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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file
number: 001-13997
Bally Total Fitness Holding
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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36-3228107
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(State or other jurisdiction
of
incorporation)
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(I.R.S. Employer
Identification No.)
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8700 West Bryn Mawr
Avenue, Chicago, Illinois
(Address of principal
executive offices)
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60631
(Zip Code)
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Registrants telephone number, including area code:
(773) 380-3000
SEE TABLE OF ADDITIONAL REGISTRANTS
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common Stock, par value
$.01 per share
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New York Stock Exchange
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Series B Junior Participating
Preferred Stock
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New York Stock Exchange
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Purchase Rights
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes: o No: þ
Indicate by check mark whether the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes: o No: þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes: o No: þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes: o No: þ
The aggregate market value of the registrants voting stock
held by non-affiliates of the registrant as of June 30,
2005, was approximately $69.6 million, based on the closing
price of the registrants common stock as reported by the
New York Stock Exchange at that date. For purposes of this
computation, affiliates of the registrant include the
registrants executive officers and directors as of
June 30, 2005. As of May 31, 2006,
41,310,827 shares of the registrants common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF
ADDITIONAL REGISTRANTS
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Jurisdiction of
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I.R.S. Employer
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Exact Name of Additional
Registrants
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Incorporation
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Identification Number
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59th Street Gym LLC
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New York
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36-4474644
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708 Gym LLC
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New York
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36-4474644
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Ace LLC
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New York
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36-4474644
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Bally Fitness Franchising,
Inc.
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Illinois
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36-4029332
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Bally Franchise RSC, Inc.
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Illinois
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36-4028744
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Bally Franchising Holdings,
Inc.
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Illinois
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36-4024133
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Bally Sports Clubs, Inc.
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New York
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36-3407784
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Bally Total Fitness Corporation
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Delaware
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36-2762953
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Bally Total Fitness International,
Inc.
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Michigan
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36-1692238
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Bally Total Fitness of California,
Inc.
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California
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36-2763344
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Bally Total Fitness of Colorado,
Inc.
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Colorado
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84-0856432
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Bally Total Fitness of Connecticut
Coast, Inc.
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Connecticut
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36-3209546
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Bally Total Fitness of Connecticut
Valley, Inc.
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Connecticut
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36-3209543
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Bally Total Fitness of Greater New
York, Inc.
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New York
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95-3445399
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Bally Total Fitness of the
Mid-Atlantic, Inc.
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Delaware
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52-0820531
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Bally Total Fitness of the
Midwest, Inc.
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Ohio
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34-1114683
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Bally Total Fitness of Minnesota,
Inc.
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Ohio
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84-1035840
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Bally Total Fitness of Missouri,
Inc.
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Missouri
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36-2779045
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Bally Total Fitness of Upstate New
York, Inc.
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New York
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36-3209544
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Bally Total Fitness of
Philadelphia, Inc.
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Pennsylvania
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36-3209542
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Bally Total Fitness of Rhode
Island, Inc.
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Rhode Island
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36-3209549
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Bally Total Fitness of the
Southeast, Inc.
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South Carolina
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52-1230906
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Bally Total Fitness of Toledo,
Inc.
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Ohio
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38-1803897
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Ballys Fitness and Racquet
Clubs, Inc.
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Florida
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36-3496461
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BFIT Rehab of West Palm Beach,
Inc.
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Florida
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36-4154170
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BTF/CFI, Inc.
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Delaware
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36-4474644
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Crunch LA LLC
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New York
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36-4474644
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Crunch World LLC
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New York
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36-4474644
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Flambe LLC
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New York
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36-4474644
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Greater Philly No. 1 Holding
Company
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Pennsylvania
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36-3209566
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Greater Philly No. 2 Holding
Company
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Pennsylvania
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36-3209557
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Health & Tennis
Corporation of New York
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Delaware
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36-3628768
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Holiday Health Clubs of the East
Coast, Inc.
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Delaware
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52-1271028
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Holiday/Southeast Holding
Corp.
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Delaware
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52-1289694
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Jack La Lanne Holding
Corp.
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New York
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95-3445400
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Mission Impossible, LLC
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California
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36-4474644
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New Fitness Holding Co., Inc.
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New York
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36-3209555
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Nycon Holding Co., Inc.
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New York
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36-3209533
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Rhode Island Holding Company
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Rhode Island
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36-3261314
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Soho Ho LLC
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New York
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36-4474644
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Tidelands Holiday Health Clubs,
Inc.
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Virginia
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52-1229398
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U.S. Health, Inc.
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Delaware
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52-1137373
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West Village Gym at the Archives
LLC
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New York
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36-4474644
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The address for service of each of the additional registrants is
c/o Bally Total Fitness Holding Corporation, 8700 West
Bryn Mawr Avenue, 2nd Floor, Chicago, Illinois 60631,
telephone 773-380-3000. The primary industrial classification
number for each of the additional registrants is 7991.
In this Annual Report on
Form 10-K,
references to the Company, Bally,
we, us, and our mean Bally
Total Fitness Holding Corporation and its consolidated
subsidiaries.
1
BALLY
TOTAL FITNESS HOLDING CORPORATION
2005 ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
2
FORWARD-LOOKING
STATEMENTS
Forward-looking statements in this
Form 10-K
including, without limitation, statements relating to the
Companys plans, strategies, objectives, expectations,
intentions, and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements involve
known and unknown risks, uncertainties, and other factors that
may cause the actual results, performance or achievements of the
Company to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. These factors include, among others,
the following:
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success of operating initiatives, advertising and promotional
efforts;
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the outcome of the Companys exploration of strategic
alternatives, for which it has engaged J.P. Morgan
Securities Inc. and The Blackstone Group L.P.;
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business abilities and judgment of personnel;
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general economic and business conditions;
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competition;
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acceptance of new product and service offerings;
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changes in business strategy or plans;
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the disclosure by the Companys management and independent
auditors of the existence of material weaknesses in internal
control over financial reporting;
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the outcome of the SEC and Department of Justice investigations;
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existence of adverse publicity or litigation (including various
stockholder litigations and the insurance rescission action) and
the outcome thereof and the costs and expenses associated
therewith;
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changes in, or the failure to comply with, government
regulations;
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ability to maintain existing or obtain new sources of financing,
on acceptable terms or at all, to satisfy the Companys
cash needs and obligations;
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availability, terms, and development of capital;
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ability to satisfy long-term obligations as they become due;
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ability to remain in compliance with, or obtain waivers under,
the Companys loan agreements and indentures; and
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other factors described in this Annual Report on
Form 10-K
and prior filings of the Company with the SEC.
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AVAILABLE
INFORMATION
Our website address is www.ballyfitness.com. We make available
free of charge on our website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the SEC. In addition, we also make available
through our website our press releases, our Code of Business
Conduct, Practices and Ethics, our Corporate Governance
Guidelines, the Charters for the Audit Committee, Nominating and
Corporate Governance Committee and Compensation Committee, as
well as contact information for the Audit Committee, including
an employee hotline and website. These materials are also
available in print to any stockholder upon request. This Annual
Report on
Form 10-K
is being sent to stockholders in lieu of an Annual Report.
Information contained on our website is not intended to be part
of this Annual Report on
Form 10-K.
The Companys Chief Executive Officer, Paul A. Toback,
certified to the New York Stock Exchange (the NYSE)
on December 29, 2005 pursuant to Section 303A.12 of
the NYSEs listing standards, that he was not aware of any
violation by the Company of the NYSEs corporate governance
listing standards as of that date. In addition, the
certifications required pursuant to Section 302 of the
Sarbanes-Oxley Act were filed as exhibits to the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2004 and are also filed as
exhibits to this Annual Report on
Form 10-K.
Our executive offices are at 8700 West Bryn Mawr Avenue,
Chicago, Illinois, 60631; our telephone number is
(773) 380-3000.
3
PART I
General
Bally Total Fitness Holding Corporation is the largest publicly
traded commercial operator of fitness centers in North America
in terms of members, revenues and square footage of its
facilities. As of December 31, 2005, we operated 409
fitness centers primarily under the Bally Total Fitness branded
servicemark. Our fitness centers are concentrated in major
metropolitan areas in 29 states, the District of Columbia
and Canada, with more than 350 fitness centers located in
the top 25 metropolitan areas in the United States and
Toronto, Canada. We operate fitness centers in over
45 major metropolitan areas representing 61% of the United
States population and over 16% of the Canadian population and
have approximately 3.6 million members. We have
approximately 21,600 employees, including approximately
10,100 full-time employees and over 5,400 personal
trainers.
The Company was incorporated in Delaware in 1983. Since its
inception, the Companys business, its markets, the
services it offers and the way it conducts its business have
changed significantly and are expected to continue to change and
evolve. These changes are primarily the result of increasing
awareness of the need for exercise, weight control, good
nutrition and a healthy lifestyle among adults and children in
the United States and Canada. The Company believes the aging of
America has also increased the size of its potential market. For
many years our target market was the 18- to
34-year old
middle-income segment of the population. In 2003, we expanded
that target market to include 35- to
54-year
olds. Currently, our members range in age from approximately 16
to 80, reflecting our many years in business.
In order to better serve these diverse members and address the
growing need for better health and fitness, in 1997 we began
offering members additional products and services, including
personal training, Bally-branded apparel, Bally-branded
nutritional products and, beginning in 2003, a nutrition and
weight management program.
Since becoming a public company in 1996, Bally has raised
significant capital used to acquire new clubs, remodel existing
clubs and purchase additional or replacement equipment. Between
1997 and 2002, the Company focused on growth through the
acquisition and internal development of new clubs. During that
period, the Company bought or opened 152 new fitness centers.
Beginning with a change of management in 2003, we changed our
focus and our business plan, scaling back our club expansion
plans and focusing on improving operating margins and cash flows
from our existing fitness centers. The first phase of our new
business plan focused on operating efficiencies, enrolling more
new members and improving our membership retention, as well as
increasing the training for our employees. Our principal
strategies for achieving success on these initiatives included
introducing
month-to-month
plan memberships, developing a new marketing strategy, making
customer service a priority and optimizing our product and
service offerings.
The second phase of our new business plan is centered around
implementation of our new club operating model, which calls for
each fitness center to be run by a general manager accountable
for the profitability of his or her fitness center. We have also
focused on cross-training employees to serve in a variety of
positions in our fitness centers so we can achieve optimal
staffing profiles to more efficiently service the fitness needs
of our current and prospective members. We believe the
combination of increased accountability and cross-trained
employees will improve customer service and, ultimately, member
acquisition and retention. Our principal strategies in this
phase of our plan include creating a simpler, more friendly
process for joining Bally that provides customers with
flexibility and options, properly aligning the compensation
incentives for key employees to promote profitability,
continuing to improve customer service, growing our product and
service offerings, leveraging consumer health trends, enhancing
our new marketing strategy, improving operating efficiencies and
optimizing our club portfolio.
As the third phase of our business plan, management intends to
address the Companys capital structure in order to reduce
leverage and debt service requirements, allowing it to invest
more of its operating cash flow in improvements into its fitness
centers. We have also begun to explore divesting non-core
assets, including, but not limited to, the sale of fitness
centers. In connection with these goals, on January 20,
2006, the Company announced
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it had completed the sale of its Crunch Fitness business and
four other high-end fitness centers in San Francisco,
including the Gorilla Sports brand.
Financial
Information About Segments
Not applicable.
Business
Strategy
Our mission is to improve the health and quality of life of our
members through cost efficient and customized fitness, nutrition
and weight management programs. We strive to be a proactive
total fitness and wellness resource, assisting our
customers in achieving results by providing personalized fitness
and nutrition plans and knowledgeable and informative fitness
coaches and personal trainers.
As noted above, in 2003 we developed and began to implement a
business plan to increase our membership origination and
membership retention. Our principal strategies in this new plan
include growing the number of new members by creating a simpler,
more friendly process for joining Bally that provides customers
with flexibility and options, properly aligning the compensation
incentives for key employees to promote profitability,
continuing to improve customer service, growing our product and
service offerings, leveraging consumer health trends, creating a
new marketing strategy to drive traffic and to promote our
brand, improving operating efficiencies and optimizing our club
portfolio. A description of each of our business strategies is
outlined below:
Grow the Number of New Members by Creating a Simple, Friendly
Process for Customers to Join Bally. Since its
inception, Bally has relied on multi-year membership contracts
with its customers. These contracts provide the Company with a
predictable revenue stream and provide our customers a
guaranteed rate during their commitment period, followed
historically by a lower, non-obligatory dues payment thereafter.
As competition increased over the past decade and consumer
shopping behaviors changed, our market research indicated that
some customers wanted an alternative to the multi-year
membership contract. In response, we added
month-to-month
memberships to all our markets in 2003. Beginning in late 2004
and through December 2005, we implemented the Build Your Own
Membership
(BYOMsm)
program, which simplifies the enrollment process and enables
members to choose the membership type, amenities and pricing
structure they prefer. Under BYOM, club members choose one of
two basic membership plans that include a modest enrollment fee
at the time of joining. They can select either a multi-year
contract with a lower enrollment fee and a reduced monthly rate,
or a
month-to-month
membership, which allows members to join on a
month-to-month
basis at a slightly higher enrollment fee and monthly rate.
Prospective members also have the option to purchase
non-renewable
paid-in-full
memberships at a savings compared to monthly programs. With any
membership, members can add amenities such as national access to
their base membership for additional monthly fees. In addition,
members may add family and friends to their membership packages
in several different ways. We believe that BYOM, in addition to
our strong brand identity and the convenience of multiple
locations, constitutes a distinct competitive advantage that
will help to increase membership sales, decrease membership
cancellations and improve retention rates and generate increased
revenues from fitness services and retail products.
Align Management and Key Employees Incentives on
Improving Profitability. Our new field level
compensation system aligns the goals of our field management
with those of senior management and the Company. This system
adds a profitability component to the compensation structure of
all senior fitness center and area supervisory personnel,
replacing a compensation system that was almost exclusively
sales-based. We have designed a new sales commission program
that is significantly simpler than our old system and rewards
the employee for maximizing the value of each membership by
focusing on key retention variables such as amount of enrollment
fee (full vs. discounted), billing method (electronic funds
transfer vs. statement), and contract type (obligatory value
plan vs. non-obligatory
month-to-month).
We believe that, upon full implementation, the transparency and
structure of this compensation system will enable Bally to more
effectively attract and retain a quality sales force committed
to inspiring new members to start a fitness and nutrition
program and also provide a higher level of ongoing customer
service. We believe a higher level of customer service should,
in turn, increase member retention and new member referrals from
existing customers.
5
Improve Customer Service and Member
Retention. Our market analysis and survey data
indicates customers are more inclined to join and stay members
of our fitness centers when our employees focus on meeting the
customers unique health and fitness goals and customizing
each individuals fitness and nutrition program. Beyond the
more customer-friendly sales process described above, other
service initiatives include the use of new sales support tools,
including a Personal Fitness Assessment (a series of questions
and tests) given to new customers in order to customize their
program. In addition, there are new initiatives to fully engage
new members by better exposing them to our personal training,
nutrition, weight loss and weight management services during the
initial membership orientation phase. In support of these
service initiatives, we implemented a new employee-training
program for club personnel designed to ensure that all Bally
employees who interact with customers have the appropriate
health, fitness and nutrition as well as customer service
expertise. As part of these new service initiatives all Bally
sales people have been or will be retrained as, or replaced by,
fitness coaches who now handle both the membership enrollment
process and new member follow-up.
Optimize Our Product and Service Offerings. We
are increasingly using our clubs for the delivery of value-added
products and services such as personal training, Bally-branded
nutritional products, fitness-related merchandise and our online
or in-club nutrition and weight management program. Integrating
these ancillary products and services into our core fitness
center operations positions Bally as a primary source for all of
our members wellness needs. Our Bally-branded nutrition
products are now sold in approximately 4,000 select retail,
grocery and drug store outlets such as Rite Aid and
Ralphs. Our licensed portable exercise equipment is
currently sold in over 13,000 retail outlets such as Ross
Stores, K-Mart, Sears, Lady Foot-Locker and Value City
Department Stores.
Leverage Consumer Health Trends and Target High Potential,
Underserved Segments. Current health and
population trends such as the obesity epidemic and the aging of
America make clear the need for more of the population to
participate in fitness. In response, we are introducing
specialized fitness programs targeting underserved consumer
markets, such as aging Baby Boomers, senior
citizens, women, multi-cultural households and families with
children. We are committed to the continuing development and
integration of new and innovative products and services that
target the specific wants and needs of these key segments.
Finally, we believe a significant opportunity exists to offer
fee-based specialty programs with a special attraction to a
niche of consumers, such as martial arts programs, and we have
begun to include such programs in a number of our fitness
centers. Multiple markets and fitness center locations allow us
to test-market and refine new products and services
in order to enhance the likelihood that only profitable and
popular programs are implemented nationally.
Implement New Marketing Strategy. For years
the Company relied heavily on aspirational television
advertising that featured young, fit people. As part of our new
business plan, we have expanded our creative strategy as well as
our targeting strategy. Based on extensive research and testing
we have produced new advertisements featuring testimonial
Before and After stories showcasing people of all
ages, sizes and ethnicities who have achieved impressive results
from participating in Bally programs.
Improve Operating Efficiencies. After a period
of rapid fitness center expansion, we have focused and continue
to focus on enhancing operating efficiencies. In particular, we
began various productivity initiatives, including consolidating
back-office functions, streamlining management, reducing
corporate benefits, pursuing rent reduction opportunities and
revitalizing or pursuing exit alternatives for underperforming
clubs. In addition, we are exploring alternative, value
enhancing advertising strategies.
