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




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##### 



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended June 30, 2010
 INDEX
 PagePART
I. FINANCIAL INFORMATIONItem 1.
Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations and Statements of Comprehensive (Loss) Income
for the three and six months ended June 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. (Removed and Reserved)
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EX-31.1EX-31.2EX-32.1EX-32.2
  2




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30, 2010 and December 31, 2009
 (All figures in $000s except share data)
 (Unaudited)
 June 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,938
    
    
    $
    10,758Accounts receivable (less allowance for doubtful accounts of $2,637 and
$2,410 as of June 30, 2010 and December 31, 2009, respectively)
    
    
    5,366
    
    
    
    4,295Inventory
    
    
    220
    
    
    
    224Prepaid corporate income taxes
    
    
    2,616
    
    
    
    1,274Prepaid expenses and other current assets
    
    
    9,013
    
    
    
    10,264Total current assets
    
    
    50,153
    
    
    
    26,815Fixed assets, net
    
    
    315,408
    
    
    
    340,277Goodwill
    
    
    32,627
    
    
    
    32,636Intangible assets, net
    
    
    78
    
    
    
    149Deferred tax assets, net
    
    
    54,752
    
    
    
    50,581Deferred membership costs
    
    
    4,189
    
    
    
    6,079Other assets
    
    
    9,789
    
    
    
    10,929Total assets
    
    $
    466,996
    
    
    $
    467,466LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of long-term debt
    
    $
    1,850
    
    
    $
    1,850Accounts payable
    
    
    5,546
    
    
    
    6,011Accrued expenses
    
    
    25,830
    
    
    
    23,656Accrued interest
    
    
    6,586
    
    
    
    6,573Deferred revenue
    
    
    38,297
    
    
    
    35,346Total current liabilities
    
    
    78,109
    
    
    
    73,436Long-term debt
    
    
    315,587
    
    
    
    316,513Deferred lease liabilities
    
    
    69,538
    
    
    
    71,438Deferred revenue
    
    
    1,939
    
    
    
    1,488Other liabilities
    
    
    11,019
    
    
    
    12,824Total liabilities
    
    
    476,192
    
    
    
    475,699Contingencies (Note 9)Stockholders deficit :Common stock, $.001 par value; issued and outstanding 22,645,618 and
22,603,199 shares at June 30, 2010 and December 31, 2009, respectively
    
    
    23
    
    
    
    23Paid-in capital
    
    
    (21,774
    )
    
    
    (22,572
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    1,113
    
    
    
    1,327Retained earnings
    
    
    11,442
    
    
    
    12,989Total stockholders deficit
    
    
    (9,196
    )
    
    
    (8,233
    )Total liabilities and stockholders deficit
    
    $
    466,996
    
    
    $
    467,466
  3




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the three and six months ended June 30, 2010 and 2009
 (All figures in $000s except share and per share data)
 (Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Club operations
    
    $
    116,172
    
    
    $
    122,620
    
    
    $
    232,767
    
    
    $
    248,088Fees and other
    
    
    1,264
    
    
    
    1,292
    
    
    
    2,428
    
    
    
    2,533117,436
    
    
    
    123,912
    
    
    
    235,195
    
    
    
    250,621Operating Expenses:Payroll and related
    
    
    48,605
    
    
    
    48,246
    
    
    
    97,116
    
    
    
    98,993Club operating
    
    
    43,804
    
    
    
    45,054
    
    
    
    87,272
    
    
    
    91,664General and administrative
    
    
    6,292
    
    
    
    7,488
    
    
    
    15,231
    
    
    
    15,835Depreciation and amortization
    
    
    13,407
    
    
    
    14,346
    
    
    
    27,061
    
    
    
    28,642Impairment of fixed assets
    
    
    2,865
    
    
    
    
    
    
    
    3,254
    
    
    
    1,131114,973
    
    
    
    115,134
    
    
    
    229,934
    
    
    
    236,265Operating income
    
    
    2,463
    
    
    
    8,778
    
    
    
    5,261
    
    
    
    14,356Interest expense
    
    
    5,179
    
    
    
    5,289
    
    
    
    10,363
    
    
    
    10,566Interest income
    
    
    (17
    )
    
    
    
