##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 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(State or other Jurisdiction of
Incorporation or Organization)
    
    20-0640002(I.R.S. Employer
Identification Number)
 5 Penn Plaza (4th Floor)
New York, New York 10001
Telephone: (212) 246-6700
 (Address, zip code, and telephone number, including
area code, of registrants principal executive office.)
 þ o
  o Large accelerated filer
þ Accelerated filer
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company  o þ




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##### 



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 FORM 10-Q
For the Quarter Ended September 30, 2008
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations and Statements of Comprehensive Income for the three
and nine months ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other Information
    
    
    23Item 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
September 30, 2008 and December 31, 2007
(All figures in $000s, except share data)
(Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,662
    
    
    $
    5,463Accounts receivable (less allowance for doubtful accounts of $3,505 and
$2,797 as of September 30, 2008 and December 31, 2007, respectively)
    
    
    13,107
    
    
    
    8,815Inventory
    
    
    236
    
    
    
    230Prepaid income taxes
    
    
    1,309
    
    
    
    Prepaid expenses and other current assets
    
    
    7,934
    
    
    
    11,334Total current assets
    
    
    33,248
    
    
    
    25,842Fixed assets, net
    
    
    349,820
    
    
    
    337,152Goodwill
    
    
    50,176
    
    
    
    50,165Intangible assets, net
    
    
    470
    
    
    
    477Deferred tax asset, net
    
    
    46,745
    
    
    
    44,345Deferred membership costs
    
    
    16,034
    
    
    
    17,974Other assets
    
    
    11,901
    
    
    
    12,808Total assets
    
    $
    508,394
    
    
    $
    488,763LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,902
    
    
    $
    10,898Accounts payable
    
    
    9,110
    
    
    
    10,891Accrued expenses
    
    
    32,482
    
    
    
    34,186Accrued interest
    
    
    414
    
    
    
    738Corporate income taxes payable
    
    
    
    
    
    
    811Deferred revenue
    
    
    44,963
    
    
    
    41,798Total current liabilities
    
    
    88,871
    
    
    
    99,322Long-term debt
    
    
    314,013
    
    
    
    305,124Deferred lease liabilities
    
    
    67,567
    
    
    
    61,221Deferred revenue
    
    
    5,295
    
    
    
    7,300Other liabilities
    
    
    14,752
    
    
    
    15,613Total liabilities
    
    
    490,498
    
    
    
    488,580Commitments and contingencies (Note 8)Stockholders equity:Common stock, $.001 par value; issued and outstanding 26,449,607 and
26,254,773 shares at September 30, 2008 and December 31, 2007,
respectively
    
    
    27
    
    
    
    26Paid-in capital
    
    
    (14,733
    )
    
    
    (16,977
    )Accumulated other comprehensive income (currency translation adjustment)
    
    
    830
    
    
    
    814Retained earnings
    
    
    31,772
    
    
    
    16,320Total stockholders equity
    
    
    17,896
    
    
    
    183Total liabilities and stockholders equity
    
    $
    508,394
    
    
    $
    488,763
  3




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2008 and 2007
(All figures in $000s except share and per share data)
(Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Club operations
    
    $
    126,682
    
    
    $
    117,425
    
    
    $
    379,318
    
    
    $
    349,893Fees and other
    
    
    1,427
    
    
    
    1,461
    
    
    
    4,504
    
    
    
    4,148128,109
    
    
    
    118,886
    
    
    
    383,822
    
    
    
    354,041Operating Expenses:Payroll and related
    
    
    49,171
    
    
    
    43,331
    
    
    
    146,228
    
    
    
    132,645Club operating
    
    
    44,398
    
    
    
    42,360
    
    
    
    128,799
    
    
    
    119,662General and administrative
    
    
    8,697
    
    
    
    8,368
    
    
    
    25,898
    
    
    
    25,248Depreciation and amortization
    
    
    13,423
    
    
    
    10,950
    
    
    
    38,788
    
    
    