Optimize Club Portfolio. On January 20,
2006, we completed the sale of the chain of health clubs
operated under the Crunch Fitness brand and certain
additional high-end fitness centers in San Francisco,
including the Gorilla Sports brand. We may also consider the
sale of certain other non-core assets and real estate to the
extent that such sales would reduce leverage, improve operating
efficiencies or reduce operating costs. On November 30,
2005 we announced that we had retained J.P. Morgan
Securities Inc. and The Blackstone Group L.P. to explore
strategic alternatives, including potential equity transactions
or the sale of businesses or assets. On March 14, 2006, we
announced that the Strategic Alternatives Committee of the Board
of Directors had authorized J.P. Morgan Securities Inc. and
The Blackstone Group L.P. to engage in discussions with
interested parties in connection with the strategic alternatives
process.
6
Membership
Plans
As noted above, our new sales strategy was developed to
modernize our approach to sales and improve customer
satisfaction, with the goal of improving our ability to sell
memberships, reducing cancellations and improving member
retention. BYOM enables members to choose a type of membership
(paid-in-full,
month-to-month
or value plan memberships) and desired amenity package. Clearly
presenting membership type and amenities enables the member to
select the combination of services and monthly payment best
suited for their individual circumstances. Under BYOM, a monthly
paying member pays a modest enrollment fee at the time of
joining and is given the option to select either a
month-to-month
plan membership with the flexibility to discontinue their
membership at any point upon prior notice or a multi-year
commitment value plan membership at a reduced monthly rate.
Paid-in-full
members pay their membership fees in full for a committed period
of time (typically
12-36 months)
upon joining. Members may also add amenities to personalize
their membership. Amenity choices cover a range of options,
including nationwide access to all our clubs, child care/kids
club access, racquet sports, martial arts, nutrition programs
and personal training. Availability varies by club and requires
the member to pay additional fees, either one-time or monthly.
In addition, members may add family and friends to their
membership in a variety of ways, including at a discount at the
point of sale.
Enrollment fees represent cash received at time of enrollment
for membership fees for members who choose a
month-to-month
or value plan membership. For month-to-month members the entire
membership fee is typically collected at time of enrollment,
while value plan member enrollment fees represent a down payment
on the total membership fee. Under our
month-to-month
plan memberships, the enrollment fee for joining our Bally Total
Fitness brand fitness centers, excluding limited special offers
and corporate programs, generally ranges from approximately $0
to $249. Under our value plan memberships, the enrollment fee
generally ranges from approximately $0 to $199.
Month-to-month
enrollment fees currently average approximately $110 per
membership, and value plan enrollment fees currently average
approximately $63 per membership. In addition, value plan
members may choose to pay a higher or lower enrollment fee if
they agree to pay a correspondingly lower or higher monthly
payment amount. Generally, 30% of new value plan members choose
to pay an enrollment fee of less than $50 by agreeing to ongoing
higher monthly payment amounts.
Monthly payments vary by membership type selected, amenity
levels and by whether additional members have been added to the
membership. Due to the availability of discounted monthly
payments on such family add-on contracts, family and friends of
primary joining members may be added at monthly rates generally
lower than those available for the primary member. Generally
during 2005, family add-on members to value plan memberships
were added as nonobligatory members (they can discontinue their
membership at any point upon prior notice) while the primary
sponsoring member makes payments on an obligatory basis. Single
membership monthly payments range from approximately $34 for one
club membership plans with minimal amenities, to $60 for all
club memberships with higher amenity levels. Family add-on
members have been added generally for $15 to $19 per month
during 2005.
In the past, monthly payments were significantly lower after
expiration of the obligatory period (which was generally
36 months). This practice led to member retention rates
that were higher than the industry average, but also resulted in
lower monthly payments generally ranging from $12 to $19 for the
majority of members who were no longer in their obligatory
period. Under the new business model, our value plan membership
agreements generally do not provide for significantly discounted
payments after a members obligatory period ends. A similar
change in renewal pricing has been implemented in our upscale
Bally Sports Clubs locations. Bally Sports Clubs offer
memberships similar to Bally Total Fitness brand clubs in terms
of enrollment fee and monthly payments, but at higher prices
which generally are $20 greater than Bally Total Fitness clubs
within the same market. The Sports Clubs membership payments
vary depending on the membership program selected and are
subject to increases after the obligatory period.
Members who choose the value plan membership under BYOM may
choose to send in payments by mail or sign up for an electronic
payment option where the fixed monthly payment is automatically
deducted from a checking, savings or credit card account. Over
92% of
month-to-month
members and over 65% of value plan members pay electronically.
Approximately 70% of all our members pay electronically. Our
experience indicates
7
that members who choose the electronic funds transfer method of
payment are more likely to make payments than members who do not
choose electronic funds transfer.
Products
and Services
Our fitness center operations provide a unique platform for the
delivery of value-added products and services to our fitness,
wellness and weight loss-conscious members. By integrating
personal training, specialty exercise programs, fitness apparel,
drinks, Bally-branded nutritional products and our nutrition and
weight management program into our core fitness center
operations, we have positioned the Bally Total Fitness brand as
the primary source for all of our members wellness and
weight loss needs.
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Personal Training. We offer fee-based personal
training services in most of our fitness centers with over 5,400
personal trainers currently on staff. Integrating personal
training into our membership programs helped fuel the growth of
this service, as new members are offered a free first work-out
with a trainer or fitness coach as an important first step
toward fitness at the beginning of their membership. We also
offer these services separately, giving customers a full range
of personal training options at the point of sale and beyond.
The Company started offering electronic funds transfer payment
options on multiple session personal training packages in 2002,
making personal training more available. We believe that deeper
penetration into the existing membership base along with new
training programs, such as small group personal training, will
continue to provide for expansion opportunities and revenue
growth in personal training. Our new multi-client personal
training sessions are more affordable for our members, but on
average, increase total revenue per session with a margin
similar to
one-on-one
training.
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Bally-branded Nutritional Products. To round
out our offerings as a provider of health, weight loss and
weight management services, we developed Bally-branded
nutritional products. Our strong and well-known brand has
allowed us to leverage our reputation, marketing strength and
experience in fitness to expand into the large market for
nutrition and weight loss products. We currently offer protein
powders, energy drinks, energy bars, snack bars, high protein
bars, weight loss products, multi-vitamins and meal replacement
powdered drink mixes. The Bally nutritional products are
categorized into three distinct product lines: weight loss,
Blast for energy, and Performance for
sports and fitness. As a policy, we require manufacturers and
suppliers of our nutritional products to maintain significant
amounts of product liability insurance. To capitalize on the
strength of the Bally brand outside our clubs, we also
distribute our Bally-branded nutritional products in
approximately 4,000 select retail, grocery and drug store
outlets.
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Bally Total Fitness Retail Stores. Our members
are a captive market of fitness conscious consumers. Our
on-site
retail stores have been designed to provide products most needed
by our members before, during and after their workout. We have
approximately 407 retail locations that sell nutritional
supplements, basic workout apparel, packaged drinks and other
fitness-related convenience products. In over 175 of our
fitness centers, our retail stores include a juice bar offering
freshly-made performance and recovery shakes and
supplement-enhanced nutritional drinks.
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Nutrition and Weight Management Program. In
January 2003, we announced the nationwide introduction of our
comprehensive online nutritional and exercise program customized
to an individuals unique metabolism. Since most of our new
members join with a weight loss goal in mind, the new nutrition
program provides a framework to meet their nutritional
objectives at our fitness centers or in the convenience and
privacy of their own home by creating an easy to use nutrition
program. This full-scale online program is an alternative to
specialty weight loss service providers. We continue to test and
bring to market new weight loss programs to meet customer
demand, such as our recently launched Complete Weight Loss
Solution. This new program combines meal plans, grocery lists,
recipes, meal replacement bars and meal replacement shakes to
offer a comprehensive 30 day weight loss program to all
Bally members. Using computer-based or manual food logging
methods, all participants in the Complete Weight Loss Solution
can track their progress towards reaching their weight loss
goals. Ballys newly launched Complete Weight Loss Solution
now allows for the integration of Bally-branded nutrition
products into a comprehensive lifestyle, health, nutrition and
fitness program. We believe the integration of nutrition, weight
loss and weight management
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services into our existing infrastructure of fitness services
gives us a unique competitive advantage over other providers of
weight management services that lack the exercise and specialty
nutritional components needed for a comprehensive weight
management solution.
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Licensed Products. With our brand recognition
and national advertising presence, we have licensed the Bally
Total Fitness brand to a third-party supplier of fitness-related
products. Our continuing licensing agreement with E&B
Giftware LLC resulted in Bally-branded portable fitness products
now being sold in over 13,000 retail stores across the
United States and Canada and in more than 10 mail order
catalogs with distribution in North America and the United
Kingdom. We believe licensing of our brand further enhances our
brand recognition and further positions us as a total source for
consumers wellness and fitness needs.
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Martial Arts. Bally Total Martial Arts
(TMA) is a program we began in 2000 that brings
martial arts to Bally members and their children. TMA is the
nations largest corporate martial arts program, currently
operating schools within 43 fitness centers in five states.
The program earns revenue through membership fees, uniform
sales, belt test fees, tournament fees and, beginning in 2006,
one-on-one
instruction. We recruit the majority of our instructors directly
from universities in the Republic of Korea. The majority of our
teaching staff are internationally certified through the World
Taekwondo Federation, the official governing body of Taekwondo
worldwide. We intend to continue growing this exciting and
profitable program.
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Members
We define a member as a person whose membership fees are not
delinquent by more than 90 days. Our membership was
approximately 3.610 million as of December 31, 2005
and 3.675 million members at December 31, 2004.
Sales and
Marketing
To support our market position as a low-cost provider of quality
health and fitness services, we devote substantial resources to
marketing and promoting our fitness centers and services. We
believe strong marketing support is critical to attracting and
retaining members at both existing and new fitness centers. The
majority of our fitness centers use the branded mark Bally
Total Fitness, including 10 upscale fitness centers
known as Bally Sports Clubs. The nationwide use of
the service mark enhances brand identity and increases
advertising efficiencies.
We operate fitness centers in more than 45 major
metropolitan areas representing approximately 61% of the United
States population and 16% of the Canadian population with more
than 350 of our fitness centers located in the top
25 metropolitan areas in the United States and Toronto,
Canada. Most of these fitness centers are located near regional,
urban and suburban shopping areas and business districts. This
concentration of our fitness centers in major metropolitan areas
increases the efficiency of our marketing and advertising
programs and enhances brand identity and
word-of-mouth
marketing. In addition, given our broad distribution of fitness
centers, we are not dependent upon one customer or group of
customers to generate future revenue opportunities. Our
highest-volume fitness center accounted for approximately 1% of
our net revenues during 2005.
Historically, we advertised primarily on television and, to a
lesser extent, through direct mail, newspapers, telephone
directories, radio, outdoor signage and other promotional
activities. In late 2003, we fundamentally reshaped our entire
marketing approach and organization, modernizing our creative
approach and expanding our marketing message to reach multiple
customer segments in the 18- to
54-year old
demographic, rather than relying exclusively on our traditional
18- to
34-year old
target audience. Our national scope of operations also allows us
to effectively use national television advertising at a lower
cost compared to purchasing these spots on a local basis, which
we believe is a distinct competitive advantage.
Our sales and marketing programs emphasize the benefits of
health, physical fitness, nutrition and exercise by appealing to
the publics desire to lose weight, look and feel better,
be healthier, experience an improved quality of life and live
longer. Advertisements focus on Ballys unique total
fitness approach (fitness, nutrition and quality of life), the
results it creates, special promotional offers and the frequent
use of Before and After customer testimonials. We
believe providing members a comprehensive, customized solution
to their fitness and nutrition
9
needs, and flexible membership and payment plans, as well as our
strong brand identity, effective national marketing programs and
the convenience of multiple locations, constitutes additional
distinct competitive advantages.
Our marketing efforts also include corporate memberships and
in-club marketing programs. Open houses and other monthly
in-club activities for members and their guests are used to
foster member loyalty and introduce prospective members to our
fitness centers. Referral incentive programs are designed to
involve current members in the process of new member enrollments
and enhance member loyalty. Direct mail and email reminders
encourage renewal of existing memberships.
We also attract membership interest from visitors to our
internet home page at www.ballyfitness.com and continue to
explore ways to use the internet as a customer relationship
management tool. Recently, we have placed greater emphasis on
the internet component of our marketing strategy by including
our website address in most of our television and print
marketing materials. We also use the internet as a way to sell
Bally goods and services, as well as
month-to-month
memberships. Our members also use our website to review account
status and pay dues.
In 2005, we continued to benefit from new and existing strategic
marketing alliances heightening public awareness of our fitness
centers and the Bally Total Fitness brand. Strategic alliances
during 2005 included Yum! Brands, Sports Display, Inc.,
Muzak®,
Discovery
Healthtm
Channel,
Gatorade®,
Kellogg Company, Hilton
Hotelstm,
Coca-Cola
Enterprises, Inc. and NBC/Mark Burnett Productions (The
Apprentice). These alliances provide the Company with an
incremental source of revenue (through in-club advertising sales
and sampling), as well as enhanced brand awareness through
association with other strong brands.
Fitness
Centers and Operations
Site selection. Our objective is to select
highly-visible locations with high traffic volume, household
density and proximity to other generators of retail traffic.
Most of our fitness centers are located near regional, urban and
suburban shopping areas and business districts of major cities.
Since 2003, our strategy for new club development has been to
add clubs to our largest, most profitable markets to reinforce
our competitive position in those markets as well as to take
advantage of existing marketing and operating synergies.
Fitness center model. Our current fitness
center model offers those fitness services our members use most
frequently, such as well-equipped cardiovascular, strength and
free weight training areas along with a wide variety of group
fitness classes. These centers, typically 25,000 to
35,000 square feet, have recently averaged approximately
30,000 square feet and cost an average of $3 million
to construct, exclusive of purchased real estate. We generally
invest approximately $500,000 in exercise equipment in a model
fitness center. We have developed a new version of our fitness
center model that is designed to be more inviting with an
updated color scheme, higher-end finishes and a greater use of
technology, with cost and durability comparable to our existing
designs. These new fitness centers reflect all of our experience
in club development and management over the past 40 years
and include innovations such as juice bar/retail/front desk
combinations for staffing efficiencies.
Fitness center operations. Our overall goal is
to maximize our members experience by combining exercise
instruction with nutrition guidance to assist our members in
achieving all of their fitness and weight loss objectives. We
believe the most effective way to retain members is by
successfully assisting them in reaching their fitness goals and
experiencing a higher quality of life. We strive to employ
friendly and helpful personnel committed to providing a high
level of customer service, creating an environment that meets
the needs of our members. Our new approach to fitness center
operations focuses on staffing our centers with well-trained
health, fitness and nutrition professionals. This requires us to
cross-train employees so they each have fitness and nutrition
skills, as well as sales skills. Once fully implemented, our
trained personnel will sell memberships as well as offer
orientations to new members on the recommended use of exercise
equipment and nutritional advice. Onsite personal trainers are
and will continue to be available to assist in the development
of a customized training regimen and have also been
cross-trained to sell memberships. Our weight loss programs and
nutrition products are available at all of our domestic fitness
centers and are an important part of our total fitness offering.
Fitness centers vary in size, amenities and types of services
provided. All of our fitness centers contain a wide variety of
state-of-the-art
progressive resistance, cardiovascular and conditioning exercise
equipment, as well as
10
free weights and stretch areas with small apparatus equipment.
Some fitness centers contain amenities such as saunas, steam
rooms, whirlpools and swimming pools. Older facilities may
contain tennis
and/or
racquetball courts. A members use of a fitness center may
include group exercise programs or personal training instruction
using Ballys proprietary training methodology called
dynamic personal training. Our unique personal
training method focuses on a total body workout through the use
of compound movements, small apparatus equipment, core
conditioning, active recovery and partner-assisted stretching.
Franchises. As of December 31, 2005
pursuant to franchise agreements, five fitness clubs in upstate
New York, one fitness club in Baton Rouge, Louisiana and one
fitness club in Jacksonville, Florida are operating or will
operate in the United States as Bally Total Fitness brand clubs.
Internationally, six fitness clubs operate as Bally Total
Fitness brand clubs pursuant to franchise
agreements one in the Bahamas, three in South
Korea and two in Mexico. Pursuant to a joint venture agreement
in which the Company holds a 35% interest with China Sports
Industry Co., Ltd., 17 fitness centers are operated in
China one under the joint venture and 16 as
franchisees. As of the date of this filing, three additional
franchise fitness centers are under construction in China.
Account
Servicing
In addition to having member service representatives at most
locations, we handle member services, collection and new member
processing activities at our Norwalk, California national
service center and some of our membership renewal processing at
our Towson, Maryland center, providing efficiencies through
centralization of these high volume activities.
All collections for past-due accounts are initially handled
internally by our national service center. We systematically
pursue past-due accounts by utilizing a series of
computer-generated correspondence and telephone contacts. Our
power-dialer system assists in the efficient administration of
our in-house collection efforts. Based on a set period of
delinquency, members are contacted by our collectors. Past due
members are generally denied entry to the fitness centers.
Delinquent accounts are generally written off after 90 or
194 days without payment, depending on delinquency history.
Accounts written off are reported to credit reporting bureaus
and selected accounts are then sold to third-party collection
services.
We prioritize our collection approach based on credit scores and
club usage, among other criteria, at various levels of
delinquency. By tailoring our membership collection approach to
reflect a delinquent members likelihood of payment, we
believe we can collect more of our membership receivables at a
lower cost than using outside collection agencies. To credit
score, we use a national bureau, which charges a nominal fee per
account.