    
    
    
    (35
    )
    
    
    (1
    )Equity in the earnings of investees and rental income
    
    
    (518
    )
    
    
    (398
    )
    
    
    (1,054
    )
    
    
    (1,009
    )(Loss) income before (benefit) provision for
corporate income taxes
    
    
    (2,181
    )
    
    
    3,887
    
    
    
    (4,013
    )
    
    
    4,800(Benefit) provision for corporate income taxes
    
    
    (1,366
    )
    
    
    1,363
    
    
    
    (2,466
    )
    
    
    1,637Net (loss) income
    
    $
    (815
    )
    
    $
    2,524
    
    
    $
    (1,547
    )
    
    $
    3,163(Loss) earnings per share:Basic
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.07
    )
    
    $
    0.14Diluted
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.07
    )
    
    $
    0.14Weighted average number of shares used in
calculating (loss) earnings per share:Basic
    
    
    22,625,137
    
    
    
    22,546,449
    
    
    
    22,615,241
    
    
    
    22,875,107Diluted
    
    
    22,625,137
    
    
    
    22,592,436
    
    
    
    22,615,241
    
    
    
    22,924,421Statements of Comprehensive (Loss) IncomeNet (loss) income
    
    $
    (815
    )
    
    $
    2,524
    
    
    $
    (1,547
    )
    
    $
    3,163Foreign currency translation adjustments
    
    
    (85
    )
    
    
    243
    
    
    
    (214
    )
    
    
    (77
    )Comprehensive (loss) income
    
    $
    (900
    )
    
    $
    2,767
    
    
    $
    (1,761
    )
    
    $
    3,086
  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, 2010 and 2009
 (All figures in $000s)
 (Unaudited)
 Six Months Ended June 30,2010
    
    
    2009Cash flows from operating activities:Net (loss) income
    
    $
    (1,547
    )
    
    $
    3,163Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    27,061
    
    
    
    28,642Impairment of fixed assets
    
    
    3,254
    
    
    
    1,131Non-cash interest expense on Senior Discount Notes
    
    
    
    
    
    
    1,203Amortization of debt issuance costs
    
    
    506
    
    
    
    406Non-cash rental expense, net of non-cash rental income
    
    
    (2,171
    )
    
    
    (667
    )Compensation expense incurred in connection with stock options and common stock
grants
    
    
    737
    
    
    
    841Increase in deferred tax asset
    
    
    (4,171
    )
    
    
    (2,474
    )Net change in certain operating assets and liabilities
    
    
    4,409
    
    
    
    10,945Decrease in deferred membership costs
    
    
    1,890
    
    
    
    4,660Landlord contributions to tenant improvements
    
    
    100
    
    
    
    2,993(Decrease) increase in insurance reserves
    
    
    (1,081
    )
    
    
    301Other
    
    
    485
    
    
    
    (134
    )Total adjustments
    
    
    31,019
    
    
    
    47,847Net cash provided by operating activities
    
    
    29,472
    
    
    
    51,010Cash flows from investing activities:Capital expenditures
    
    
    (6,262
    )
    
    
    (28,485
    )Net cash used in investing activities
    
    
    (6,262
    )
    
    
    (28,485
    )Cash flows from financing activities:Proceeds from borrowings on Revolving Loan Facility
    
    
    
    
    
    
    5,000Repayment of borrowings on Revolving Loan Facility
    
    
    
    
    
    
    (19,000
    )Repayment of long term borrowings
    
    
    (925
    )
    
    
    (925
    )Change in book overdraft
    
    
    
    
    
    
    126Repurchase of common stock
    
    
    
    
    
    
    (5,355
    )Proceeds from exercise of stock options
    
    
    76
    
    
    
    36Tax benefit from stock option exercises
    
    
    
    
    
    
    21Net cash used in financing activities
    
    
    (849
    )
    
    
    (20,097
    )Effect of exchange rate changes on cash
    
    
    (181
    )
    
    
    (68
    )Net increase in cash and cash equivalents
    
    
    22,180
    
    
    
    2,360Cash and cash equivalents beginning of period
    
    
    10,758
    
    
    