    33,772Impairment of fixed assets
    
    
    839
    
    
    
    
    
    
    
    1,981
    
    
    
    116,528
    
    
    
    105,009
    
    
    
    341,694
    
    
    
    311,327Operating income
    
    
    11,581
    
    
    
    13,877
    
    
    
    42,128
    
    
    
    42,714Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,521Interest expense
    
    
    5,783
    
    
    
    6,493
    
    
    
    17,930
    
    
    
    19,902Interest income
    
    
    (76
    )
    
    
    (344
    )
    
    
    (291
    )
    
    
    (882
    )Equity in the earnings of investees and rental income
    
    
    (634
    )
    
    
    (447
    )
    
    
    (1,701
    )
    
    
    (1,351
    )Income before provision for corporate income taxes
    
    
    6,508
    
    
    
    8,175
    
    
    
    26,190
    
    
    
    12,524Provision for corporate income taxes
    
    
    2,668
    
    
    
    3,100
    
    
    
    10,738
    
    
    
    4,884Net income
    
    $
    3,840
    
    
    $
    5,075
    
    
    $
    15,452
    
    
    $
    7,640Earnings per share:Basic
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.59
    
    
    $
    0.29Diluted
    
    $
    0.14
    
    
    $
    0.19
    
    
    $
    0.58
    
    
    $
    0.29Weighted average number of shares used in
calculating earnings per share:Basic
    
    
    26,445,288
    
    
    
    26,225,449
    
    
    
    26,389,804
    
    
    
    26,122,531Diluted
    
    
    26,547,121
    
    
    
    26,678,939
    
    
    
    26,464,915
    
    
    
    26,583,782Statements of Comprehensive IncomeNet income
    
    $
    3,840
    
    
    $
    5,075
    
    
    $
    15,452
    
    
    $
    7,640Foreign currency translation adjustments
    
    
    (441
    )
    
    
    (171
    )
    
    
    16
    
    
    
    (183
    )Comprehensive income
    
    $
    3,399
    
    
    $
    4,904
    
    
    $
    15,468
    
    
    $
    7,457
  4




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TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2008 and 2007
(All figures in $000s)
(Unaudited)
 Nine MonthsEnded September 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    15,452
    
    
    $
    7,640Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    38,788
    
    
    
    33,772Impairment of fixed assets
    
    
    1,981
    
    
    
    Non-cash interest expense on Senior Discount Notes
    
    
    10,328
    
    
    
    9,268Loss on extinguishment of debt
    
    
    
    
    
    
    12,521Amortization of debt issuance costs
    
    
    583
    
    
    
    630Noncash rental expense, net of noncash rental income
    
    
    (242
    )
    
    
    495Compensation expense incurred in connection with stock options and common stock grants
    
    
    876
    
    
    
    616Net changes in certain operating assets and liabilities
    
    
    3,770
    
    
    
    3,168Increase in deferred tax asset
    
    
    (2,400
    )
    
    
    (9,778
    )Landlord contributions to tenant improvements
    
    
    4,282
    
    
    
    3,958Change in reserve for self-insured liability claims
    
    
    1,738
    
    
    
    2,085Decrease (increase) in deferred membership costs
    
    
    1,940
    
    
    
    (1,834
    )Other
    
    
    (190
    )
    
    
    104Total adjustments
    
    
    61,454
    
    
    
    55,005Net cash provided by operating activities
    
    
    76,906
    
    
    
    62,645Cash flows from investing activities:Capital expenditures
    
    
    (63,162
    )
    
    
    (64,580
    )Insurance proceeds
    
    
    1,074
    
    
    
    Acquisition of business
    
    
    
    
    
    
    (4,450
    )Net cash used in investing activities
    
    
    (62,088
    )
    
    
    (69,030
    )Cash flows from financing activities:Proceeds from New Credit Facility
    
    
    
    
    
    
    185,000Costs related to issuance of New Credit Facility
    
    
    
    
    