Competition
We are the largest publicly-traded commercial operator of
fitness centers in North America in terms of members, revenues
and square footage of our facilities. We are the largest
operator, or among the largest operators, of fitness centers in
every major market in which we operate fitness centers. Within
each market, we compete with other commercial fitness centers;
physical fitness and recreational facilities established by
local governments, hospitals, and businesses for their
employees; the YMCA and similar organizations; and, to a certain
extent, with racquet, tennis and other athletic clubs, country
clubs, weight-reduction businesses, vitamin stores, juice and
smoothie companies and the home-use fitness equipment industry.
We also compete, to some degree, with entertainment and retail
businesses for the discretionary income of our target markets.
In addition, we face regional competition with increasingly
large fitness companies such as 24 Hour Fitness Worldwide,
Inc., L.A. Fitness, Inc., Town Sports International
Holdings, Inc. (NSDQ: CLUB), Life Time Fitness, Inc.
(NYSE: LTM) and Curves International, Inc. However, we
believe our national brand identity, nationwide operating
experience, membership options, significant advertising, ability
to allocate advertising and administration costs over all of our
fitness centers, customized fitness offerings, purchasing power
and account processing and collection infrastructure gives us
distinct competitive advantages in our markets. Future
competitive factors may emerge which may hinder our ability to
compete as effectively.
We believe competition has increased to some extent in certain
markets from regional competitors expanding their scope of
operations, and due to the decrease in the barriers to entry
into the market with financing available from, among others,
financial institutions, landlords, equipment manufacturers,
private equity sources and the
11
public capital markets. We believe several competitive factors
influence success in the fitness center business, including
convenience, price, customer service, quality of operations,
quality programming and ability to secure prime real estate at
economical rates. We believe with our locations, our strong
brand identity and our flexible and affordable membership plans,
we have the flexibility to respond to economic conditions and
competition.
Our pursuit of new business initiatives, particularly the sale
of weight management services, nutritional products and apparel,
has us competing against large, established companies with more
experience selling products on a retail basis. In some
instances, our competitors in these business initiatives have
substantially greater financial resources and we may not be able
to compete effectively. However, the high volume of traffic to
our fitness centers does provide a consistent stream of
customers for our products and services.
Trademarks
and Trade Names
The majority of our fitness centers use the service mark
Bally Total
Fitness®.
Other facilities operate under the names Bally Sports
Clubssm
and the The Sports Clubs of
Canada®.
We operated facilities under the Crunch
Fitnesssm
brand and the Gorilla
Sportssm
brand until January 20, 2006, when we completed the sale of
the Crunch Fitness business, including the Crunch Fitness and
Gorilla Sports brands. We operated several fitness centers under
the Pinnacle
Fitness®
brand until May 1, 2006, when we converted those clubs to
Bally clubs. The use of our trademarks and service
marks enhances brand identity and increases advertising
efficiencies.
Seasonality
of Business
Historically, we have experienced greater membership
originations in the first quarter and lower membership
originations in the fourth quarter, while advertising
expenditures are typically lower during the fourth quarter. This
seasonality of membership also impacts the timing of revenue
generation from our products and services business.
Employees
At December 31, 2005, we had approximately
21,600 employees, including approximately
11,500 part-time employees. The distribution of our
employees is summarized as follows:
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approximately 20,050 employees are involved in fitness
center operations, including sales personnel, instructors,
personal trainers, club-level supervisory and facility personnel;
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approximately 500 employees are organized into seven
regions to supervise and support club management, including
sales, marketing, finance, personal training, group exercise,
and field human resource management;
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approximately 600 employees are involved in the operation
of our member processing and collection centers; and
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approximately 450 employees are accounting, management
information systems, marketing, human resources, real estate,
legal and administrative support personnel.
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We are not a party to a collective bargaining agreement with any
of our employees. Although we experience high turnover of
non-management personnel, historically we have not experienced
difficulty in obtaining adequate replacement personnel.
Periodically, however, our sales personnel become somewhat more
difficult to replace due, in part, to increased competition for
skilled retail sales personnel in our industry and with other
industries. We believe, however, that implementation of the BYOM
and new club staffing programs will mitigate this difficulty by
virtue of simplified enrollment programs and our ability to use
other service staff in the membership enrollment process.
Government
Regulation
Our operations and business practices are subject to regulation
at federal, state, provincial and local levels. The general
rules and regulations of the Federal Trade Commission (the
FTC) and of other federal, state, provincial and
local consumer protection agencies apply to our franchising,
advertising, sales and other trade practices.
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State and provincial statutes and regulations affecting the
fitness industry have been enacted or proposed in all of the
states and provinces in which we conduct business. Typically,
these statutes and regulations prescribe certain forms and
regulate the terms and provisions of membership contracts,
including:
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giving the member the right to cancel the contract, in most
cases, within three business days after signing;
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requiring an escrow for funds received from pre-opening sales or
the posting of a bond or proof of financial responsibility; and,
in some cases,
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establishing maximum prices and terms for membership contracts
and limitations on the financing term of contracts.
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In addition, we are subject to numerous other types of federal,
state and provincial regulations governing the sale, financing
and collection of memberships, including, among others, the
Truth-in-Lending
Act and Regulation Z adopted thereunder, as well as state
and provincial laws governing the collection of debts. These
laws and regulations are subject to varying interpretations by a
large number of state, provincial and federal enforcement
agencies and the courts. We maintain internal review procedures
in order to comply with these requirements and believe our
activities are in substantial compliance with all applicable
statutes, rules and regulations.
Under so-called cooling-off statutes in most states
and provinces in which we operate, new members of fitness
centers have the right to cancel their memberships for a period
of three to fifteen days after the date the contract was entered
into and are entitled to refunds of any payment made. The amount
of time new members have to cancel their membership contract
depends on the applicable state or provincial law. Further, our
membership contracts provide that a member may cancel his or her
membership at any time for qualified medical reasons or if the
member relocates a certain distance away from any Bally fitness
center. The specific procedures for cancellation in these
circumstances vary according to differing state and provincial
laws. In each instance, the canceling member is entitled to a
refund of prepaid amounts only. Furthermore, where permitted by
law, a cancellation fee is due upon cancellation, which may
offset any refunds owed.
We are a party to some state and federal consent orders. The
consent orders essentially require continued compliance with
applicable laws and require us to refrain from activities not in
compliance with those laws. From time to time, we make minor
adjustments to our operating procedures to remain in compliance
with those consent orders.
Our nutritional products, and the advertising thereof, are
subject to regulation by one or more federal agencies, including
the Food and Drug Administration (the FDA) and the
FTC. For example, the FDA regulates the formulation, manufacture
and labeling of vitamins and other nutritional supplements in
the United States, while the FTC is principally charged with
regulating marketing and advertising claims.
We are subject to state and federal labor laws governing our
relationship with employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements.
Certain job categories are paid at rates related to the federal
minimum wage. Accordingly, further increases in the minimum wage
would increase labor costs. Our martial arts personnel are
generally foreign nationals with expertise in their field and
are, therefore, subject to applicable immigration laws and other
regulations.
Other
Because of the nature of its operations, the Company is not
required to carry significant amounts of retail inventory either
for delivery requirements to its fitness centers or to assure
continuous availability of goods from suppliers.
Recent
Developments
Sale of
Crunch Fitness
On January 20, 2006, we completed the sale of the chain of
health clubs operated under the Crunch Fitness brand
along with certain additional health clubs located in
San Francisco, California. Currently, two health clubs
constituting part of the Crunch Fitness chain that could not be
transferred to the purchaser at closing are being
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managed by the purchaser as part of the acquired business until
the parties secure consents necessary to complete the transfers.
We received the $45 million purchase price at closing (less
$2.25 million deposited in an escrow account to cover any
required purchase price adjustments), plus $0.5 million in
purchase price adjustments, as consideration for the
transaction. In connection with the transaction, the Company
sold property and equipment with a net book value of
approximately $13 million and goodwill and intangibles with
a net book value of approximately $27 million as of
December 31, 2005. Deferred revenue and deferred rent
associated with the sold health clubs was approximately
$20.6 million and $15 million, respectively, at
December 31, 2005. The Company expects to record a gain of
approximately $38 million in the first quarter of 2006 as a
result of the sale. After escrow, transaction costs and
expenses, in accordance with our Amended and Restated Credit
Agreement dated October 14, 2004 (the Credit
Agreement), we retained $10 million of the sale
proceeds and paid $30 million to reduce outstanding
indebtedness under our term loan. On June 6, 2006,
$1.8 million was released from the escrow account, all of
which was used to reduce outstanding indebtedness under our term
loan. The remaining funds held in the escrow account will be
released upon satisfaction of the terms and conditions of the
escrow agreement.
The Company
and/or
certain of its subsidiaries remain liable for the obligations
(including rent) on certain leases transferred to the purchaser
in the amount of $90.2 million and may remain liable for
the obligations on three additional leases that have not yet
transferred to purchaser in an additional amount of
$8.5 million.
The amount of foregoing liabilities will reduce over time as
obligations are paid by the purchaser under these leases.
However, certain of the leases possess renewal options which, if
exercised by purchaser, will again increase the amount of
liability of the Company
and/or
certain of its subsidiaries under such lease existing as of the
date of such exercise by purchaser but for no more than the
obligations for a 5 year period under any such lease.
The Companys exposure for these retained liabilities is
mitigated by two letters of credit naming the Company as
beneficiary, aggregating $3.2 million and having a term
equal to the longer of three years or the time the purchaser has
a Debt to EBITDA Ratio of less than 3 to 1.
The Company will record a liability on its balance sheet for the
estimated fair value of these retained liabilities equal to
$0.6 million based upon an analysis prepared by an
independent third party valuation company.
Changes
With Respect to the Board of Directors
On January 11, 2006, we announced the appointment of John
W. Rogers, Jr. as Lead Independent Director of our Board of
Directors.
On January 11, 2006, we announced the establishment of a
special committee (the Strategic Alternatives
Committee) comprised of four independent directors, led by
the Lead Independent Director, to manage the strategic process
with J.P. Morgan Securities Inc. and The Blackstone Group
L.P., the Companys outside financial advisors, in
evaluating alternatives relative to the possible sale,
recapitalization or other strategic transaction involving the
Company.
We held our Annual Meeting of Stockholders on January 26,
2006, at which time J. Kenneth Looloian did not stand for
re-election as a director of the Company. The vote at the Annual
Meeting was certified by IVS Associates, Inc. on
February 7, 2006, and Charles J. Burdick, Barry R. Elson
and Don R. Kornstein were duly elected as directors of the
Company. Eric Langshur was not re-elected. On February 9,
2006, Adam S. Metz resigned from the Board of Directors and Eric
Langshur was unanimously reappointed by the Board of Directors.
Mr. Langshur continues to serve as chairman of the Audit
Committee.
On February 10, 2006, we expanded the Strategic
Alternatives Committee to five members and announced that Don R.
Kornstein would co-chair the Strategic Alternatives Committee
with John W. Rogers, Jr., and that Barry M. Deutsch, Barry
R. Elson and Steven S. Rogers would also serve on the Strategic
Alternatives Committee.
Annual
Meeting of Stockholders
On February 7, 2006, IVS Associates, Inc. certified the
vote of the Annual Meeting of Stockholders held January 26,
2006 and confirmed that Charles J. Burdick, Barry R. Elson and
Don R. Kornstein were elected as directors of the Company. In
addition to the election of new directors, IVS Associates, Inc.
certified that the
14
proposal to adopt the 2006 Omnibus Equity Compensation Plan
was defeated, that the proposal to ratify the appointment of
KPMG LLP as independent auditor was approved, that the
stockholder proposal of Pardus Capital Management L.P. regarding
bylaw amendments was approved, and that the stockholder
proposals of Liberation Investments, L.P. did not receive the
required approval of 75% of the outstanding common shares of the
Company.
Credit
Agreement Amendment and Noteholder Consent
Solicitation
On March 14, 2006, we announced that we would not meet the
March 16, 2006 deadline for filing our Annual Report on
Form 10-K
for the year ended December 31, 2005 with the SEC. Although
the delay in filing resulted in defaults of the financial
reporting covenants under the indentures governing our
97/8% Senior
Subordinated Notes (Senior Subordinated Notes) and
101/2% Senior
Notes due 2011 (Senior Notes), it did not constitute
an event of default without delivery of a notice of default and
expiration of a
30-day cure
period. A cross-default under our Credit Agreement would have
occurred 10 days after receipt of such notice.
Additionally, a default would also have occurred under the
Credit Agreement if we did not deliver audited financial
statements for the year ended December 31, 2005 to the
lenders thereunder by March 31, 2006.
On March 24, 2006, we announced that we would seek waivers
of the defaults of the financial reporting covenants under the
indentures governing the Senior Subordinated Notes and the
Senior Notes through a consent solicitation, which was commenced
on March 27, 2006. In connection with the consent
solicitation, we entered into agreements with approximately 53%
of the holders of the Senior Subordinated Notes to consent to
the requested waivers.
On March 30, 2006, we entered into the Third Amendment and
Waiver with the lenders under our Credit Agreement that modified
the definition of Consolidated Interest Expense,
modified permitted dispositions, clarified the definition of
Banking Day, extended the time for delivering the
audited financial statements for the year ended
December 31, 2005 and the unaudited financial statements
for the quarter ended March 31, 2006 until July 10,
2006, extended the time for delivering the unaudited financial
statements for the quarter ending June 30, 2006 until
September 11, 2006, with an option to elect to extend until
October 11, 2006, permitted payment of the consent fees to
the holders of the Senior Subordinated Notes and the Senior
Notes and excludes fees and expenses incurred in connection with
the consent solicitation from the computation of financial
covenants.
On April 10, 2006, we completed the consent solicitations
to amend the indentures governing the Senior Subordinated Notes
and the Senior Notes to waive any default arising under the
financial reporting covenants from a failure to timely file
financial statements with the SEC for the year ended
December 31, 2005 and the quarter ended March 31, 2006
through July 10, 2006, and for the quarter ended
June 30, 2006 through September 11, 2006, with an
option to elect to extend through October 11, 2006.
In connection with these consents, we issued
1,956,195 shares of unregistered common stock and paid
$0.8 million in consent fees to the holders of the Senior
Subordinated Notes and the Senior Notes, paid the lenders under
the Credit Agreement $2.5 million in fees and recorded
$22 million in deferred finance charges as of
March 31, 2006. Additionally, on April 11, 2006, the
Company entered into stock purchase agreements (the Stock
Purchase Agreements) to sell 400,000 shares of
unregistered common stock to each of Wattles Capital Management,
LLC and investment funds affiliated with Ramius Capital Group,
L.L.C. Proceeds of $5.6 million from the sales of Common
Stock were used to fund: (i) the cash portion of the
consent fees paid to holders of the Senior Subordinated Notes
and Senior Notes and related expenses; (ii) fees and
expenses relating to the Credit Agreement amendment and waiver;
and (iii) additional working capital.
On June 23, 2006, the Company entered into the Fourth
Amendment to the Credit Agreement which extends the 10 day
period to 28 days after which a cross-default will occur
upon receipt of any financial reporting covenant default notice
under the indentures governing the Senior Subordinated Notes or
Senior Notes for the third quarter of 2006. The Company paid the
lenders under the Credit Agreement fees of $0.5 million in
connection with the Fourth Amendment.
15
We are in the process of implementing new accounting processes
and technologies designed to shorten the time required to
prepare and file our financial statements. In addition, as
described above, while we have secured additional time to file
our second quarter financial statements with the SEC without
causing a default under the indentures governing the Senior
Notes and the Senior Subordinated Notes, and to file our third
quarter financial statements with the SEC without causing a
cross-default under our Credit Agreement, we cannot assure you
that we will be able to make such filings within the extended
time periods. Failure to do so will lead to further defaults
under the indebtedness and the Credit Agreement and could
require us to seek additional consents from our bondholders and
lenders.
On March 31, 2006, the Company was not in compliance with
two credit agreements with the same lender. These agreements
represented debt of restricted subsidiaries in the amount of
$3.1 million and debt of an unrestricted subsidiary in the
amount of $1.7 million. On April 13, 2006, these
agreements were amended and the Company was in compliance with
the amended agreements.
Management
Changes
On April 17, 2006, the Company announced that Carl J.
Landeck, Senior Vice President and Chief Financial Officer was
no longer an employee of the Company and that Ronald G. Eidell
of Tatum, LLC had joined the Company as Senior Vice President,
Finance, with responsibility for all accounting and finance
functions.
16
Item 1A. Risk
Factors
In addition to the factors discussed in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations, the
following factors may affect our future results. If any of the
following risks actually occur, our business, financial
condition or operating results could be materially adversely
affected. In such case, the trading price of our underlying
common stock could decline and investors may lose part or all of
their investment. Additional risks and uncertainties, not
presently known to us or that we currently deem immaterial, may
also impair our business operations. As a result, we cannot
predict every risk factor, nor can we assess the impact of all
of the risk factors on our business or the extent to which any
factor, or combination of factors, may impact our financial
condition and results of operations.
Our
substantial leverage could adversely affect our financial
health.
We have a substantial amount of debt. As of May 31, 2006,
our total consolidated debt was approximately
$735.2 million. Our substantial indebtedness could
adversely affect our financial health by, among other things:
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limiting our ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions of
clubs and other general corporate requirements;
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continuing to require us to dedicate a substantial portion of
any cash flows from operations to make interest payments on our
debt, which reduces funds available for operations and future
business opportunities;
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increasing our vulnerability to adverse economic conditions;
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limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we
operate; and
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making us more highly leveraged than some of our competitors,
which could potentially decrease our ability to compete in our
industry.
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Our
inability to comply with covenants under the Credit Agreement
and indentures governing our Senior Notes and Senior
Subordinated Notes could adversely impact our ability to operate
our business.