    10,399Cash and cash equivalents end of period
    
    $
    32,938
    
    
    $
    12,759Summary of the change in certain operating assets and liabilities:Increase in accounts receivable
    
    $
    (1,090
    )
    
    $
    (1,035
    )Decrease (increase) in inventory
    
    
    3
    
    
    
    (103
    )Decrease in prepaid expenses and other current assets
    
    
    1,084
    
    
    
    1,581Increase in accounts payable, accrued expenses and accrued interest
    
    
    2,352
    
    
    
    452Increase in accrued interest on Senior Discount Notes
    
    
    
    
    
    
    6,346Change in prepaid corporate income taxes and corporate income taxes payable
    
    
    (1,342
    )
    
    
    5,648Increase (decrease) in deferred revenue
    
    
    3,402
    
    
    
    (1,944
    )Net change in certain working capital components
    
    $
    4,409
    
    
    $
    10,945Supplemental disclosures of cash flow information:Cash payments for interest
    
    $
    10,343
    
    
    $
    3,046Cash payments for income taxes
    
    $
    3,045
    
    
    $
    880
  5




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In $000s except share and per share data)
 (Unaudited)
 1. Basis of Presentation
  Form 10-K
  Correction of an Accounting Error
  Change in Estimated Average Membership Life
  6




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##### Table of Contents



2. Recent Accounting Pronouncements
      3. Long-Term Debt
 June 30,
    
    
    December 31,2010
    
    
    2009Term Loan Facility
    
    $
    178,987
    
    
    $
    179,91311% Senior Discount Notes
    
    
    138,450
    
    
    
    138,450317,437
    
    
    
    318,363Less: Current portion due within one year
    
    
    1,850
    
    
    
    1,850Long-term portion
    
    $
    315,587
    
    
    $
    316,513
  7




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##### Table of Contents



Fair Market Value
  4. (Loss) Earnings Per Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Weighted average number of shares of Common Stock
outstanding  basic
    
    
    22,625,137
    
    
    
    22,546,449
    
    
    
    22,615,241
    
    
    
    22,875,106Effect of dilutive stock options and restricted Common Stock
    
    
    
    
    
    
    45,987
    
    
    
    
    
    
    
    49,315Weighted average number of shares of Common Stock
outstanding  diluted
    
    
    22,625,137
    
    
    
    22,592,436
    
    
    
    22,615,241
    
    
    
    22,924,421(Loss) earnings per share:Basic
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.07
    )
    
    $
    0.14Diluted
    
    $
    (0.04
    )
    
    $
    0.11
    
    
    $
    (0.07
    )
    
    $
    0.14
  8




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##### Table of Contents



5. Common Stock and Stock-Based Compensation
   Option Grants
  Risk Free
    
    
    ExpectedNumber of
    
    
    Exercise
    
    
    Black-Scholes
    
    
    
    
    
    
    Dividend
    
    
    Interest
    
    
    TermDate
    
    Options
    
    
    Price
    
    
    Valuation
    
    
    Volatility
    
    
    Yield
    
    
    Rate
    
    
    (Years)January 4, 2010
    
    
    7,000
    
    
    $
    2.47
    
    
    $
    1.73
    
    
    
    83.99
    %
    
    
    0.0
    %
    
    
    2.83
    %
    
    
    5.50January 4, 2010
    
    
    7,500
    
    
    $
    2.47
    
    
    $
    1.81
    
    
    
    83.99
    %
    
    
    0.0
    %
    
    
    3.18
    %
    
    
    6.25Total
    
    
    14,500
   Restricted Stock Awards
   9




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##### Table of Contents



Stock Grants
  Number of
    
    
    Price Per
    
    
    Grant Date FairDate
    
    Shares
    
    
    Share
    
    
    ValueMarch 25, 2010
    
    
    3,049
    
    
    $
    4.10
    
    
    $
    13June 24, 2010
    
    
    5,252
    
    
    $
    2.38
    
    
    $
    12Total
    
    
    8,301
 6. Fixed Asset Impairment and Club Closures
     7. Goodwill and Other Intangibles
   10




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##### Table of Contents



NYSC
    
    
    BSC
    
    
    SSC
    
    
    Outlier Clubs
    
    
    TotalBalance as of January 1, 2009Goodwill
    
    $
    31,403
    
    
    $
    15,766
    
    
    $
    1,070
    
    
    $
    3,982
    
    
    $
    52,221Accumulated impairment of goodwill
    
    
    