    
    (2,634
    )Repayment of Senior Notes
    
    
    
    
    
    
    (169,999
    )Premium paid on extinguishment of debt and related costs
    
    
    
    
    
    
    (9,309
    )Repayment of long term borrowings
    
    
    (1,435
    )
    
    
    (1,105
    )Repayment of borrowings on Revolving Loan Facility
    
    
    (9,000
    )
    
    
    Change in book overdraft
    
    
    (583
    )
    
    
    2,122Proceeds from exercise of stock options
    
    
    1,194
    
    
    
    1,997Excess tax benefit from stock option exercises
    
    
    174
    
    
    
    1,061Net cash (used in) provided by financing activities
    
    
    (9,650
    )
    
    
    7,133Effect of exchange rate changes on cash
    
    
    31
    
    
    
    111Net increase in cash and cash equivalents
    
    
    5,199
    
    
    
    859Cash and cash equivalents at beginning of period
    
    
    5,463
    
    
    
    6,810Cash and cash equivalents at end of period
    
    $
    10,662
    
    
    $
    7,669Summary of change in certain operating assets and liabilities:(Increase) in accounts receivable
    
    $
    (3,611
    )
    
    $
    (4,479
    )(Increase) decrease in inventory
    
    
    (4
    )
    
    
    210Decrease (increase) in prepaid expenses and other current assets
    
    
    3,478
    
    
    
    (1,219
    )Increase in accounts payable, accrued expenses and accrued interest
    
    
    4,884
    
    
    
    2,509Change in corporate income taxes
    
    
    (2,120
    )
    
    
    (456
    )Increase in deferred revenue
    
    
    1,143
    
    
    
    6,603Net changes in certain operating assets and liabilities
    
    $
    3,770
    
    
    $
    3,168Supplemental disclosures of cash flow information:Cash payments for interest
    
    $
    7,795
    
    
    $
    13,517Cash payments for income taxes
    
    $
    15,233
    
    
    $
    14,054
  5




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##### Table of Contents



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All figures $000s except share and per share data)
(Unaudited)
 1. Basis of Presentation
     2. Recent Accounting Changes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB No. 115
 Business Combinations
 6




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  An amendment of ARB No. 51
 Share-Based
Payment
 3. Long-Term Debt
 September 30,
    
    
    December 31,2008
    
    
    2007($000s)
    
    
    ($000s)Term Loan Facility
    
    $
    182,225
    
    
    $
    183,613Revolving Loan Facility borrowings
    
    
    
    
    
    
    9,00011% Senior Discount Notes (Payment-in-Kind Notes)
    
    
    133,638
    
    
    
    123,310Notes payable for acquired businesses
    
    
    52
    
    
    
    99315,915
    
    
    
    316,022Less current portion to be paid within one year
    
    
    1,902
    
    
    
    10,898Long-term portion
    
    $
    314,013
    
    
    $
    305,124
   7




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##### Table of Contents



4. Earnings Per Share
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited)
    
    (Unaudited)2008
    
    2007
    
    2008
    
    2007Weighted average number of shares of Common Stock
outstanding  basic
    
    
    26,445,288
    
    
    
    26,225,449
    
    
    
    26,389,804
    
    
    
    26,122,531Effect of diluted stock options and restricted Common Stock
    
    
    101,833
    
    
    
    453,490
    
    
    
    75,111
    
    
    
    461,251Weighted average number of shares of Common Stock
outstanding  diluted
    
    
    26,547,121
    
    
    
    26,678,939
    
    
    
    26,464,915
    
    
    
    26,583,782
 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
    
    
    11Balance as of September 30, 2008
    
    $
    50,176
 As of September 30, 2008($000s)Gross Carrying
    
    
    AccumulatedAcquired Intangible Assets
    
    Amount
    
    
    Amortization
    
    
    Net IntangiblesMembership lists
    
    $
    11,211
    
    
    $
    (11,076
    )
    
    $
    135Covenants-not-to-compete
    
    
    1,687
    
    
    