The Credit Agreement and indentures governing our Senior Notes
and Senior Subordinated Notes contain covenants that include,
among others, financial reporting covenants; restrictions on
incurring additional indebtedness; incurring liens; certain
types of payments (including capital stock dividends and
redemptions, and payments on existing indebtedness); capital
expenditures; investments; and sale and leaseback transactions.
The Company has failed to comply with its financial reporting
covenants during 2004, 2005 and 2006, and has obtained waivers
with respect to its non-compliance. Any breach of any of these
covenants will result in a default
and/or
cross-default under the Credit Agreement or the indentures.
In addition, the Credit Agreement requires the Company to meet
certain interest coverage and leverage tests, as such tests are
defined in the Credit Agreement. If we are unable to comply with
these covenants there would be a default under the Credit
Agreement which could result in a cross-default under the
indentures governing the Senior Notes and the Senior
Subordinated Notes. Upon a default under the Credit Agreement,
we will not have access to the revolving credit facility and
likely will not have adequate liquidity to meet our operating
needs. Changes in economic or business conditions, results of
operations or other factors could also cause the Company to
default under its debt instruments. A default, if not waived by
Ballys lenders, could result in acceleration of the
Companys debt.
We are
uncertain of our ability to obtain additional financing for our
future capital needs. If we are unable to obtain additional
financing, we may not be able to continue to operate our
business.
The Company requires substantial cash flows to fund its capital
spending and working capital requirements. We maintain a
substantial amount of debt, the terms of which require
significant interest payments each year. We currently anticipate
our cash flow and availability under our $100 million
revolving credit facility pursuant to our Credit Agreement will
be sufficient to meet our expected needs for working capital and
other cash requirements through the first quarter of 2007.
However, changes in terms or other requirements by vendors could
negatively
17
impact cash flows and liquidity. We do not believe our cash flow
and availability under the revolving credit facility will be
sufficient to repay our $300 million Senior Subordinated
Notes which are due in October 2007. In addition, the Credit
Agreement will terminate in the event that the Senior
Subordinated Notes have not been refinanced on or before
April 15, 2007. As a result, we may need to raise
additional funds through public or private equity or debt
financings. We cannot assure you that any such funds will be
available to us on favorable terms or at all. If such funds are
unavailable to us, we may default on our Senior Subordinated
Notes, our Senior Notes and our Credit Agreement, and may not be
able to continue to operate our business. In addition, upon a
default under our Credit Agreement, whether directly or as a
result of a cross-default to other indebtedness, we will not be
able to draw on the revolving credit facility and may not be
able to continue to operate our business.
There
can be no assurance that any strategic transaction will occur,
or if one is undertaken, of its
potential terms or timing.
As we previously announced, we are currently exploring strategic
alternatives to enhance stockholder value, and the Strategic
Alternatives Committee of our Board of Directors has engaged
J.P. Morgan Securities Inc. and The Blackstone Group L.P.
to assist the Company in this process. The Strategic
Alternatives Committee authorized J.P. Morgan Securities
Inc. and The Blackstone Group L.P. to engage in discussions with
interested parties in connection with the strategic alternative
process. There can be no assurance that any transaction will
occur, or if one is undertaken, of its potential terms or timing.
We are
subject to risks associated with implementation of the new
business initiatives.
We have devoted significant resources to the development and
testing of new business initiatives, including our BYOM program
and our new club staffing programs. However, there can be no
assurance the results of our national roll-out of these programs
will be successful. The introduction of BYOM could result in
pricing contraction or variances in the average payment
collected. Furthermore, the national roll-out required
significant resources in the planning and implementation, as
well as additional training for our club personnel, and may
require additional such training in the future which may result
in additional costs and distract personnel from other
responsibilities. Accordingly, there can be no assurance that
these programs will be effective in attracting
and/or
retaining members. Furthermore, some initiatives are long-term
strategic initiatives and, accordingly, may not result in
short-term operating efficiencies and, if unsuccessful, may
result in additional operating costs.
We may
not be able to attract or retain a sufficient number of members
to maintain or expand the business.
The profitability of the Companys fitness centers is
dependent, in part, on the Companys ability to originate
and retain members. There are numerous factors that could affect
the Companys membership origination and retention at its
fitness centers or that could lead to a decline in member
origination and retention rates, including the ability of the
Company to deliver quality service at a competitive cost, the
presence of direct and indirect competition in the areas where
the Companys fitness centers are located, delayed
reinvestment into aging clubs, and the publics level of
interest in fitness and general economic conditions. As a result
of these factors, there can be no assurance that the
Companys membership levels will be adequate to maintain
the business or permit the expansion of its operations. See
Item 1 Business Business
Strategy.
The
positive results achieved from introducing the sale of products
and services during recent years may not continue in the
future.
We have introduced a number of business initiatives to
capitalize on our brand identity, distribution infrastructure,
significant member base and frequency of visitation. These
initiatives primarily focus on selling ancillary products and
services to our members within our fitness centers and include:
providing personal training services; selling Bally-branded
nutritional products; opening retail stores selling nutritional
products, workout apparel and related accessories; and martial
arts programs. We have generated significant revenue from
products and services since implementing these initiatives.
However, they may not continue to be successful in the future.
The sale and marketing of nutritional products, workout apparel
and related accessories and the provision of
18
rehabilitative and physical therapy services involve significant
risk of competition. See
Item 1 Business Competition.
We may
not be able to continue to compete effectively in each of our
markets in the future.
The fitness center industry is highly competitive. Within each
market in which we operate, we compete with other commercial
fitness centers, physical fitness and recreational facilities
established by local governments, hospitals and businesses for
their employees, the YMCA and similar organizations and, to a
certain extent, with racquet, tennis and other athletic clubs,
country clubs, weight reducing salons, vitamin stores and the
home-use fitness equipment industry. We also compete, to some
extent, with entertainment and retail businesses for the
discretionary income of our target markets. In addition, we face
greater regional competition with increasingly large and
well-capitalized fitness companies such as 24 Hour Fitness
Worldwide, Inc., L.A. Fitness, Inc., Town Sports International
Holdings, Inc., Life Time Fitness, Inc. and Curves
International, Inc. We may not be able to continue to compete
effectively in each of our markets in the future. Additionally,
competitive conditions may limit our ability to maintain or
increase pricing of membership fees and may impact our ability
to attract new members, retain existing members and retain or
attract qualified personnel.
Our
trademarks and trade names may be misappropriated or subject to
claims of infringement.
We attempt to protect our trademarks and trade names through a
combination of trademark and copyright laws, as well as
licensing agreements and third-party nondisclosure agreements.
Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a
material adverse effect on our business, results of operations
and financial condition.
Non-compliance
with Payment Card Industry Data Standards could adversely affect
our business.
Similar to others in the retail industry, we are currently not
fully compliant with new Payment Card Industry Data Security
Standards. We are working cooperatively with our third party
assessor, our payment processor and our primary credit card
companies to become compliant. If we are not able to achieve and
maintain compliance, we may be liable for substantial fines and
penalties and possibly lose our ability to accept credit cards
for the payment of memberships
and/or the
sale of products and services. The inability to accept credit
cards would have a material adverse impact on our business and
results of operations.
Weaknesses
in the Companys internal controls and procedures could
have a material adverse effect on the Company.
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
in accordance with U.S. generally accepted accounting
principles (GAAP). In making its assessment of
internal control over financial reporting as of
December 31, 2005, management used the criteria described
in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. A material weakness is
a control deficiency, or combination of control deficiencies,
that results in a more than remote likelihood a material
misstatement of the annual or interim financial statements will
not be prevented or detected. These material weaknesses
contributed to the restatements of our consolidated financial
statements for 2002 and 2003, the adjustment to accumulated
deficit as of December 31, 2002, set forth herein (See
Note 2 of Notes to Consolidated Financial Statements,
Adjustment to Accumulated Deficit as of December 31, 2002),
and the restatements of the 2005 condensed quarterly financial
statements. We cannot assure you further restatements or
adjustments may not be required in the future.
Management determined that 11 material weaknesses in our
internal control over financial reporting existed as of
December 31, 2005. See
Item 9A Controls and Procedures for a
description of these material weaknesses.
Due to the existence of these material weaknesses, management
concluded we did not maintain effective internal control over
financial reporting as of December 31, 2005, based on the
criteria in the Internal
Control Integrated Framework. Further,
the material weaknesses identified resulted in an adverse
opinion by our
19
independent registered public accounting firm on the
effectiveness of our internal control over financial reporting.
We do not believe that all material weaknesses will be
remediated by December 31, 2006.
We are developing a remediation plan and intend to implement
remediation measures during 2006 and 2007, each designed to
remediate the material weaknesses in our internal controls by
December 31, 2007 (See
Item 9A Controls and Procedures). We
cannot assure you as to when the remediation plan will be fully
implemented, nor can we assure you that additional material
weaknesses will not be identified by our management or
independent accountants in the future. We have incurred and will
continue to incur substantial expenses relating to the
remediation of material weaknesses in our internal controls
identified in our management assessment. These expenses may
materially and adversely affect our financial condition, results
of operations and cash flows. In addition, even after the
remedial measures discussed in
Item 9A Controls and Procedures are fully
implemented, our internal controls may not prevent all potential
error and fraud, because any control system, no matter how well
designed, can only provide reasonable and not absolute assurance
that the objectives of the control system will be achieved.
Our
ability to report our financial results on a timely basis in the
future could be adversely affected by our weaknesses in internal
controls.
If we are unable to substantially improve our internal controls,
including the capability and efficiencies of our computer and
information technology systems, our ability to report our
financial results on a timely and accurate basis will continue
to be adversely affected. If we are unable to timely file
reports with the SEC, we may be required to seek further waivers
of reporting covenants from our bondholders and lenders and pay
additional consent fees to our bondholders and lenders. We
cannot assure you that such waivers could be obtained. If we are
unable to obtain a waiver, defaults would occur under our Senior
Notes and Senior Subordinated Notes, with a potential
cross-default under the Credit Agreement if the holders of the
Senior Notes or Senior Subordinated Notes deliver a notice of
default. Upon any such event, we may not be able to continue to
operate our business. In addition, if we are unable to timely
file, the Company could be considered for delisting by the New
York Stock Exchange and our stockholders could find it difficult
to buy or sell our common shares and the trading prices for our
common shares could be adversely effected. Our ability to access
the capital markets is also subject to our timely filing of
periodic reports with the SEC, and our recent failure to file
certain reports on a timely basis limits our ability to access
the capital markets using a short-form registration.
Any
adverse outcome of investigations currently being conducted by
the SEC or the U.S. Attorneys Office could have a
material adverse impact on us, on the trading prices of our
securities and on our ability to access the capital
markets.
We are cooperating with investigations currently being conducted
by the SEC and the U.S. Attorneys Office. We cannot
currently predict the outcome of either of these investigations,
which could be material. Nor can we predict whether any
additional investigation(s) will be commenced or, if so, the
impact or outcome of any such additional investigation(s). Until
these existing investigations and any additional investigations
that may arise in connection with the historical conduct of the
business are resolved, the trading prices of our securities may
be adversely affected and it may be more difficult for us to
raise additional capital or incur indebtedness or other
obligations. If an unfavorable result occurs in any such
investigation, we could be required to pay civil
and/or
criminal fines or penalties, or be subjected to other types of
sanctions, which could have a material adverse effect on our
operations. Fines, penalties or settlements could also result in
a default under our Credit Agreement. The trading prices for our
securities or our ability to access the capital markets and our
business and financial condition could be further materially
adversely affected.
The
impact of ongoing purported securities class action, derivative
and insurance-related litigation may be material. We are also
subject to the risk of additional litigation and regulatory
action in connection with the restatement of our consolidated
financial statements. The potential liability from any such
litigation or regulatory action could adversely affect our
business.
In 2004, we restated our consolidated financial statements for
the fiscal year ended December 31, 2003 and 2002. In
connection with these restatements, we and certain of our former
and current officers and directors have
20
been named as defendants in a number of lawsuits, including
purported class action and stockholder derivative suits and
suits by individuals from whom we purchased health club
businesses with shares of our common stock. We cannot currently
predict the impact or outcome of these litigations, which could
be material. The continuation and outcome of these lawsuits and
related ongoing investigations, as well as the initiation of
similar suits and investigations, may have a material adverse
impact on our results of operations and financial condition.
In addition, we maintain primary and excess directors and
officers liability insurance policies. In November 2005 and
April 2006, we and certain of our former and current officers
and directors were named as defendants in actions by several
insurers to rescind
and/or to
obtain a declaration that no coverage is afforded by certain of
our excess directors and officers liability insurance policies
for the years in which the class action and derivative claims
were made. We believe that these actions are without merit and
intend to vigorously defend them. However, we cannot currently
predict the impact or outcome of these litigations, nor can we
ensure that we will be able to maintain both our primary and
excess directors and officers liability insurance policies, the
loss of either of which could be material. The continuation and
outcome of these lawsuits, as well as the initiation of similar
suits, may have a material adverse impact on our results of
operations and financial condition.
As a result of the restatements of our consolidated financial
statements described herein, we could become subject to
additional purported class action, derivative or other
securities litigation. As of the date hereof, we are not aware
of any additional litigation or investigation having been
commenced against us related to these matters, but we cannot
predict whether any such litigation or regulatory investigation
will be commenced or, if it is, the outcome of any such
litigation or investigation. The initiation of any additional
securities litigation or investigations, together with the
lawsuits and investigations described above, may also harm our
business and financial condition.
Until the existing litigation and regulatory investigations, any
additional litigation or regulatory investigation, and any
claims or issues that may arise in connection with the
historical conduct of the business are resolved, it may be more
difficult for us to raise additional capital or incur
indebtedness or other obligations. If an unfavorable result
occurred in any such action, our business and financial
condition could be further adversely affected.
For a further description of the nature and status of these
legal proceedings, see Item 3 Legal
Proceedings.
We are
subject to various other litigation risks, including class
actions, that could have a material adverse impact on
us.
We are, and have been in the past, named as defendants in a
number of purported class action lawsuits based on alleged
violations of state and local consumer protection laws and
regulations governing the sale, financing and collection of
membership fees. To date, we have successfully defended or
settled such lawsuits without a material adverse effect on our
financial condition or results of operations. However, we cannot
assure you that we will be able to successfully defend or settle
all pending or future purported class action claims, and our
failure to do so may have a material adverse effect on our
financial condition.
From time to time the Company is party to various lawsuits,
claims and other legal proceedings that arise in the ordinary
course of business, including claims that may be asserted
against us by members, their guests or our employees. We cannot
assure you that we will be able to maintain our general
liability insurance on acceptable terms in the future or that
such insurance will provide adequate coverage against potential
claims.
We are
subject to extensive government regulation. Changes in these
regulations could have a negative effect on our financial
condition and operating results.
Our operations and business practices are subject to federal,
state and local government regulations in the various
jurisdictions where our fitness centers are located and where
our nutritional products are sold, including:
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general rules and regulations of the FTC, state and local
consumer protection agencies and state statutes that prescribe
provisions of membership contracts and that govern the
advertising, sale, financing and collection of membership fees
and dues;
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state and local health regulations; and
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federal regulation of health and nutritional supplements.
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We are also a party to several state and federal consent orders.
These consent orders essentially require continued compliance
with applicable laws and require us to refrain from activities
not in compliance with such applicable laws. From time to time,
we make minor adjustments to our operating procedures to remain
in compliance with applicable laws and we believe our operations
are in material compliance with all applicable statutes, rules
and regulations. The implementation of BYOM and the new club
staffing program has required certain market specific
adjustments and may require future adjustments to remain in
compliance with federal, state and local regulations. Our
failure to comply with these statutes, rules and regulations may
result in fines or penalties. Penalties may include regulatory
or judicial orders enjoining or curtailing aspects of our
operations. It is difficult to predict the future development of
such laws or regulations, and although we are not aware of any
material proposed changes, any changes in such laws could have a
material adverse effect on our financial condition and results
of operations.
If we
do not retain our key personnel or fail to attract and retain
other highly skilled employees our
business may suffer.
The success of our business is heavily dependent on the
capabilities of our management team. If critical persons were to
leave, it might be difficult to replace them and our business
could be adversely affected. In addition, the Company has little
equity compensation with which to induce or retain management.
The Companys 1996 Long-Term Incentive Plan expired on
January 3, 2006, and as of the date of this filing, only
42,500 shares of common stock are available to be issued to
new employees under the Companys Inducement Award Equity
Incentive Plan. Further, stockholders did not approve the
proposed 2006 Omnibus Equity Compensation Plan at the
Companys Annual Meeting of Stockholders held in January
2006. We cannot assure you that we can attract and retain a
sufficient number of qualified personnel to meet our business
needs.
The
continuing time, effort and expense relating to internal and
external investigations and the
development and implementation of improved internal controls and
procedures may have an adverse effect on our
business.
In addition to the challenges of the various government
investigations and extensive litigation we face, our current
management team is expected to spend considerable time and
effort dealing with the follow up to internal and external
investigations involving our historical accounting and internal
controls, and in further developing and implementing accounting
policies and procedures, disclosure controls and procedures and
corporate governance policies and procedures. The significant
time and effort required for these matters may distract the
management team and have an adverse effect on our business.
22
Item 1B. Unresolved
Staff Comments
None.
Our executive office is located in leased office space
(approximately 70,000 square feet) in an office park in
Chicago, Illinois. We also lease space in Norwalk, California
for our national service center, and Towson, Maryland for our
information systems and renewal processing facilities.
