1, 2007.(b)
    
    The following matters were voted upon at the annual meeting:
 (i)
    
    The first item considered was the election of eight directors of the Company to serve
until the 2008 annual meeting of shareholders, and the results of such voting were as follows:
 Nominee
    
    For
    
    
    WithheldKeith E. Alessi
    
    
    24,672,407
    
    
    
    77,800Paul N. Arnold
    
    
    24,695,507
    
    
    
    54,700Bruce C. Bruckmann
    
    
    24,340,458
    
    
    
    409,749J. Rice Edmonds
    
    
    24,363,558
    
    
    
    386,649Jason M. Fish
    
    
    24,521,853
    
    
    
    228,354Thomas J. Galligan III
    
    
    24,718,007
    
    
    
    32,200Robert J. Giardina
    
    
    24,519,882
    
    
    
    230,325Kevin McCall
    
    
    24,718,007
    
    
    
    32,200
 (ii)
    
    The second item was a proposal to ratify PricewaterhouseCoopers LLP as the Companys
independent auditor for the year ending December 31, 2007, which was approved with 24,747,157
shares voted in favor of such proposal, 2,034 shares voted against such proposal, and holders of
1,016 shares abstaining.
 
 ITEM 5. Other Information.
  22




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##### Table of Contents



ITEM 6. Exhibits.
 Exhibits
 Exhibit No.
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act, as amended32.1
    
    Section 1350 Certification32.2
    
    Section 1350 Certification
 23




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##### Table of Contents



SIGNATURES
  DATE: August 2, 2007
    TOWN SPORTS INTERNATIONAL
HOLDINGS, INC.By:
    /s/ Richard PyleRichard PyleChief Financial Officer 

(principal financial, accounting officer) DATE: August 2, 2007
    By:
    /s/ Robert GiardinaRobert GiardinaChief Executive Officer

(principal executive officer) 24