    (1,352
    )
    
    
    335Beneficial lease
    
    
    223
    
    
    
    (223
    )
    
    
    $
    13,121
    
    
    $
    (12,651
    )
    
    $
    470
 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 September 30, ($000s)2009
    
    $
    3322010
    
    
    572011
    
    
    572012
    
    
    24$
    470
  10




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##### Table of Contents



7. Income Taxes
 Accounting for
Uncertainty in Income Taxes
   8. Commitments and Contingencies
 Sarah Cruz, et al v. Town Sports International,
dba New York Sports Club
  11




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##### Table of Contents



9. Investments in Affiliated Companies
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,($000s)
    
    ($000s)2008
    
    2007
    
    2008
    
    2007Revenue
    
    $
    813
    
    
    $
    907
    
    
    $
    2,587
    
    
    $
    2,738Income from operations
    
    
    229
    
    
    
    331
    
    
    
    961
    
    
    
    1,111Net income
    
    
    190
    
    
    
    307
    
    
    
    851
    
    
    
    1,030
 12




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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 81.3% of our total revenue for the nine months ended September
30, 2008. We recognize revenue from membership dues in the month when the services are
rendered. Approximately 95% of our members pay their monthly dues by Electronic Funds
Transfer, or EFT, while the balance is paid annually in advance. We recognize revenue from
initiation fees over the expected average life of the membership.
    
    Ancillary club revenue:For the nine months ended September 30, 2008, we generated 12.4%
of our revenue from personal training and 5.1% 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.
  13




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##### Table of Contents



Historical Club Growth
  2007
    
    2008Q1
    
    Q2
    
    Q3
    
    Q4
    
    Total
    
    Q1
    
    Q2
    
    Q3Wholly owned clubs operated at beginning of period
    
    
    147
    
    
    
    150
    
    
    
    150
    
    
    
    152
    
    
    
    147
    
    
    
    159
    
    
    
    160
    
    
    
    161New clubs opened
    
    
    3
    
    
    
    1
    
    
    
    2
    
    
    
    8
    
    
    
    14
    
    
    
    2
    
    
    
    3
    
    
    
    1Clubs 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
    
    
    
    161
    
    
    
    162Total clubs operated at end of period (1)
    
    
    152
    
    
    
    152
    
    
    
    154
    
    
    
    161
    
    
    
    161
    
    
    
    162
    
    
    
    163
    
    
    
    164
 
 (1)
    
    Includes wholly owned and partly owned clubs. In addition to the
above, as of September 30, 2008 and December 31, 2007, we managed four
and five university fitness clubs, respectively, in which we did not
have an equity interest. 14




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##### Table of Contents



Comparable Club Revenue
  Results of Operations
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Payroll and related
    
    
    38.3
    
    
    
    36.5
    
    
    
    38.1
    
    
    
    37.5Club operating
    
    
    34.7
    
    
    
    35.6
    
    
    
    33.5
    
    
    
    33.8General and administrative
    
    
    6.8
    
    
    
    7.0
    
    
    
    6.8
    
    
    
    7.1Depreciation and amortization
    
    
    10.5
    
    
    
    9.2
    
    
    
    10.1
    
    
    
    9.5Impairment of fixed assets
    
    
    0.7
    
    
    
    
    
    
    
    0.5
    
    
    
    91.0
    
    
    
    88.3
    
    
    
    89.0
    
    
    
    87.9Operating income
    
    
    9.0
    
    
    
    11.7
    
    
    
    11.0
    
    
    
    12.1Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.5Interest expense
    
    
    4.5
    
    
    
    5.5
    
    
    
    4.7
    
    
    
    5.6Interest income
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (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
    
    
    5.1
    
    
    
    6.9
    
    
    
    6.8
    
    
    
    3.6Provision for corporate income taxes
    
    
    2.1
    
    
    
    2.6
    
    
    
    2.8
    
    
    