The following table sets forth information concerning fitness
centers operated by the Company:
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Bally
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Upscale
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Total Fitness
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Branded
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Clubs
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Clubs
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Total
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Total Clubs as of
December 31, 2002
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354
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56
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410
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Clubs opened during 2003
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11
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1
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12
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Clubs acquired during 2003
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0
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1
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1
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Clubs closed during 2003
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(6
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)
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0
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(6
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Total Clubs as of
December 31, 2003
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359
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58
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417
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Clubs opened during 2004
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6
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0
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6
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Clubs acquired during 2004
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1
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0
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1
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Clubs closed during 2004
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(7
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)
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(1
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)
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(8
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Converted
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4
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(4
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0
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Total Clubs as of
December 31, 2004
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363
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53
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416
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Clubs opened during 2005
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
Clubs closed during 2005
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(8
|
)
|
Converted
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Clubs as of
December 31, 2005
|
|
|
359
|
|
|
|
50
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clubs operated as of
December 31, 2005*
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
44
|
|
|
|
2
|
|
|
|
46
|
|
Leased
|
|
|
315
|
|
|
|
48
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
359
|
|
|
|
50
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Between January 20, 2006 and May 31, 2006, we
transferred ownership of 23 leased Crunch, Gorilla and
Pinnacle upscale branded clubs; two additional Crunch locations
will be transferred upon satisfaction of all conditions. See
Item 1 Business Recent
Developments Sale of Crunch Fitness.
|
|
|
|
|
|
|
|
|
|
|
Gross square footage as of
December 31:
|
|
|
|
|
2003
|
|
|
12,624,720
|
|
2004
|
|
|
12,667,649
|
|
2005
|
|
|
12,565,209
|
|
The leases for fitness centers we have entered into in the last
five years generally provide for an initial term of
15 years. Most leases give us at least one five-year option
to renew and often two or more such options.
Substantially all of our properties are subject to liens under
the Credit Agreement or other mortgages.
23
|
|
Item 3.
|
Legal
Proceedings
|
Putative
Securities Class Actions
Between May and July 2004, ten putative securities class
actions, now consolidated and designated In re Bally Total
Fitness Securities Litigation were filed in the United
States District Court for the Northern District of Illinois
against the Company and certain of its former and current
officers and directors. Each of these substantially similar
lawsuits alleged that the defendants violated
Sections 10(b)
and/or 20(a)
of the Securities Exchange Act of 1934, as amended (the
Exchange Act), as well as the associated
Rule 10b-5,
in connection with the Companys proposed restatement.
On March 15, 2005, the Court appointed a lead plaintiff and
on May 23, 2005 the Court appointed lead plaintiffs
counsel. By stipulation of the parties, the consolidated lawsuit
was stayed pending restatement of the Companys financial
statements in November 2005. On December 30, 2005,
plaintiffs filed an amended consolidated complaint, asserting
claims on behalf of a putative class of persons who purchased
Bally stock between August 3, 1999 and April 28, 2004.
The various defendants filed motions to dismiss the amended
consolidated complaint on February 24, 2006, which motions
are currently pending. It is not yet possible to determine the
ultimate outcome of these actions.
Stockholder
Derivative Lawsuits in Illinois State Court
On June 8, 2004, two stockholder derivative lawsuits were
filed in the Circuit Court of Cook County, Illinois, by two
Bally stockholders, David Schacter and James Berra, purportedly
on behalf of the Company against Paul Toback, James McAnally and
John Rogers, Jr., who are current directors
and/or
officers, and Lee Hillman, John Dwyer, J. Kenneth Looloian,
Stephen Swid, George Aronoff, Martin Franklin and Liza Walsh,
who are now former officers
and/or
directors. These lawsuits allege claims for breaches of
fiduciary duty against those individuals in connection with the
Companys restatement regarding the timing of recognition
of prepaid dues. The two actions were consolidated on
January 12, 2005. By stipulation of the parties, the
consolidated lawsuit was stayed pending restatement of the
Companys financial statements in November 2005. An amended
consolidated complaint was filed on February 27, 2006.
Bally filed a motion to dismiss on May 20, 2006, directed
solely to the issue of whether plaintiffs have adequately
alleged demand futility as required by applicable Delaware law
in order to establish standing to sue derivatively. That motion
is currently pending. It is not yet possible to determine the
ultimate outcome of these actions.
Stockholder
Derivative Lawsuits in Illinois Federal Court
On April 5, 2005, a stockholder derivative lawsuit was
filed in the United States District Court for the Northern
District of Illinois, purportedly on behalf of the Company
against certain current and former officers and directors of the
Company by another of the Companys stockholders, Albert
Said. This lawsuit asserts claims for breaches of fiduciary duty
in failing to supervise properly its financial and corporate
affairs and accounting practices. Plaintiff also requests
restitution and disgorgement of bonuses and trading proceeds
under Delaware law and the Sarbanes-Oxley Act of 2002. By
stipulation of the parties, the lawsuit was stayed pending
restatement of the Companys financial statements In
November 2005. An amended consolidated complaint was filed on
February 27, 2006. Bally filed a motion to dismiss on
May 30, 2006, directed solely to the issues of whether the
court has subject matter jurisdiction and whether plaintiffs
have adequately alleged demand futility as required by
applicable Delaware law in order to establish standing to sue
derivatively. That motion is currently pending. It is not yet
possible to determine the ultimate outcome of this action.
Lawsuit
in Oregon
On September 17, 2004, a lawsuit captioned Jack Garrison
and Deane Garrison v. Bally Total Fitness Holding
Corporation, Lee S. Hillman and John W. Dwyer, CV 04 1331,
was filed in the United States District Court for the District
of Oregon. The plaintiffs alleged that the defendants violated
certain provisions of the Oregon Securities Act, breached the
contract of sale, and committed common-law fraud in connection
with the acquisition of the plaintiffs business in
exchange for shares of Bally stock.
24
On April 7, 2005, all defendants joined in a motion to
dismiss two of the four counts of plaintiffs complaint,
including plaintiffs claims of breach of contract and
fraud. On November 28, 2005, the District Court granted the
motion to dismiss plaintiffs claims for breach of contract
and fraud against all parties. Motions for summary judgment were
filed on April 21, 2006 and are currently pending. It is
not yet possible to determine the ultimate outcome of this
action.
Lawsuit
in Massachusetts
On March 11, 2005, plaintiffs filed a complaint in the
matter of Fit Tech Inc., et al. v. Bally Total
Fitness Holding Corporation, et al., Case No.
05-CV-10471
MEL, pending in the United States District Court for the
District of Massachusetts. This action is related to an earlier
action brought in 2003 by the same plaintiffs in the same court
alleging breach of contract and violation of certain earn-out
provisions of an agreement whereby the Company acquired certain
fitness centers from plaintiffs in return for shares of Bally
stock. The 2005 complaint asserted new claims against the
Company for violation of state and federal securities laws on
the basis of allegations that misrepresentations in Ballys
financial statements resulted in Ballys stock price to be
artificially inflated at the time of the Fit-Tech transaction.
Plaintiffs also asserted additional claims for breach of
contract and common law claims. Certain employment disputes
between the parties to this litigation are also subject to
arbitration in Chicago.
Plaintiffs claims are brought against the Company and its
current Chairman and CEO Paul Toback, as well as former Chairman
and CEO Lee Hillman and former CFO John Dwyer. Plaintiffs have
voluntarily dismissed all claims under the federal securities
laws, leaving breach of contract, common law and state
securities claims pending. On April 4, 2006, the Court
granted motions to dismiss all claims against defendants Hillman
and Dwyer for lack of jurisdiction. Under the current schedule,
motions to dismiss on other grounds are to be filed on
July 19, 2006. It is not yet possible to determine the
ultimate outcome of this action.
Securities
and Exchange Commission Investigation
In April 2004, the Division of Enforcement of the SEC commenced
an investigation in connection with the Companys
restatement. The Company continues to fully cooperate in the
ongoing SEC investigation. It is not yet possible to determine
the ultimate outcome of this investigation.
Department
of Justice Investigation
In February 2005, the United States Justice Department commenced
a criminal investigation in connection with the Companys
restatement. The investigation is being conducted by the United
States Attorney for the Northern District of Illinois. The
Company is fully cooperating with the investigation. It is not
yet possible to determine the ultimate outcome of this
investigation.
Demand
Letters
On December 27, 2004, the Company received a stockholder
demand that it bring actions or seek other remedies against
parties potentially responsible for the Companys
accounting errors. The Board appointed a Special Demand
Evaluation Committee consisting of three independent directors
to evaluate that request. On June 21, 2005, the Company
received a second, substantially similar, stockholder demand,
which the Special Demand Evaluation Committee also evaluated
along with the other stockholder demand. The Special Demand
Evaluation Committee retained independent counsel,
Sidley & Austin LLP, to assist it in evaluating the
demands.
On March 10, 2006, the Companys Board of Directors
accepted the recommendation of its Special Demand Evaluation
Committee that no further action be taken at this time against
any current or former officers or directors of the Company
regarding the matters raised in the two shareholder demand
letters. The Committees recommendation, based on the
report of its independent counsel and adopted by the Board of
Directors, was based on consideration of a variety of factors,
including (i) the nature and strength of the Companys
potential claims; (ii) defenses available to the officers
and directors; (iii) potential damages and resources
available to satisfy any damages award; (iv) the
Companys indemnification and advancement obligations under
its charter, bylaws, and individual agreements;
(v) potential expenses to the Company and potential
counterclaims arising from the pursuit of potential civil
claims; and (vi) business disruption and employee morale
issues.
25
Insurance
Lawsuits
On November 10, 2005, two of our excess directors and
officers liability insurance providers filed a complaint
captioned Travelers Indemnity Company and ACE American
Insurance Company v. Bally Total Fitness Holding
Corporation; Holiday Universal, Inc, n/k/a Bally Total Fitness
of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John
W. Dwyer; Lee S. Hillman; Stephen C. Swid; James McAnally; J.
Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of
the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff
Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin
E. Franklin, Case No. 05C 6441, in the United States
District Court for the Northern District of Illinois. The
complaint alleged that financial information included in the
Companys applications for directors and officers liability
insurance in the
2002-2004
policy years was materially false and misleading. Plaintiff
requests the Court to declare two of the Companys excess
policies for the year 2002-2003 void, voidable
and/or
subject to rescission, and to declare that the exclusions
and/or
conditions of a separate excess policy for the year
2003-2004
bar coverage with respect to certain of the Companys
claims. Firemans Fund, another excess carrier, was allowed to
join in the case on January 4, 2006. Defendants filed
motions to dismiss or stay the proceedings on February 10,
2006, which motions are currently pending. On April 6,
2006, an additional excess directors and officers liability
insurance provider filed a complaint captioned RLI Insurance
Company v. Bally Total Fitness Holding Corporation; Holiday
Universal, Inc.; George N. Aronoff; Paul Toback; John H. Dwyer;
Lee S. Hillman; Stephen C. Swid; James McAnally; J. Kenneth
Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of the
Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff
Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin
E. Franklin, Case No. 06CH06892 in the circuit court of
Cook County, Illinois, County Department Chancery Division. The
complaint alleged that financial information included in the
Companys applications for directors and officers liability
insurance in the
2002-2003
policy year was materially false and misleading. Plaintiff
requests the Court to declare the Companys excess policy
for the year 2002-2003 void, voidable
and/or
subject to rescission. The Company and the individual defendants
have not yet responded to the complaint. It is not yet possible
to determine the ultimate outcome of these actions.
Other
The Company is also involved in various other claims and
lawsuits incidental to its business, including claims arising
from accidents at its fitness centers. In the opinion of
management, the Company is adequately insured against such
claims and lawsuits, and any ultimate liability arising out of
such claims and lawsuits should not have a material adverse
effect on the financial condition or results of operations of
the Company. In addition, from time to time, customer complaints
are investigated by various governmental bodies. In the opinion
of management, none of these other complaints or investigations
currently pending should have a material adverse effect on our
financial condition or results of operations.
In addition, we are, and have been in the past, named as
defendants in a number of purported class action lawsuits based
on alleged violations of state and local consumer protection
laws and regulations governing the sale, financing and
collection of membership fees. To date we have successfully
defended or settled such lawsuits without a material adverse
effect on our financial condition or results of operations.
However, we cannot assure you that we will be able to
successfully defend or settle all pending or future purported
class action claims, and our failure to do so may have a
material adverse effect on our financial condition or results of
operations. See
Item 1 Business Government
Regulation and Item 1A Risk Factors.
26
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
On July 13, 2005, the Company commenced a solicitation of
consents seeking an extension through October 31, 2005 of
the waivers under the indentures governing its Senior
Subordinated Notes and Senior Notes with respect to its
inability to provide current financial statements. On
August 24, 2005, certain beneficial owners of $155,829,000
in aggregate principal amount of the Senior Subordinated Notes
consented to the extension of the waiver through
November 30, 2005 providing the necessary consent to the
waiver extension.
On August 25, 2005, the Company terminated the consent
solicitation of the holders of the Senior Subordinated Notes. On
August 30, 2005, the Company received the necessary
consents from the holders of the Senior Notes to a waiver
extension through November 30, 2005. On October 18,
2005, the Company commenced a follow-on consent solicitation to
holders of the Senior Subordinated Notes, which closed on
November 1, 2005. The vote totals for the consents are set
forth on the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
Principal Amount
|
|
Principal Amount
|
|
Principal Amount
|
Notes
|
|
Outstanding ($)
|
|
Voted For ($)
|
|
Voted Against ($)
|
|
Abstained ($)
|
|
Senior Subordinated Notes
|
|
|
299,764,000
|
|
|
|
277,810,000
|
|
|
|
N/A
|
|
|
|
21,954,000
|
|
Senior Notes
|
|
|
235,000,000
|
|
|
|
228,870,000
|
|
|
|
N/A
|
|
|
|
6,130,000
|
|
27
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity and Related Stockholder
Matters
|
Our common stock is traded on the NYSE under the symbol
BFT. The following table sets forth, for the periods
indicated, the high and low quarterly sales prices for a share
of our common stock as reported on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2004:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
8.04
|
|
|
$
|
4.96
|
|
Second quarter
|
|
|
6.16
|
|
|
|
3.60
|
|
Third quarter
|
|
|
5.54
|
|
|
|
3.20
|
|
Fourth quarter
|
|
|
4.37
|
|
|
|
2.95
|
|
2005:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
4.72
|
|
|
$
|
3.06
|
|
Second quarter
|
|
|
3.85
|
|
|
|
2.86
|
|
Third quarter
|
|
|
4.73
|
|
|
|
2.90
|
|
Fourth quarter
|
|
|
7.95
|
|
|
|
4.40
|
|
2006:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
9.87
|
|
|
$
|
6.14
|
|
As of May 31, 2006, there were 7,090 holders of record of
our common stock.
We have not paid a cash dividend on our common stock since we
became a public company in January 1996 and do not anticipate
paying dividends in the foreseeable future. The terms of our
Credit Agreement restrict us from paying dividends without the
consent of the lenders during the term of the agreement. In
addition, the indentures for our Senior Notes and Senior
Subordinated Notes generally limit dividends paid by us to the
aggregate of 50% of consolidated net income, as defined, earned
after January 1, 1998 and the net proceeds to us from any
stock offerings and the exercise of stock options and warrants.
On October 17, 2005, the Company entered into a consent
agreement with its lenders under its Credit Agreement to permit
the Company to enter into Rights Plan Transactions (as defined).
On October 18, 2005, the Companys Board of Directors
adopted a Stockholder Rights Plan (Rights Plan),
authorized a new class of and issuance of up to
100,000 shares of Series B Junior Participating
Preferred Stock, and declared a dividend of one preferred share
purchase right (the Right) for each share of Common
Stock held of record at the close of business on
October 31, 2005. Each Right, if and when exercisable,
entitles its holder to purchase one one-thousandth of a share of
Series B Junior Participating Preferred Stock at a price of
$13.00 per one one-thousandth of a Preferred Share subject
to certain anti-dilution adjustments.
The Rights Plan provides that the Rights become exercisable only
after a triggering event, including a person or group acquiring
15% or more of the Companys Common Stock. The
Companys Board of Directors is entitled to redeem the
Rights for $0.001 per Right at any time prior to a person
acquiring 15% or more of the outstanding Common Stock.
Should a person or group acquire more than 15% of the
Companys Common Stock, each Right will entitle its holder
to purchase, at the Rights then-current exercise price and
in lieu of receiving shares of preferred stock, a number of
shares of Common Stock of Bally having a market value at that
time of twice the Rights exercise price. In the same
regard, the Rights of the acquiring person or group will become
void and will not be exercisable. If Bally is acquired in a
merger or other business combination transaction not approved by
the Board of Directors, each Right will entitle its holder to
purchase, at the Rights then-current exercise price and in
lieu of receiving shares of preferred stock, a number of the
acquiring companys common shares having a market value at
that time of twice the Rights exercise price.
28
The Rights Plan will terminate on July 15, 2006 unless the
issuance of the Rights is ratified by Company stockholders prior
to that time. We will not seek ratification of the Rights Plan
by the Companys stockholders.
Repurchases
of Common Stock
The Company does not regularly repurchase shares nor does the
Company have a share repurchase program. Furthermore, the terms
of our Credit Agreement generally do not allow us to repurchase
common stock without lender approval. We do not expect to
repurchase any of our common stock in the foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The information required by Item 201(d) of
Regulation S-K
is provided under Item 12 Security
Ownership of Certain Beneficial Owners and
Management Securities Authorized for Issuance
Under Equity Compensation Plans, which is incorporated herein by
reference.