    
    
    
    (15,766
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    (19,611
    )31,403
    
    
    
    
    
    
    
    1,070
    
    
    
    137
    
    
    
    32,610Changes due to foreign currency
exchange rate fluctuations
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2009Goodwill
    
    
    31,403
    
    
    
    15,766
    
    
    
    1,096
    
    
    
    3,982
    
    
    
    52,247Accumulated impairment of goodwill
    
    
    
    
    
    
    (15,766
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    (19,611
    )31,403
    
    
    
    
    
    
    
    1,096
    
    
    
    137
    
    
    
    32,636Changes due to foreign currency
exchange rate fluctuations
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Balance as of June 30, 2010Goodwill
    
    
    31,403
    
    
    
    15,766
    
    
    
    1,087
    
    
    
    3,982
    
    
    
    52,238Accumulated impairment of goodwill
    
    
    
    
    
    
    (15,766
    )
    
    
    
    
    
    
    (3,845
    )
    
    
    (19,611
    )$
    31,403
    
    
    $
    
    
    
    $
    1,087
    
    
    $
    137
    
    
    $
    32,627
  June 30,
    
    
    December 31,2010
    
    
    2009Covenants-not-to-compete
    
    $
    1,508
    
    
    $
    1,508Accumulated amortization
    
    
    (1,430
    )
    
    
    (1,359
    )$
    78
    
    
    $
    149
 8. Income Taxes
    11




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9. Contingencies
 Sarah Cruz, et al v. Town Sports
International, d/b/a New York Sports Club
  Town Sports International, LLC v. Ajilon
Solutions
 12




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13




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Item 2. Managements Discussion and Analysis of Financial Condition & Results of Operations
 Introduction
    Revenue and operating expenses
  
    
    Membership revenue:Our largest sources of revenue are
dues and initiation fees paid by our members. These dues
and fees comprised 80.5% of our total revenue for the
six months ended June 30, 2010. We recognize revenue
from membership dues in the month when the services are
rendered. Approximately 95.0% 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, 2010, we generated 12.9% of our revenue from
personal training and 5.6% 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.
   14




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Student Membership
  Historical Club Count
  2009
    
    
    2010Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Full-Year
    
    
    Q1
    
    
    Q2Wholly owned clubs operated at beginning of period
    
    
    164
    
    
    
    165
    
    
    
    164
    
    
    
    163
    
    
    
    164
    
    
    
    159
    
    
    
    159New clubs opened
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Clubs closed, relocated or merged
    
    
    (3
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    (9
    )
    
    
    
    
    
    
    Wholly owned clubs at end of period
    
    
    165
    
    
    
    164
    
    
    
    163
    
    
    
    159
    
    
    
    159
    
    
    
    159
    
    
    
    159Total clubs operated at end of period (1) (2)
    
    
    167
    
    
    
    166
    
    
    
    165
    
    
    
    161
    
    
    
    161
    
    
    
    161
    
    
    
    161
 
 (1)
    
    Includes wholly-owned and partly-owned clubs. In addition to the above, during all periods presented,
we managed four university fitness clubs in which we did not have an equity interest.(2)
    
    In July 2010 we closed one club in Manhattan. 15




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##### Table of Contents



Comparable Club Revenue
   2009:Three months ended March 31, 2009
    
    
    (2.1
    )%Three months ended June 30, 2009
    
    
    (6.3
    )%Three months ended September 30, 2009
    
    
    (7.0
    )%Three months ended December 31, 2009
    
    
    (7.1
    )%2010:Three months ended March 31, 2010
    
    
    (6.0
    )%Three months ended June 30, 2010
    
    
    (4.2
    )%
  Results of Operations
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    41.4
    
    
    
    38.9
    
    
    
    41.3
    
    
    
    39.5Club operating
    
    
    37.3
    
    
    
    36.4
    
    
    
    37.1
    
    
    
    36.6General and administrative
    
    
    5.4
    
    
    
    6.0
    
    
    
    6.5
    
    
    
    6.3Depreciation and amortization
    
    
    11.4
    
    
    