    1.4Net income
    
    
    3.0
    %
    
    
    4.3
    %
    
    
    4.0
    %
    
    
    2.2
    %
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Revenue (in $000s) was comprised of the following:
 Three Months Ended September 30,2008
    
    
    2007Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % Revenue
    
    
    % GrowthMembership dues
    
    $
    101,025
    
    
    
    78.9
    %
    
    $
    93,735
    
    
    
    78.8
    %
    
    
    7.8
    %Initiation fees
    
    
    3,505
    
    
    
    2.7
    %
    
    
    3,202
    
    
    
    2.7
    %
    
    
    9.5
    %Membership revenue
    
    
    104,530
    
    
    
    81.6
    %
    
    
    96,937
    
    
    
    81.5
    %
    
    
    7.8
    %Personal training revenue
    
    
    14,871
    
    
    
    11.6
    %
    
    
    13,243
    
    
    
    11.2
    %
    
    
    12.3
    %Other ancillary club revenue
    
    
    7,281
    
    
    
    5.7
    %
    
    
    7,245
    
    
    
    6.1
    %
    
    
    0.5
    %Ancillary club revenue
    
    
    22,152
    
    
    
    17.3
    %
    
    
    20,488
    
    
    
    17.3
    %
    
    
    8.1
    %Fees and other revenue
    
    
    1,427
    
    
    
    1.1
    %
    
    
    1,461
    
    
    
    1.2
    %
    
    
    (2.3
    )%Total revenue
    
    $
    128,109
    
    
    
    100.0
    %
    
    $
    118,886
    
    
    
    100.0
    %
    
    
    7.8
    %
   15




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##### Table of Contents



Operating expenses (in $000s) were comprised of the following:
 Three Months EndedSeptember 30,2008
    
    
    2007
    
    
    % VariancePayroll and related
    
    $
    49,171
    
    
    $
    43,331
    
    
    
    13.5
    %Club operating
    
    
    44,398
    
    
    
    42,360
    
    
    
    4.8
    %General and administrative
    
    
    8,697
    
    
    
    8,368
    
    
    
    3.9
    %Depreciation and amortization
    
    
    13,423
    
    
    
    10,950
    
    
    
    22.6
    %Impairment of fixed assets
    
    
    839
    
    
    
    
    
    
    
    100.0
    %Operating expenses
    
    $
    116,528
    
    
    $
    105,009
    
    
    
    11.0
    %
  Payroll and related
 Club operating
 
    
    Rent and occupancy expenses increased $2.6 million. Rent and occupancy
costs increased $2.8 million at clubs that opened after July 1, 2007
or that are currently under construction and increased $248,000 at our
clubs opened prior to July 1, 2007. Rent and occupancy expenses
decreased $347,000 at our clubs closed and/or relocated after July 1,
2007.
    
    Advertising and marketing expenses decreased $1.5 million to $2.3
million from $3.8 million, primarily due to a reduction in general
awareness advertising in 2008. We have decreased advertising expense
as we discount our new member initiation fees in an effort to drive
membership sales.
 Depreciation and amortization
 Impairment of fixed assets
 Interest Expense
  Interest Income
  16




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##### Table of Contents



Provision for Corporate Income Taxes
  Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Revenue (in $000s) was comprised of the following:
 Nine Months Ended September 30,2008
    
    
    2007Revenue
    
    
    % Revenue
    
    
    Revenue
    
    
    % RevenueMembership dues
    
    $
    301,696
    
    
    
    78.6
    %
    
    $
    278,537
    
    
    
    78.7
    %
    
    
    8.3
    %Initiation fees
    
    
    10,393
    
    
    
    2.7
    %
    
    
    9,181
    
    
    
    2.6
    %
    
    
    13.2
    %Membership revenue
    
    
    312,089
    
    
    
    81.3
    %
    
    
    287,718
    
    
    
    81.3
    %
    
    
    8.5
    %Personal training revenue
    
    
    47,712
    
    
    
    12.4
    %
    
    
    42,646
    
    
    