29
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data reflects certain results
of operations and certain balance sheet data for the years ended
2001 to 2005. The data below should be read in conjunction with,
and is qualified by reference to
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and notes thereto included
elsewhere in this report. The financial information presented
may not be indicative of our future performance.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per share,
per member and fitness center data)
|
|
|
Statement of Operations
Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,071,033
|
|
|
$
|
1,047,988
|
|
|
$
|
1,002,871
|
|
|
$
|
937,847
|
|
|
$
|
810,088
|
|
Impairment of goodwill and other
intangibles(3)
|
|
|
1,220
|
|
|
|
405
|
|
|
|
54,505
|
|
|
|
1,619
|
|
|
|
1,801
|
|
Asset impairment charges(4)
|
|
|
10,115
|
|
|
|
14,772
|
|
|
|
19,605
|
|
|
|
18,258
|
|
|
|
26,281
|
|
Operating income (loss)
|
|
|
75,659
|
|
|
|
38,216
|
|
|
|
(38,879
|
)
|
|
|
(33,866
|
)
|
|
|
(26,258
|
)
|
Loss from continuing operations
|
|
|
(9,614
|
)
|
|
|
(30,256
|
)
|
|
|
(102,674
|
)
|
|
|
(94,068
|
)
|
|
|
(92,941
|
)
|
Loss from continuing operations
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share(5)
|
|
$
|
(.28
|
)
|
|
$
|
(.92
|
)
|
|
$
|
(3.14
|
)
|
|
$
|
(2.92
|
)
|
|
$
|
(3.35
|
)
|
Balance Sheet
Data(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
480,094
|
|
|
$
|
502,459
|
|
|
$
|
551,236
|
|
|
$
|
658,172
|
|
|
$
|
637,952
|
|
Long-term debt, less current
maturities
|
|
|
756,304
|
|
|
|
737,432
|
|
|
|
704,678
|
|
|
|
721,933
|
|
|
|
694,695
|
|
Stockholders deficit
|
|
|
(1,463,686
|
)
|
|
|
(1,472,125
|
)
|
|
|
(1,442,957
|
)
|
|
|
(1,336,905
|
)
|
|
|
(1,249,871
|
)
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly membership revenue
recognized per member(6)
|
|
$
|
19.56
|
|
|
$
|
19.03
|
|
|
$
|
18.88
|
|
|
$
|
18.55
|
|
|
$
|
16.55
|
|
Average number of members(6)
|
|
|
3,704
|
|
|
|
3,724
|
|
|
|
3,666
|
|
|
|
3,571
|
|
|
|
3,581
|
|
Number of joining members
during
the period
|
|
|
1,203
|
|
|
|
1,165
|
|
|
|
965
|
|
|
|
935
|
|
|
|
908
|
|
Number of members at end of period
|
|
|
3,610
|
|
|
|
3,675
|
|
|
|
3,647
|
|
|
|
3,568
|
|
|
|
3,574
|
|
Fitness centers open at end of
period
|
|
|
409
|
|
|
|
416
|
|
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417
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410
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405
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(1) |
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The financial data as of December 31, 2005 and 2004 and for
each of the years in the three-year period ended
December 31, 2005 are derived from, and should be read in
conjunction with, the audited consolidated financial statements
of the Company and the notes thereto appearing elsewhere herein.
The financial data as of December 31, 2003 is derived from
audited consolidated financial statements issued in conjunction
with the Annual Report on
Form 10-K
for the year ended December 31, 2004. The financial data as
of December 31, 2002 and 2001 and for the year ended
December 31, 2001 are derived from unaudited consolidated
financial statements not presented separately herein. |
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(2) |
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Certain balance sheet items in 2002 and 2001 have been restated.
See Note 2 of Notes to Consolidated Financial Statements,
Adjustment to Accumulated Deficit as of December 31, 2002. |
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(3) |
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Effective January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). As a
consequence, the Company no longer amortizes goodwill and
intangible assets with indefinite useful lives. See Note 7
of Notes to Consolidated Financial Statements, Goodwill and
Other Intangible Assets. The Company has recorded impairment
adjustments to write down the carrying value of its goodwill
pursuant to the requirements of SFAS No. 142, and
prior to its adoption, pursuant to SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of
(SFAS No. 121). |
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(4) |
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See Note 5 of Notes to Consolidated Financial Statements,
Asset Impairment Charges. |
30
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(5) |
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The Companys basic and diluted earnings per share is
calculated on the following average number of shares
outstanding: 2005 34,624,039;
2004 32,838,811;
2003 32,654,738;
2002 32,163,019; and
2001 27,744,046. |
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(6) |
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Average monthly membership revenue per member represents annual
membership revenue recognized for the year divided by 12,
divided by the average number of members for the period. The
average number of members during the year is derived by dividing
the sum of the total members outstanding at the end of each
quarter in the year by four. Certain prior year membership
amounts have been restated to include contracts in process at
the end of the respective quarter. |
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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The following discussion of the financial condition and results
of operations of Bally should be read in conjunction with
Item 8 Consolidated Financial Statements
and Supplementary Data and Item 1A Risk
Factors.
Executive
Summary of Business
Bally is the largest publicly traded commercial operator of
fitness centers in North America in terms of members, revenues
and square footage of its facilities. As of December 31,
2005, we operated 409 fitness centers collectively serving
approximately 3.610 million members. These 409 fitness
centers occupied a total of 12.6 million square feet.
Our fitness centers are concentrated in major metropolitan areas
in 29 states, the District of Columbia and Canada, with
more than 350 fitness centers located in the top 25 metropolitan
areas in the United States and Canada. As of December 31,
2005, we operated fitness centers in over 45 major metropolitan
areas representing 61% of the United States population and over
16% of the Canadian population. Currently, approximately 50% of
new joining members participate in a membership plan allowing
multiple club access, varying from market to nationwide access
to all like-branded fitness centers. Members electing multiple
center access are required to make larger monthly payments than
those who select a single club membership.
Concentrating our clubs in major metropolitan areas has the
additional benefits of (i) providing our members access to
multiple locations to facilitate achieving their fitness goals;
(ii) strengthening the Bally Total
Fitness®
brand awareness; (iii) leveraging national advertising;
(iv) enabling the Company to develop promotional
partnerships with other national or regional companies; and
(v) more cost effective regional management and control by
leveraging our existing operations in those markets.
Historically, Bally memberships in most markets required a two
or three year commitment from the member with payments comprised
of an initiation fee, interest and monthly dues. Since late
2003, we have expanded these offers to include
month-to-month
membership options that provide greater flexibility to members.
Beginning in late 2004 and through December 2005, we implemented
the Build Your Own Membership
(BYOMsm)
program, which simplifies the enrollment process and enables
members to choose the membership type, amenities and pricing
structure they prefer.
We have three principal sources of revenue:
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1)
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Our primary revenue source is membership services revenue
derived from the operation of our fitness centers. Membership
services revenue includes amounts paid by our members in the
form of membership fees and dues payments. It also includes
revenue generated from provision of personal training services.
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Currently, the majority of our members choose to purchase their
membership under our multi-year value plan by paying an
enrollment fee and by making monthly payments throughout the
obligatory term of their membership. After the obligatory period
of membership, our members enter the non-obligatory renewal
period of membership and make monthly payments (renewal
payments) to maintain membership privileges. Under sales
methods in effect prior to December 2005, renewal payments were
substantially discounted from the obligatory period monthly
payment level. Following the nationwide implementation of our
new BYOM pricing plan, in most markets renewal payments carry a
smaller or no discount from the obligatory period monthly
payment level. Our members may also choose to purchase a prepaid
31
membership for periods up to three years. Members choosing our
month-to-month
membership payment option make
month-to-month
non-obligatory payments after paying an enrollment fee. Ongoing
membership dues for members in renewal periods may be paid
monthly or annually or may be prepaid for multiple future
periods.
Our membership services revenue is generally collected as cash
on a basis that does not conform to its basis of revenue
recognition, resulting in the deferral of significant amounts
received early in the membership period that will be recognized
in later periods. This recognition methodology is a consequence
of our long history of offering membership programs with higher
levels of monthly or total payments during the obligatory period
of membership, generally for periods of up to three years,
followed by discounted payments in the subsequent renewal phase
of membership. Our revenue recognition objective is to recognize
an even amount of membership revenue from our members throughout
their entire term of membership, regardless of the payment
pattern. As a result, we make estimates of membership term
length on a composite group basis of all members joining in a
period and set up separate amortization pools based on estimated
total group membership term length averages. Estimated term
lengths used to create the separate amortization term groups for
revenue recognition are based on historical average membership
terms experienced by our members.
Membership services revenue related to members who maintain
their membership for periods beyond the obligatory term of
membership is deferred as collected and recognized on a
straight-line basis over the estimated term of total membership.
Our historical evaluation of members has resulted in a
determination that approximately 37% of originated monthly
payment revenue from our members is subject to deferral to be
recognized over their entire term of membership. As a result, we
defer all collections received from members in this group, and
recognize as membership service revenue these amounts based on
five amortization pools with amortization periods of
39 months to 245 months, representing composite
average membership terms of between 37 months and
360 months. Membership services revenues that have been
prepaid in their entirety for the obligatory period of
membership are recognized in a similar manner, except that the
estimate of the group expected to remain a member for only the
obligatory period of membership is amortized over the length of
the contract, which is generally 36 months, but varies by
state. Based on the historical attrition patterns of members who
pay their membership in full upon origination, approximately 57%
of such membership revenue relates to members who maintain their
membership beyond the obligatory three-year period of
membership, which is amortized using the same five amortization
pools as described for monthly collections.
We evaluate the actual attrition patterns of all of our deferred
revenue pools on a quarterly basis and make adjustments from our
historical experience to take into account actual attrition by
origination month groups. As we determine that our new estimated
attrition is different than the initial estimate based on
historical patterns, we recognize as a change in accounting
estimate a charge or credit to membership services revenue in
the period of evaluation to cumulatively adjust past recognition
and ending deferred revenue. Under our deferred revenue
methodology, an increase in membership attrition rates will
result in an increase in revenue in the period of adjustment as
it is determined that amounts previously deferred to future
periods of membership no longer need to be deferred.
Alternatively, a decrease in membership attrition rates can
reduce membership services revenue as it is determined that
amounts previously considered earned are required to be deferred
for recognition in future periods.
Our membership mix impacts the amount of cash that we defer for
later recognition as revenue, and the period of time over which
we recognize that revenue. During 2005 we increased our sales of
month-to-month memberships, nonobligatory add-on memberships,
and nonrenewable paid in full contracts. The average deferral
period for these memberships is substantially shorter than the
average deferral period for members that select our multi-year
plans that include memberships with discounted payments in the
renewal phase of membership. As a result of these shorter
deferral periods, cash is recognized as revenue more quickly for
month-to-month, nonobligatory add-on, and nonrenewable paid in
full memberships than for the multi-year plans.
32
Personal training and other services are provided at most of the
Companys fitness centers. Personal training services
contracts are either
paid-in-full
at the point of origination, or are financed and collected
generally over three months after an initial payment.
Collections related to
paid-in-full
personal training services contracts are deferred and recognized
as personal training services are rendered. Revenue related to
personal training services contracts that have been financed is
recognized at the later of cash receipt or the rendering of
personal training services.
Membership services revenue comprised approximately 94% of our
2005 and 93% of our 2004 and 2003 revenue. Membership services
revenue is recognized at the later of when membership services
fees are collected or earned. Membership services fees collected
but not yet earned are included as a deferred revenue liability
on the balance sheet.
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2)
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We generate revenue from the sales of products at our in-fitness
center retail stores including Bally-branded and third-party
nutritional products, juice bar nutritional drinks and
fitness-related convenience products such as clothing. Revenue
from product sales represented approximately 5% of total revenue
in 2005, 2004 and 2003.
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3)
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The balance of our revenue (approximately 1% for 2005 and 2% for
2004 and 2003) primarily consists of franchising revenue,
guest fees and specialty fitness programs. We also generate
revenue through granting concessions in our facilities to
operators offering wellness-related services such as physical
therapy and from sales of Bally-branded products by
third-parties. Revenue from sales of in-club advertising and
sponsorships is also included in this category, which we refer
to as miscellaneous revenue.
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Our operating costs and expenses are comprised of the following:
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1)
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Membership services expenses consist primarily of salaries,
commissions, payroll taxes, benefits, rent, real estate taxes
and other occupancy costs, utilities, repairs and maintenance
and supplies to operate our fitness centers and provide personal
training. Also included are the costs to operate member
processing and collection centers, which provide contract
processing, member relations, billing and collection services.
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2)
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Retail products expenses consist primarily of the cost of
products sold as well as the payroll and related costs of
dedicated retail associates.
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3)
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Advertising expenses consist of our marketing department, media
and production and advertising costs to support fitness center
membership growth as well as the growth of our brand.
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4)
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General and administrative expenses include costs relating to
our centralized support functions, such as information
technology, accounting, treasury, human resources, procurement,
real estate and development and senior management. General and
administrative also includes professional services costs such as
legal, consulting and auditing as well as expenses related to
the various accounting investigations.
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5)
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Impairment of goodwill and other intangibles includes the
write-down of the net book value of these assets pursuant to
SFAS No. 142. Under SFAS No. 142, the
carrying value of our indefinite life intangible assets is
annually evaluated and compared to the fair value of such
assets. Impairments are recorded when we determine that the net
book value of these assets exceeds their fair value.
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6)
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Asset impairment charges include the write-down of the net book
value of our assets (other than indefinite life intangible
assets evaluated under SFAS No. 142) pursuant to
SFAS No. 144. SFAS No. 144, the carrying
value of our assets, primarily property and equipment assets, is
evaluated when circumstances indicate that the carrying value
may have been impaired. Asset impairment charges represent the
excess of the carrying value of the assets over their fair value.
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7)
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Depreciation and amortization represent primarily the
depreciation on our fitness centers, including amortization of
leasehold improvements. Owned buildings and related improvements
are depreciated over 5 to 35 years and leasehold
improvements are amortized on the straight-line method over the
lesser of the estimated useful lives of the improvements, or the
remaining noncancellable lease terms. In addition, equipment and
furnishings are depreciated over 5 to 10 years.
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33
We evaluate the results of our fitness centers on a two-tiered
segment basis (comparable and non-comparable) depending on how
long the fitness centers have been open at the measurement date.
We include a fitness center in comparable fitness center
revenues beginning on the first day of the 13th full
calendar month of the fitness centers operation, prior to
which time we refer to the fitness center as a non-comparable
fitness center and, therefore, an element of noncomparable
revenue.
We measure performance using key operating statistics such as
profitability per club, per area and per region. We also
evaluate average revenue per member and fitness center operating
expenses, with an emphasis on payroll and occupancy costs as a
percentage of sales. We use fitness center cash contribution and
cash revenue to evaluate overall performance and profitability
on an individual fitness center basis. In addition, we focus on
several membership statistics on a fitness center-level and
system-wide basis. These metrics include new membership sales,
growth of fitness center membership base and growth of
system-wide members, fitness center number of workouts per
month, fitness center membership sales mix among various
membership types and membership retention.
Our primary sources of cash are enrollment fees,
paid-in-full
and monthly membership fees and dues payments made by our
members and sales of products and services, primarily personal
training. Because enrollment fees, membership fees and monthly
membership dues are recognized over the later of when such
payments are collected or earned, cash received from membership
fees and monthly membership dues will often be received before
such payments are recognized in the consolidated statement of
operations.
Our primary capital expenditures relate to the construction of
new fitness centers and upgrading and expanding our existing
fitness centers. The construction and equipment costs for a new
fitness center approximates $3.5 million, on average, which
varies based on the costs of construction labor, as well as on
the planned service offerings, size and configuration of the
facility and on the market.
Most of our operating costs are relatively fixed, but
compensation costs, including sales compensation costs, are
variable based on membership origination and personal training
sales trends. Because of the large pool of relatively fixed
operating costs and the minimal incremental cost of carrying
additional members, increased membership origination and better
membership retention lead ultimately to increased profitability.
Accordingly, we are focusing on member acquisition and member
retention as key objectives.
We believe we are well positioned to benefit from continued
growth in club membership, which, according to the IHRSAs
Industry Data Survey of the Health and Fitness Club Industry,
increased 4.8% in 2004. Increased competition, however,
including competition from very small fitness centers (less than
3,000 square feet), will require us to continue to reinvest
in our facilities to remain competitive. Furthermore, price
discounting by competitors, particularly in more competitive
markets, may negatively impact our membership growth
and/or our
average revenue per member. Our principal strategies are to
improve member origination and retention by enhancing customer
service, promoting and improving our products and services and
improving operating efficiencies. We believe the BYOM program
provides a unique opportunity to combine a customized membership
offering with this expanded service philosophy. See
Item 1A Risk
Factors We may not be able to attract or
retain a sufficient number of members to maintain or expand the
business and We are subject to risks associated with
implementation of the new business initiatives.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles and
include accounting policies we believe are appropriate to report
accurately and fairly our operating results and financial
position. We apply those accounting principles and policies in a
consistent manner from
period-to-period.
Our significant accounting policies are summarized in
Note 1 in the Notes to Consolidated Financial Statements.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make judgments, estimates and assumptions at a
specific point in time that affect the reported amounts of
certain assets, liabilities, revenues, and expenses, and related
disclosures of contingent assets and liabilities. We base our
estimates on historical experience and other factors we believe
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and
34
liabilities not readily obtainable from other sources. Actual
results could differ from those estimates. We believe the
following critical accounting policies are impacted
significantly by judgments, estimates and assumptions used in
the preparation of the Consolidated Financial Statements:
Revenue Recognition: The Companys
principal sources of revenue include membership services,
principally health club memberships and personal training
services, and the sale of nutritional products. The Company
recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements, as amended by SEC Staff
Accounting Bulletin No. 104, Revenue
Recognition. As a general principle, revenue is
recognized when the following criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable and
(iv) collectability is reasonably assured. With respect to
health club memberships and personal training, the Company
relies upon a signed contract between the Company and the
customer as the persuasive evidence of a sales arrangement.