    11.6
    
    
    
    11.5
    
    
    
    11.4Impairment of fixed assets
    
    
    2.4
    
    
    
    
    
    
    
    1.4
    
    
    
    0.597.9
    
    
    
    92.9
    
    
    
    97.8
    
    
    
    94.3Operating income
    
    
    2.1
    
    
    
    7.1
    
    
    
    2.2
    
    
    
    5.7Interest expense
    
    
    4.4
    
    
    
    4.3
    
    
    
    4.4
    
    
    
    4.2Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in the earnings of investees and rental income
    
    
    (0.4
    )
    
    
    (0.3
    )
    
    
    (0.5
    )
    
    
    (0.4
    )(Loss) income before (benefit) provision for
corporate income taxes
    
    
    (1.9
    )
    
    
    3.1
    
    
    
    (1.7
    )
    
    
    1.9(Benefit) provision for corporate income taxes
    
    
    (1.2
    )
    
    
    1.1
    
    
    
    (1.0
    )
    
    
    0.7Net (loss) income
    
    
    (0.7
    )%
    
    
    2.0
    %
    
    
    (0.7
    )%
    
    
    1.2
    %
 16




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##### Table of Contents



THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2009
 Revenue (in $000s) was comprised of the following for the periods indicated:
 Three Months Ended June 30,2010
    
    
    2009Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % VarianceMembership dues
    
    $
    91,987
    
    
    
    78.3
    %
    
    $
    98,358
    
    
    
    79.4
    %
    
    
    (6.5
    )%Initiation fees
    
    
    2,432
    
    
    
    2.1
    %
    
    
    3,343
    
    
    
    2.7
    %
    
    
    (27.3
    )%Membership revenue
    
    
    94,419
    
    
    
    80.4
    %
    
    
    101,701
    
    
    
    82.1
    %
    
    
    (7.2
    )%Personal training revenue
    
    
    15,582
    
    
    
    13.2
    %
    
    
    15,169
    
    
    
    12.2
    %
    
    
    2.7
    %Other ancillary club revenue
    
    
    6,171
    
    
    
    5.3
    %
    
    
    5,750
    
    
    
    4.7
    %
    
    
    7.3
    %Ancillary club revenue
    
    
    21,753
    
    
    
    18.5
    %
    
    
    20,919
    
    
    
    16.9
    %
    
    
    4.0
    %Fees and other revenue
    
    
    1,264
    
    
    
    1.1
    %
    
    
    1,292
    
    
    
    1.0
    %
    
    
    (2.2
    )%Total revenue
    
    $
    117,436
    
    
    
    100.0
    %
    
    $
    123,912
    
    
    
    100.0
    %
    
    
    (5.2
    )%
    Operating expenses (in $000s) were comprised of the following for the periods indicated:
 Three Months Ended June 30,2010
    
    
    2009
    
    

% VariancePayroll and related
    
    $
    48,605
    
    
    $
    48,246
    
    
    
    0.7
    %Club operating
    
    
    43,804
    
    
    
    45,054
    
    
    
    (2.8
    )%General and administrative
    
    
    6,292
    
    
    
    7,488
    
    
    
    (16.0
    )%Depreciation and amortization
    
    
    13,407
    
    
    
    14,346
    
    
    
    (6.5
    )%Impairment of fixed assets
    
    
    2,865
    
    
    
    
    
    
    NAOperating expenses
    
    $
    114,973
    
    
    $
    115,134
    
    
    
    (0.1
    )%
  Payroll and related
 
    
    Payroll related to our membership consultants decreased $2.2 million. The
amount of membership consultant payroll deferred over the past two years has been declining
with our decline in initiation fees collected. Our payroll costs that we defer are limited to the amount
 17




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##### Table of Contents



of these initiation fees. This has
resulted in a decrease in membership consultant payroll previously deferred but recognized
in the three months ended June 30, 2010. Also contributing to this decrease is the increase
in the amount of payroll costs deferred in the three months ended June 30, 2010 as
initiation fees collected have increased from $703,000 to $2.2 million. The aforementioned
decrease in payroll is net of a $641,000 charge reflecting the change in the estimated
average membership life from 28 months to 25 months effective April 1, 2010.
 