    12.0
    %
    
    
    11.9
    %Other ancillary club revenue
    
    
    19,517
    
    
    
    5.1
    %
    
    
    19,529
    
    
    
    5.5
    %
    
    
    0.0
    %Ancillary club revenue
    
    
    67,229
    
    
    
    17.5
    %
    
    
    62,175
    
    
    
    17.5
    %
    
    
    8.1
    %Fees and other revenue
    
    
    4,504
    
    
    
    1.2
    %
    
    
    4,148
    
    
    
    1.2
    %
    
    
    8.6
    %Total revenue
    
    $
    383,822
    
    
    
    100.0
    %
    
    $
    354,041
    
    
    
    100.0
    %
    
    
    8.4
    %
   Operating expenses (in $000s) were comprised of the following:
 Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    % VariancePayroll and related
    
    $
    146,228
    
    
    $
    132,645
    
    
    
    10.2
    %Club operating
    
    
    128,799
    
    
    
    119,662
    
    
    
    7.6
    %General and administrative
    
    
    25,898
    
    
    
    25,248
    
    
    
    2.6
    %Depreciation and amortization
    
    
    38,788
    
    
    
    33,772
    
    
    
    14.9
    %Impairment of fixed assets
    
    
    1,981
    
    
    
    
    
    
    
    100.0
    %Operating expenses
    
    $
    341,694
    
    
    $
    311,327
    
    
    
    9.8
    %
  Payroll and related
 17




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##### Table of Contents



Club operating
 
    
    Rent and occupancy expenses increased $7.3 million. Rent and occupancy
costs increased $6.7 million at clubs that opened after July 1, 2007,
or that are currently under construction and increased $1.2 million at
our clubs opened prior to July 1, 2007. Rent and occupancy expenses
decreased $477,000 at our clubs closed and/or relocated after July 1,
2007.
    
    Cleaning, laundry and towel expenses increased $1.6 million due to new
club openings, an increase in the number of clubs that used an
outsourced laundry service, as well as overall increase in member
usage of 12.6%.
    
    Advertising and marketing expenses decreased $2.6 million to $6.2
million from $8.8 million primarily due to a reduction in general
awareness advertising in 2008.
 Depreciation and amortization
 Impairment of fixed assets
 Loss on Extinguishment of Debt
  Interest Expense
  Interest Income
  Provision for Corporate Income Taxes
  18




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##### Table of Contents



Liquidity and Capital Resources
  Operating Activities.
  Investing Activities.
 Financing Activities.
 19




---



##### Table of Contents




    
    Making it more difficult to satisfy our obligations;
    
    Increasing our vulnerability to general adverse economic conditions;
    
    Limiting our ability to obtain additional financing to fund future working capital,
capital expenditures, acquisitions of new clubs and other general corporate requirements;
    
    Requiring cash flow from operations for the payment of interest on our credit facility
and 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.
         20




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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(1)
    
    $
    396,924
    
    
    $
    1,902
    
    
    $
    32,890
    
    
    $
    345,633
    
    
    $
    16,499Operating Lease Obligations(2)
    
    
    925,045
    
    
    
    80,145
    
    
    
    165,340
    
    
    
    152,620
    
    
    
    526,940Total Contractual Cash Obligations
    
    $
    1,321,969
    
    
    $
    82,046
    
    
    $
    198,230
    
    
    $
    498,253
    
    
    $
    543,439
 
 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.      21




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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:
 22




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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.
  
 ITEM 5. Other Information.
  
 Item 6. Exhibits
  23




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##### Table of Contents



SIGNATURES
  TOWN SPORTS INTERNATIONAL
HOLDINGS, INC.DATE: October 30, 2008By:
    /s/ Daniel GallagherDaniel GallagherChief Financial Officer
(principal financial, accounting officer) 24




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##### Table of Contents



INDEX TO EXHIBITS
  Exhibit No.
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a
 14(a) and Rule 15d  14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a
 14(a) and Rule 15d  14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 25