Delivery of health club services extends throughout the term of
membership. Delivery of personal training services occurs when
individual personal training sessions have been rendered.
The Company receives membership fees and monthly dues from its
members. Membership fees, which customers often finance, become
customer obligations upon contract execution and after a
cooling off period of three to fifteen calendar days
depending on jurisdiction, while monthly dues become customer
obligations on a
month-to-month
basis as services are provided. Membership fees and monthly dues
are recognized at the later of when collected or earned.
Membership fees and monthly dues collected but not earned are
included in deferred revenue. The majority of members commit to
a membership term of between 12 and 36 months. The majority
of these contracts are
36-month
contracts. Contracts typically include a members right to
renew the membership at a discount compared to the monthly
payments made during the initial contractual term.
Additional members may be added to the primary joining
members contract. These additional members may be added as
obligatory members that commit to the same membership term as
the primary member, or nonobligatory members that can
discontinue their membership at any time.
Membership revenue is earned on a straight-line basis over the
longer of the contractual term or the estimated membership term.
Membership life is estimated at time of contract execution based
on historical trends of actual attrition, and these estimates
are updated quarterly to reflect actual membership retention.
The Companys estimates of membership life were up to
360 months during 2005, 2004, and 2003. As of
December 31, 2005, the weighted average membership life for
members that commit to a membership term of between 12 and
36 months is 39 months. Members with these terms that
finance their initial membership fee have a weighted average
membership life of 37 months, while those members that pay
their membership fee in full at point of sale have a weighted
average membership life of 56 months. Because of the
discount in monthly payments made during the renewal term when
compared to monthly payments made in the initial contractual
term, the estimate of membership term impacts the amount of
revenue deferred in the initial contractual term. Changes in
member behavior, competition, and Company performance may cause
actual attrition to differ significantly from estimated
attrition. A resulting change in estimated attrition may have a
material effect on reported revenues in the period in which the
change of estimate is made.
At December 31, 2005, 2004 and 2003, approximately 61% of
members were in the non-obligatory renewal period of membership.
Renewal members can cancel their membership at any time prior to
their monthly or annual due date. Membership revenue from
members in renewal include monthly dues paid to maintain their
membership, as well as amounts paid during the obligatory period
that have been deferred as described above, to be recognized
over the estimated term of membership, including renewal periods.
Month-to-month
members may cancel their membership prior to their monthly due
date. Membership revenue for these members is earned on a
straight-line basis over the estimated membership life.
Membership life for
month-to-month
members is currently estimated at between 4 and 41 months,
with an average of 15 months.
Paid-in-full
members who purchase nonrenewable memberships must repurchase
the same membership plan to continue membership beyond the
initial contractual term. Such membership fees are deferred and
amortized over the contract term.
35
Personal training and other services are provided at most of the
Companys fitness centers. Revenue related to personal
training services is recognized when the four criteria of
recognition described above are met, which is generally upon
rendering. Personal training services contracts are either
paid-in-full
at the point of origination, or are financed and collected over
periods generally through three months after an initial payment.
Collections of amounts related to
paid-in-full
personal training services contracts, are deferred and
recognized as personal training services are rendered. Revenue
related to personal training contracts that have been financed
is recognized at the later of cash receipt or the rendering of
personal training services.
Sales of nutritional products and other fitness-related products
occur primarily through the Companys in-club retail stores
and are recognized upon delivery to the customer, generally at
point of sale. Revenue recognized in the accompanying
consolidated statement of operations as
miscellaneous includes amounts earned as commissions
in connection with a long-term licensing agreement related to
the third-party sale of Bally branded fitness equipment. Such
amounts are recognized prior to collection based on commission
statements from the licensee. Other amounts included in
miscellaneous revenue are recorded upon receipt and include
franchising fees, facility rental fees, locker fees, late
charges and other marketing fees pursuant to in-club promotion
agreements.
The Company enters into contracts that include a combination of
(i) health club services (which may include two or more
members on a single contract), (ii) personal training
services, and (iii) nutritional products. In these multiple
element arrangements, health club services are typically the
last delivered service. The Company accounts for these
arrangements as single units of accounting because they do not
have objective and reliable evidence of the fair value of health
club services.
In November 2002, the Emerging Issues Task Force
(EITF) issued a final consensus on
Issue 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(Issue 00-21).
In May 2003, the EITF issued additional interpretive guidance
regarding the application of
Issue 00-21.
Issue 00-21,
which provides guidance on how and when to recognize revenues on
arrangements requiring delivery of more than one product or
service, was effective prospectively for arrangements entered
into in fiscal periods beginning after June 15, 2003.
Effective July 1, 2003, the Company adopted
Issue 00-21
on a prospective basis. Under
Issue 00-21,
elements qualify for separation when the services have value on
a stand-alone basis, fair value of the separate elements exists
and, in arrangements that include a general right of refund
relative to the delivered element, performance of the
undelivered element is considered probable and substantially in
the Companys control. As the Company does not have
objective and reliable evidence of the fair value of health club
services and treats these arrangements as single units of
accounting, the adoption of
Issue 00-21
did not have an impact on the Companys financial
statements.
Costs related to acquiring members and delivering membership
services are expensed as incurred.
Self-Insurance Costs: We retain risk related
to workers compensation and general liability claims,
supplemented by individual and aggregate stop-loss limits.
Reported liabilities represent our best estimate, using
generally accepted actuarial reserving methods, of the ultimate
obligations for reported claims plus those incurred, but not
reported, for all claims through December 31, 2005.
Case-reserves are established for reported claims using case
basis evaluation of the underlying claim data and are updated as
information becomes known. The liabilities for workers
compensation claims are accounted for on a present value basis
utilizing a risk-adjusted discount rate. The difference between
the discounted and undiscounted workers compensation
liabilities was $1 million as of December 31, 2005.
The assumptions underlying the ultimate costs of existing claim
losses are subject to a high degree of unpredictability, which
can affect the ultimate liability for such claims. For example,
variability in inflation rates of health care costs inherent in
these claims can affect the amounts realized. Similarly, changes
in legal trends and interpretations, as well as a change in the
nature and method of how claims are settled, can impact ultimate
costs. Although our estimates of liabilities incurred do not
anticipate significant changes in historical trends for these
variables, any changes could affect future claim costs and
currently recorded liabilities.
Valuation of Long-Lived Assets: In accordance
with SFAS No. 144, we monitor the carrying values of
long-lived assets for potential impairment each quarter based on
whether certain trigger events have occurred. These events
include current period losses combined with a history of losses
or a projection of continuing losses or a significant decrease
in the market value of an asset. When a trigger event occurs, an
impairment calculation is
36
performed, comparing projected undiscounted cash flows,
utilizing current cash flow information and expected growth
rates related to specific fitness centers, to the respective
carrying values. If impairment is identified for long-lived
assets to be held and used, we compare discounted future cash
flows to the current carrying values of the related assets. We
record impairment when the carrying values exceed the discounted
cash flows.
The factors most significantly affecting the impairment
calculation are our estimates of future cash flows. Our cash
flow projections carry several years into the future and include
assumptions on variables such as growth in revenues, our cost of
capital, inflation, the economy and market competition. Any
changes in these variables could have an effect upon our
valuation.
We perform impairment reviews at the club level as opposed to a
review on an area or regional level basis. Use of a different
level could produce significantly different results.
Generally, costs to reduce the carrying values of long-lived
assets are reflected in the Consolidated Statements of
Operations as asset impairment charges. These
charges amounted to $10.1 million, $14.8 million and
$19.6 million in 2005, 2004 and 2003, respectively. Changes
may continue to occur as a result of investments in clubs in
turnaround situations.
Valuation of Goodwill: Goodwill is reviewed
for impairment during the fourth quarter of each year on
December 31, and also upon the occurrence of trigger
events. The reviews are performed at a reporting unit level
defined as one level below our operating regions, effectively
the individual markets in which we operate. Generally, estimated
fair value is based on a projection of discounted future cash
flows, and is compared to the carrying value of the reporting
unit for purposes of identifying potential impairment. Projected
future cash flows are based on managements knowledge of
the current operating environment and expectations for the
future. If potential for impairment is identified, the fair
value of an area is measured against the fair value of its
underlying assets and liabilities, excluding goodwill, to
estimate an implied fair value of the areas goodwill.
Goodwill impairment is recognized for any excess of the carrying
value of the areas goodwill over the implied fair value.
These charges amounted to $0 and $42.1 million in 2004 and
2003, respectively. No impairment of goodwill was identified at
December 31, 2005.
The annual impairment review requires the extensive use of
accounting judgment and financial estimates. Application of
alternative assumptions and definitions, such as reviewing
goodwill for impairment at a different organizational level,
could produce significantly different results. Similar to our
policy on impairment of long-lived assets, the cash flow
projections used in our goodwill impairment reviews can be
affected by several items such as inflation, the economy and
market competition, which could have an effect upon these
projections.
Valuation of Intangible Assets: In addition to
goodwill, the Company has recorded intangible assets totaling
$9.4 million for trademarks, $4.7 million for
leasehold rights and $0.3 million for membership relations
at December 31, 2005. Balances at December 31, 2004
were $9.9 million for trademarks, $7.0 million for
leasehold rights and $0.8 million for membership relations.
Leasehold rights are amortized using the straight-line method
over the respective lease periods without regard to any
extension options. We test these assets annually for impairment.
Impairment charges for 2005, 2004 and 2003 amounted to
$1.2 million, $.4 million and $12.4 million,
respectively.
Stock Option Plans: We apply Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in
accounting for our stock option plans. Accordingly, because the
exercise price of the option granted is equal to or greater than
the market value of the underlying stock on the option grant
date, no stock-based compensation expense is included in net
earnings, other than expenses related to restricted stock
awards. Note 1 of the Notes to Consolidated Financial
Statements describes the effect on net earnings if compensation
cost for all options had been determined based on the fair value
at the grant date for awards, consistent with the methodology
prescribed under SFAS No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123).
37
Results
of Operations
The following table sets forth key operating data for the
periods indicated (dollars in thousands except per member data):
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|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
% of Total
|
|
|
December 31,
|
|
|
% of Total
|
|
|
Previous Year
|
|
|
|
2005
|
|
|
Revenue
|
|
|
2004
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Percent
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
$
|
869,302
|
|
|
|
81
|
%
|
|
$
|
850,541
|
|
|
|
81
|
%
|
|
$
|
18,761
|
|
|
|
2
|
%
|
Personal training
|
|
|
134,595
|
|
|
|
13
|
%
|
|
|
125,441
|
|
|
|
12
|
%
|
|
|
9,154
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue
|
|
|
1,003,897
|
|
|
|
94
|
%
|
|
|
975,982
|
|
|
|
93
|
%
|
|
|
27,915
|
|
|
|
3
|
%
|
Retail products
|
|
|
50,685
|
|
|
|
5
|
%
|
|
|
53,340
|
|
|
|
5
|
%
|
|
|
(2,655
|
)
|
|
|
(5
|
)%
|
Miscellaneous
|
|
|
16,451
|
|
|
|
1
|
%
|
|
|
18,666
|
|
|
|
2
|
%
|
|
|
(2,215
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,071,033
|
|
|
|
100
|
%
|
|
|
1,047,988
|
|
|
|
100
|
%
|
|
|
23,045
|
|
|
|
2
|
%
|
OPERATING COSTS AND
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
726,937
|
|
|
|
68
|
%
|
|
|
732,741
|
|
|
|
69
|
%
|
|
|
(5,804
|
)
|
|
|
(1
|
)%
|
Retail products
|
|
|
52,004
|
|
|
|
5
|
%
|
|
|
54,496
|
|
|
|
5
|
%
|
|
|
(2,492
|
)
|
|
|
(5
|
)%
|
Advertising
|
|
|
55,014
|
|
|
|
5
|
%
|
|
|
61,602
|
|
|
|
6
|
%
|
|
|
(6,588
|
)
|
|
|
(11
|
)%
|
Information technology
|
|
|
21,341
|
|
|
|
2
|
%
|
|
|
18,288
|
|
|
|
2
|
%
|
|
|
3,053
|
|
|
|
17
|
%
|
Other general and administrative
|
|
|
66,172
|
|
|
|
6
|
%
|
|
|
57,689
|
|
|
|
6
|
%
|
|
|
8,483
|
|
|
|
15
|
%
|
Impairment of goodwill and other
intangibles
|
|
|
1,220
|
|
|
|
NM
|
|
|
|
405
|
|
|
|
NM
|
|
|
|
815
|
|
|
|
201
|
%
|
Asset impairment charges
|
|
|
10,115
|
|
|
|
1
|
%
|
|
|
14,772
|
|
|
|
1
|
%
|
|
|
(4,657
|
)
|
|
|
(32
|
)%
|
Depreciation and amortization
|
|
|
62,571
|
|
|
|
6
|
%
|
|
|
69,779
|
|
|
|
7
|
%
|
|
|
(7,208
|
)
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
995,374
|
|
|
|
93
|
%
|
|
|
1,009,772
|
|
|
|
96
|
%
|
|
|
(14,398
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
75,659
|
|
|
|
7
|
%
|
|
$
|
38,216
|
|
|
|
4
|
%
|
|
$
|
37,443
|
|
|
|
98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
% of Total
|
|
|
December 31,
|
|
|
% of Total
|
|
|
Previous Year
|
|
|
|
2004
|
|
|
Revenue
|
|
|
2003
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Percent
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
$
|
850,541
|
|
|
|
81
|
%
|
|
$
|
830,511
|
|
|
|
83
|
%
|
|
$
|
20,030
|
|
|
|
2
|
%
|
Personal training
|
|
|
125,441
|
|
|
|
12
|
%
|
|
|
99,355
|
|
|
|
10
|
%
|
|
|
26,086
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue
|
|
|
975,982
|
|
|
|
93
|
%
|
|
|
929,866
|
|
|
|
93
|
%
|
|
|
46,116
|
|
|
|
5
|
%
|
Retail products
|
|
|
53,340
|
|
|
|
5
|
%
|
|
|
55,266
|
|
|
|
5
|
%
|
|
|
(1,926
|
)
|
|
|
(3
|
)%
|
Miscellaneous
|
|
|
18,666
|
|
|
|
2
|
%
|
|
|
17,739
|
|
|
|
2
|
%
|
|
|
927
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,047,988
|
|
|
|
100
|
%
|
|
|
1,002,871
|
|
|
|
100
|
%
|
|
|
45,117
|
|
|
|
4
|
%
|
OPERATING COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
732,741
|
|
|
|
69
|
%
|
|
|
726,231
|
|
|
|
73
|
%
|
|
|
6,510
|
|
|
|
1
|
%
|
Retail products
|
|
|
54,496
|
|
|
|
5
|
%
|
|
|
57,493
|
|
|
|
6
|
%
|
|
|
(2,997
|
)
|
|
|
(5
|
)%
|
Advertising
|
|
|
61,602
|
|
|
|
6
|
%
|
|
|
53,503
|
|
|
|
5
|
%
|
|
|
8,099
|
|
|
|
15
|
%
|
Information technology
|
|
|
18,288
|
|
|
|
2
|
%
|
|
|
12,507
|
|
|
|
1
|
%
|
|
|
5,781
|
|
|
|
46
|
%
|
Other general and administrative
|
|
|
57,689
|
|
|
|
6
|
%
|
|
|
41,139
|
|
|
|
4
|
%
|
|
|
16,550
|
|
|
|
40
|
%
|
Impairment of goodwill and other
intangibles
|
|
|
405
|
|
|
|
NM
|
|
|
|
54,505
|
|
|
|
5
|
%
|
|
|
(54,100
|
)
|
|
|
(99
|
)%
|
Asset impairment charges
|
|
|
14,772
|
|
|
|
1
|
%
|
|
|
19,605
|
|
|
|
2
|
%
|
|
|
(4,833
|
)
|
|
|
(25
|
)%
|
Depreciation and amortization
|
|
|
69,779
|
|
|
|
7
|
%
|
|
|
76,767
|
|
|
|
8
|
%
|
|
|
(6,988
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,009,772
|
|
|
|
96
|
%
|
|
|
1,041,750
|
|
|
|
104
|
%
|
|
|
(31,978
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
38,216
|
|
|
|
4
|
%
|
|
$
|
(38,879
|
)
|
|
|
(4
|
)%
|
|
$
|
77,095
|
|
|
|
198
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Key
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Average monthly membership revenue
recognized per member(1)
|
|
$
|
19.56
|
|
|
$
|
19.03
|
|
|
$
|
18.88
|
|
Average number of members during
the year (000s)(1)
|
|
|
3,704
|
|
|
|
3,724
|
|
|
|
3,666
|
|
Number of joining members during
the year (000s)
|
|
|
1,203
|
|
|
|
1,165
|
|
|
|
965
|
|
Number of members at end of year
(000s)
|
|
|
3,610
|
|
|
|
3,675
|
|
|
|
3,647
|
|
Fitness centers open at end of year
|
|
|
409
|
|
|
|
416
|
|
|
|
417
|
|
|
|
|
(1) |
|
Average monthly membership revenue per member represents annual
membership revenue recognized for the year divided by 12,
divided by the average number of members for the period. The
average number of members during the year is derived by dividing
the sum of the total members outstanding at the end of each
quarter in the year by four. |
Summary
of revenue recognition method
The Companys strategy is to grow the number of members by
continued new member acquisition and improved retention. The
Company also intends to grow its product and services revenue,
as well as personal training.