    
    Payroll related to our membership incentive bonuses was $694,000 higher in
the three months ended June 30, 2010 compared to the same period in 2009. We were
forecasting our management incentive bonus payout at 100% of target compared to 50% in the
same period in 2009.
    
    Personal training payroll increased $1.1 million due to the increase in
personal training revenue as well as an increase in payroll related to personal training
promotions geared at attracting additional private training clientele.
    
    Payroll related to severance charges increased $377,000 from corporate
employee reductions in the three months ended June 30, 2010.
  Club operating
 
    
    Rent and occupancy expenses decreased $687,000. Rent and occupancy costs increased
$911,000 at our clubs that opened prior to March 31, 2009 and decreased $487,000 at our
clubs that were closed after March 31, 2010. In addition, we recorded early lease
termination costs of $411,000 in the three months ended June 30, 2009, for a club that was
closed prior to the lease expiration date. We also recorded $700,000 in damages in
June 2009 paid to a landlord of one of TSI LLCs former health clubs.
    
    Operating expenses relating to laundry and towels decreased approximately $413,000
primarily related to the opening of our laundry facility in Elmsford, NY in January 2009.
  General and administrative
  Depreciation and amortization
  Impairment of fixed assets
 18




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##### Table of Contents



(Benefit) Provision for Corporate Income Taxes
    SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2009
 Revenue (in $000s) was comprised of the following for the periods indicated:
 Six Months Ended June 30,2010
    
    
    2009Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % VarianceMembership dues
    
    $
    184,796
    
    
    
    78.6
    %
    
    $
    199,066
    
    
    
    79.4
    %
    
    
    (7.2
    )%Initiation fees
    
    
    4,456
    
    
    
    1.9
    %
    
    
    6,507
    
    
    
    2.6
    %
    
    
    (31.5
    )%Membership revenue
    
    
    189,252
    
    
    
    80.5
    %
    
    
    205,573
    
    
    
    82.0
    %
    
    
    (7.9
    )%Personal training revenue
    
    
    30,381
    
    
    
    12.9
    %
    
    
    30,170
    
    
    
    12.1
    %
    
    
    0.7
    %Other ancillary club revenue
    
    
    13,134
    
    
    
    5.6
    %
    
    
    12,345
    
    
    
    4.9
    %
    
    
    6.4
    %Ancillary club revenue
    
    
    43,515
    
    
    
    18.5
    %
    
    
    42,515
    
    
    
    17.0
    %
    
    
    2.4
    %Fees and other revenue
    
    
    2,428
    
    
    
    1.0
    %
    
    
    2,533
    
    
    
    1.0
    %
    
    
    (4.1
    )%Total revenue
    
    $
    235,195
    
    
    
    100.0
    %
    
    $
    250,621
    
    
    
    100.0
    %
    
    
    (6.2
    )%
   19




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##### Table of Contents



Operating expenses (in $000s) were comprised of the following for the periods indicated:
 Six Months Ended June 30,2010
    
    
    2009
    
    
    % VariancePayroll and related
    
    $
    97,116
    
    
    $
    98,993
    
    
    
    (1.9
    )%Club operating
    
    
    87,272
    
    
    
    91,664
    
    
    
    (4.8
    )%General and administrative
    
    
    15,231
    
    
    
    15,835
    
    
    
    (3.8
    )%Depreciation and amortization
    
    
    27,061
    
    
    
    28,642
    
    
    
    (5.5
    )%Impairment of fixed assets
    
    
    3,254
    
    
    
    1,131
    
    
    
    187.7
    %Operating expenses
    
    $
    229,934
    
    
    $
    236,265
    
    
    
    (2.7
    )%
  Payroll and related
 
    
    Payroll related to our membership consultants decreased $4.0 million. The
amount of membership consultant payroll deferred over the past two years has been declining
with our decline in initiation fees collected. Our payroll costs that we defer are limited
to the amount of these initiation fees. This has resulted in a decrease in membership
consultant payroll previously deferred but recognized in the six months ended June 30,
2010. Also contributing to this decrease is the increase in the amount of payroll costs
deferred in the six months ended June 30, 2010 as initiation fees collected have increased
from $1.7 million to $2.9 million. The aforementioned decrease in payroll is net of a
$641,000 charge reflecting the change in the estimated average membership life from
28 months to 25 months effective April 1, 2010.
    
    Payroll related to our membership incentive bonuses was $722,000 higher in
the six months ended June 30, 2010 compared to the same period in 2009. We were
forecasting our management incentive bonus payout at 100% of target compared to 50% in the
same period in 2009.
    
    Personal training payroll increased $1.3 million due to the increase in
personal training revenue as well as an increase in payroll related to personal training
promotions geared at attracting additional private training clientele.
    
    Payroll related to severance charges increased $354,000 from corporate
employee reductions in the six months ended June 30, 2010.
  Club operating
 
    
    Rent and occupancy expenses decreased $809,000. Rent and occupancy costs increased
$311,000 at clubs that opened after January 1, 2009 and $1.4 million at our clubs that
opened prior to January 1, 2009 and decreased $1.1 million at our clubs that were closed
after January 1, 2009. In addition, we recorded early lease termination costs of $811,000
in the six months ended June 30, 2009 at three clubs that were closed prior to the lease
expiration dates. We also recorded $700,000 in damages in June 2009 paid to a landlord of
one of TSI LLCs former health clubs.
    
    Operating expenses relating to laundry and towels decreased approximately $1.5 million
primarily related to the opening of our laundry facility in Elmsford, NY in January 2009.
 20




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##### Table of Contents




    
    Utilities decreased $882,000 in the six months ended June 30, 2010 compared with the
same period last year.
  General and administrative
  Depreciation and amortization
  Impairment of fixed assets
 (Benefit) Provision for Corporate Income Taxes
   Liquidity and Capital Resources
  Operating Activities.
 21




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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 our 11% Senior Discount Notes and reducing our ability to use our cash flow to fund
working capital, capital expenditures, acquisitions of new clubs and general corporate
requirements; and
    
    limiting our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate.
  22




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##### Table of Contents



23




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##### Table of Contents



Payments Due by Period (in ($000s)Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsLong-term debt
    
    $
    317,437
    
    
    $
    1,850
    
    
    $
    3,700
    
    
    $
    311,887
    
    
    $
    Interest payments on long-term debt(1)
    
    
    70,045
    
    
    
    19,509
    
    
    
    38,884
    
    
    
    11,652
    
    
    
    Operating lease obligations(2)
    
    
    812,373
    
    
    
    82,087
    
    
    
    157,361
    
    
    
    142,187
    
    
    
    430,738Total contractual cash obligations
    
    $
    1,199,855
    
    
    $
    103,446
    
    
    $
    199,945
    
    
    $
    465,726
    
    
    $
    430,738
 Notes:
 
 (1)
    
    Includes 11% annual interest on the Senior Discount Notes and variable interest on the
2007 Term Loan Facility using the rate of as of June 30, 2010 of 2.4%.(2)
    
    Operating lease obligations include base rent only. Certain leases provide for
additional rent based on real estate taxes, common area maintenance and defined amounts
based on the operating results of the lessee.   Recent Changes in or Recently Issued Accounting Pronouncements
  Forward-Looking Statements
  24




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##### Table of Contents



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:
 25




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
 Sarah Cruz, et al v. Town Sports International,
d/b/a New York Sports Club
  Town Sports International, LLC v. Ajilon
Solutions
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  26




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##### Table of Contents



ITEM 3. Defaults Upon Senior Securities.
  
 ITEM 4. (Removed and Reserved)
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  http://investor.mysportsclubs.com http://investor.mysportsclubs.com
  27




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##### Table of Contents



SIGNATURES
  TOWN SPORTS INTERNATIONAL
HOLDINGS, INC.  By:
    /s/ Daniel GallagherDaniel GallagherChief Financial Officer
(principal financial and accounting officer) 28




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##### Table of Contents



INDEX TO EXHIBITS
  Exhibit No.
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of Town
Sports International Holdings, Inc. (incorporated by reference
to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2006).3.2
    
    Second Amended and Restated By-laws of the Company
(incorporated by reference to Exhibit 3.1 of the Companys
Current Report on Form 8-K, filed on May 19, 2008).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.
 29