The Companys sources of membership revenue include health
club memberships and personal training services. As a general
principle, revenue is recognized when the following criteria are
met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable and
(iv) collectability is reasonably assured. The Company
relies upon a signed contract between the Company and the
customer as the persuasive evidence of a sales arrangement.
Delivery of health club services extends throughout the term of
membership. Delivery of personal training services occurs when
individual personal training sessions have been rendered.
The Company receives membership fees and monthly dues from its
members. Membership fees, which customers often finance, become
customer obligations upon contract execution and after a
cooling off period of three to fifteen calendar days
depending on jurisdiction, while monthly dues become customer
obligations on a
month-to-month
basis as services are provided. Membership fees and monthly dues
are recognized at the later of when collected or earned.
Membership fees and monthly dues collected but not earned are
included in deferred revenue. The majority of members commit to
a membership term of between 12 and 36 months. The majority
of these contracts are 36 month contracts. Contracts
generally include a members right to renew the membership
at a discount compared to the payments made during the initial
membership term.
Additional members may be added to the primary joining
members contract. These additional members may be added as
obligatory members that commit to the same membership term as
the primary member, or nonobligatory members that can
discontinue their membership at any time. The percent of add-on
members has increased resulting from the popularity of this
program, representing 26%, 25% and 22% of all members at
December 31, 2005, 2004 and 2003, respectively.
Membership revenue is earned on a straight-line basis over the
longer of the contractual term or the estimated membership term.
Membership life is estimated at time of contract execution based
on historical trends of actual attrition, and these estimates
are updated quarterly to reflect actual membership retention.
The Companys estimates of membership life were up to
360 months during 2005, 2004 and 2003. As of
December 31, 2005, the weighted average membership life for
members that commit to a membership term of between 12 and
36 months is 39 months. Members with these terms that
finance their initial membership fee have a weighted average
membership life of 37 months, while those members that pay
their membership fee in full at point of sale have a weighted
average membership life of 56 months. Because of the
discount in monthly payments made during the renewal term when
compared to payments made in the initial contractual term, the
estimate of membership term impacts the amount of revenue
deferred in the obligatory period.
39
Cash collected for membership revenues is deferred and
recognized on a straight-line basis over periods based on
expected member attrition and cash collection patterns using
historical trends, with the vast majority of membership revenues
being recognized over six years or less. As a result, membership
revenue recognized in the current period is largely attributable
to the amortization of previously deferred cash receipts from
prior periods. Decreasing attrition will result in more cash
collected, but will also result in an increase in the
amortization period. Increasing attrition, on the other hand,
would decrease cash collected but accelerate the recognition of
deferred revenue. We monitor actual retention and cash
collection patterns and record any adjustments necessary to
reflect the impact of changes in such patterns on a quarterly
basis. Revenues recognized during a period reflect cash
collected during prior periods and, to a lesser extent, cash
collected in the current period. As a result, management
considers both the cash collected for membership services as
well as the revenue recognized in evaluating the Companys
results of operations.
Members in the non-obligatory renewal period of membership can
cancel their membership at any time prior to their monthly or
annual due date. Membership revenue from members in renewal
includes monthly dues paid to maintain their membership, as well
as amounts paid during the obligatory period that have been
deferred as described above, to be recognized over the estimated
term of membership, including renewal periods.
Month-to-month
members may cancel their membership prior to their monthly due
date. Membership revenue for these members is earned on a
straight-line basis over the estimated member life. Member life
is currently estimated at between 4 and 41 months, with an
average of 15 months, for
month-to-month
members. Management believes that
month-to-month
memberships have become more appealing to those consumers who
are willing to pay more, and do not want to be locked into a
long-term obligation.
Personal training services are generally provided shortly after
payment is received by the Company, which results in a
relatively low and constant deferred revenue liability balance.
As a result, personal training revenues recognized are
relatively consistent with the level of cash received.
Comparison
of the years ended December 31, 2005 and 2004
Total revenue for the year ended December 31, 2005 was
$1,071.0 million compared to $1,048.0 million in 2004,
an increase of $23.0 million (2%). The increase in total
revenue resulted from the following:
|
|
|
|
|
Membership revenue recognized increased to $869.3 million
from $850.5 million in 2004, an increase of
$18.8 million (2%) from the prior year. The increase in
membership revenue in the current year is the result of a 3%
increase in the average monthly revenue recognized per member.
|
|
|
|
Cash collections of membership revenue during 2005 were
$834.0 million, an increase of $7.9 million (1%) from
2004. This increase is the result of an increase in
paid-in-full
membership fees, advance payments of dues and membership fees,
and monthly payments from
month-to-month
members partially offset by a decrease in payments from financed
members and renewal term monthly dues payments. See Note 11
of Notes to Consolidated Financial Statements, Deferred Revenue.
|
|
|
|
Personal training revenue increased to $134.6 million from
$125.4 million in 2004, an increase of $9.2 million
(7%), primarily reflecting the Companys emphasis on growth
in personal training services.
|
|
|
|
Retail products revenue decreased to $50.7 million from
$53.3 million in 2004, a decrease of $2.6 million
(5%), due primarily to the conversion of 45 lower performing
full size in club retail stores to a more efficient, but lower
sales model integrated with the front desk operation.
|
|
|
|
Miscellaneous revenue decreased to $16.5 million (12%) in
2005 from $18.7 million in 2004, primarily due to a
$1.1 million decrease in sponsorship revenue from income
producing strategic partnerships, a $.6 million decrease in
chiropractic and other clinical services revenue and a
$.5 million reduction in franchise fees.
|
40
Operating costs and expenses for the year ended
December 31, 2005 were $995.4 million compared to
$1,009.8 million during 2004, a decrease of
$14.4 million (1%). This decrease resulted from the
following:
|
|
|
|
|
Membership services expenses for the year ended
December 31, 2005 decreased $5.8 million (1%) from
2004, reflecting a $10.7 million decrease in personnel
costs as a result of the Companys cost reduction
initiatives, partially offset by an $8.5 million increase
in occupancy and insurance costs.
|
|
|
|
Retail products expenses, which include labor costs, for the
year ended December 31, 2005 decreased $2.5 million
(5%) from 2004 as a result of the 5% decrease in retail product
revenue described above. Gross margin on retail products revenue
was 37% and 49% for 2005 and 2004, respectively.
|
|
|
|
Advertising expenses for the year ended December 31, 2005
decreased $6.6 million (11%) from 2004, primarily due to a
planned reduction in media spending (television and radio
advertising) and deferral of production costs in the fourth
quarter of 2005.
|
|
|
|
Information technology expenses for the year ended
December 31, 2005 increased $3.1 million (17%) from
2004 primarily as a result of costs associated with implementing
new business initiatives and improved controls for the Company
and compliance and security enhancements. Information technology
spending for 2005 was approximately 2.0% of total revenues as
compared to 1.7% during 2004.
|
|
|
|
Other general and administrative expenses for the year ended
December 31, 2005 increased $8.5 million (15%),
primarily as a result of $7.9 million in higher
professional services costs such as legal, consulting and
auditing and $3.7 million related to the accelerated
vesting of restricted shares, offset by $7.3 million in
insurance claim proceeds. Expenses in 2005 also include the
impact of a $4.6 million write off of equipment in the
fourth quarter of the year.
|
|
|
|
Impairment charges related to other intangible assets as well as
asset impairment charges for the year ended December 31,
2005 were $3.8 million less than 2004 principally due to
fewer club locations with deteriorating operating performance.
|
|
|
|
Depreciation expense for the year ended December 31, 2005
decreased $7.2 million (10%) from 2004, reflecting fewer
depreciable assets resulting from the Companys fixed asset
impairment charges in 2004 and prior years, along with lower
levels of capital spending.
|
We believe that membership revenue in 2006 will increase (after
adjusting 2005 results for the effects of the sale of Crunch
Fitness) primarily by enrolling new members and improving member
retention as we implement BYOM, our new club staffing model and
other initiatives designed to keep the member focused on fitness
(See
Item 1 Business Business
Strategy). We generally expect changes in variable operating
expenses in 2006 to track the changes in net revenue (also after
adjusting 2005 results for the effects of the sale of Crunch
Fitness). We are in the process of fully rolling out our new
club staffing model to all our clubs, a program we expect to
complete in 2006. Accordingly, expenses expected to be lower
than 2005 levels include payroll and related costs, reflecting
lower staffing levels on average than we experienced in 2005.
Overall, approximately 70% of our expenses (primarily rent,
utilities, maintenance and other occupancy related costs) are
fixed in nature and do not vary with member or revenue levels.
The balance of our expenses are variable and we have
considerable ability to vary both the amount and timing of such
expenses. We have changed the phasing and amount of planned
expenses in the past and will likely do the same in 2006.
Comparison
of the years ended December 31, 2004 and 2003
Total revenue for the year ended December 31, 2004 was
$1,048.0 million compared to $1,002.9 million in 2003,
an increase of $45.1 million (4%). The increase in total
revenue resulted from the following:
|
|
|
|
|
Membership revenue recognized increased to $850.5 million
from $830.5 million in 2003, an increase of
$20 million (2%) from the prior year. Membership revenue in
2003 includes $11 million received as cash proceeds from
the sale of previously charged off obligatory membership
accounts. The increase in membership revenue in 2004 is the
result of a 2% increase in the average number of members to
3.724 million members for 2004.
|
41
|
|
|
|
|
Cash collections of membership revenue during 2004 was
$826.1 million, a decrease of $10.6 million (1%) from
2003. This decrease is primarily the result of $11 million
received in 2003 from the sale of previously charged-off
obligatory membership accounts.
|
|
|
|
Personal training revenue increased to $125.4 million from
$99.4 million in 2003, an increase of $26.1 million
(26%), primarily reflecting the Companys emphasis on and
continued growth in personal training services.
|
|
|
|
Retail products revenue decreased to $53.3 million from
$55.3 million in 2003, a decrease of $1.9 million
(3%), due in part to the elimination of the sale of
ephedra-based products. The direct operating loss from the
retail business decreased to a loss of $1.2 million in 2004
as compared to a loss of $2.2 million in 2003.
|
|
|
|
Miscellaneous revenue increased to $18.7 million (6%) in
2004 from $17.7 million in 2003, primarily due to an
increase in specialty program revenues from our martial arts
program.
|
Operating costs and expenses for the year ended
December 31, 2004 were $1,009.8 million compared to
$1,041.8 million during 2003, a decrease of
$32.0 million (3%). This decrease resulted from the
following:
|
|
|
|
|
Membership services expenses for the year ended
December 31, 2004 increased $6.5 million (1%) from
2003, reflecting increases in occupancy and insurance costs and
in personnel costs largely attributable to the 26% increase in
personal training revenues described above, partially offset by
reductions in operating expenses despite a 21% increase in new
member sign-ups.
|
|
|
|
Retail products expenses, which include labor costs, for the
year ended December 31, 2004 decreased $3.0 million
(5%) from 2003 as a result of the 4% decrease in retail product
revenue described above. Gross margin on retail products revenue
was 49% for both 2004 and 2003.
|
|
|
|
Advertising expenses for the year ended December 31, 2004
increased $8.1 million (15%) from 2003, reflecting
increases in media spending (primarily television and radio
advertising) and consumer research to drive new member
enrollments and to adjust for the impact of inflation on
advertising which had not been increased in the past several
years.
|
|
|
|
Information technology expenses for the year ended
December 31, 2004 increased $5.8 million (46%) from
2003 primarily as a result of costs associated with implementing
improved controls for the Company and compliance and security
enhancements necessary to comply with the Sarbanes-Oxley Act of
2002. Information technology spending for 2004 was approximately
1.7% of total revenues as compared to 1.2% during 2003.
|
|
|
|
Other general and administrative expenses for the year ended
December 31, 2004 increased $16.6 million (40%),
primarily as a result of $8.7 million of costs, net of
insurance proceeds, incurred during 2004 in connection with the
investigations and litigation related to the restatement of the
Companys financial statements and a $2.0 million
increase in insurance costs.
|
|
|
|
Impairment charges related to goodwill and other intangibles as
well as asset impairment charges for the year ended
December 31, 2004 were $58.9 million less than 2003
principally due to charges recorded during 2003 related to the
Crunch business acquired by the Company on December 31,
2001 that did not perform as originally expected.
|
|
|
|
Depreciation expense for the year ended December 31, 2004
decreased $7.0 million (9%) from 2003 reflecting the
relatively high proportion of the Companys facilities that
are in excess of 15 years old, which is the longest period
over which the Company depreciates its leasehold improvements.
|
Financial
Condition
Our consolidated assets of $480.1 million as of
December 31, 2005 reflect a decrease of $22.4 million
from 2004. This decrease was primarily due to a
$38.0 million decrease in property and equipment, resulting
from a
42
decrease in capital expenditures in 2005 of $11.9 million
compared to 2004 and asset impairment charges of
$10.1 million. This decrease was offset in part by:
|
|
|
|
|
an increase in prepaid expenses of $4.9 million, primarily
from prepaid advertising; and
|
|
|
|
an increase in deferred financing costs of $11.7 million
due to the consent solicitation.
|
Liquidity
and Capital Resources
The following table summarizes the Companys liquidity for
2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Change from
|
|
|
|
2005
|
|
|
2004
|
|
|
Previous Year
|
|
|
Cash and equivalents
|
|
$
|
17.5
|
|
|
$
|
19.2
|
|
|
$
|
(1.7
|
)
|
Undrawn revolving credit facility
|
|
|
51.4
|
|
|
|
91.3
|
|
|
|
(39.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity
|
|
$
|
68.9
|
|
|
$
|
110.5
|
|
|
$
|
(41.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Credit Agreement provides for a
$100 million revolving credit facility that expires in June
2008, and a $175 million term loan expiring in October 2009
(the term loan balance was $141 million at June 15,
2006 due to the previously mentioned repayment, pursuant to the
sale of Crunch Fitness). The rate of interest on borrowings
under the revolving credit is equal to the Eurodollar or
reference rate (higher of the prime rate of the federal funds
rate plus 0.50%) plus a margin that varies based on the total
leverage of the Company. The interest on the term loan is equal
to the Eurodollar rate or reference rate plus a fixed margin.
The Credit Agreement is secured by substantially all of the
Companys real and personal property and contains
restrictive covenants that include certain interest coverage and
leverage tests (see subsequent discussion of Debt).
Additionally, the Credit Agreement will terminate early in the
event that the Senior Subordinated Notes have not been repaid or
refinanced on or before April 15, 2007.
There was $35 million borrowed and $13.6 million in
letters of credit issued under the revolving credit facility at
December 31, 2005. The increased borrowing level during
2005 was due in part to payment of a judgment resulting from an
arbitration award against the Company, various consent payments
and other fees to lenders and increased professional fees.
As of December 31, 2005, we were in compliance with all
covenants under the Credit Agreement.
The Company requires operating cash flow to fund its capital
spending and working capital requirements. The Company maintains
a substantial amount of debt, the terms of which require
significant interest payments each year. The Company currently
anticipates that cash flow and availability under the
$100 million revolving credit facility under the Credit
Agreement will be sufficient to meet its expected needs for
working capital and other cash requirements through the first
quarter of 2007. However, our cash flows and liquidity may be
negatively impacted by various items, including changes in terms
or other requirements by vendors, regulatory fines or penalties,
settlements or adverse results in securities or other
litigations, future consent payments to lenders or bondholders
if required and unexpected capital requirements.
The Credit Agreement will terminate if the Senior Subordinated
Notes are not repaid or refinanced on or before April 15,
2007. We do not believe our cash flow and availability under the
$100 million revolving credit facility will be sufficient
to meet our needs in 2007 when the Senior Subordinated Notes
come due. Therefore, we may need to raise additional funds
through private or public debt or equity financings. There is no
assurance that funds will be available to the Company on
favorable terms or at all. If such funds are unavailable to us,
we may default on our Senior Notes, our Senior Subordinated
Notes and our Credit Agreement. In addition, upon a default
under our Credit Agreement, whether directly or as a result of a
cross-default to other indebtedness, we will not be able to draw
on the revolving credit facility and may not be able to continue
to operate our business.
43
Interest
Expense
Interest expense for the year ended December 31, 2005
increased $18.1 million to $85.3 million, principally
due to higher interest rates ($10.9 million) as a result of
the increase in general interest rate levels plus the full year
impact of the replacement of the Companys accounts
receivable securitization with a higher rate term loan, and an
increase in amortization of deferred financing fees
($5.1 million) resulting from the fees paid to obtain the
waiver of financial reporting covenants under certain debt
agreements (see subsequent discussion under Consent
Solicitations).
Interest expense for the year ended December 31, 2004
increased $4.6 million to $67.2 million from the year
ended December 31, 2003, principally due to a higher
average effective interest rate in 2004 resulting from increases
in general interest rate levels and the replacement of the
Companys accounts receivable securitization with a higher
average rate term loan during 2004.
Of our total debt outstanding of $769.3 million at
December 31, 2005, approximately 53% bears interest at
floating rates. This includes the effect of interest rate swap
agreements which effectively convert $200 million of Senior
Subordinated Notes into variable rate obligations. Our interest
expense increased during 2005 as a result of the rising interest
rate environment and will continue to increase if interest rates
continue to rise in 2006. Correspondingly, should rates
decrease, we would benefit from the lower rates. Our interest
expense will be favorably impacted by the $30 million
reduction in our term loan from the application of the proceeds
from the sale of Crunch Fitness. In March and April 2006, we
paid fees to lenders and bondholders that will further increase
amortization of deferred financing costs and interest expense.
Cash
Flows
The following table summarizes the Companys cash flows for
2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Change from Previous
Year
|
|
|
|
2005
|
|
|
2004
|
|
|
Dollars
|
|
|
Percent
|
|
|
Cash provided by operating
activities
|
|
$
|
30.7
|
|
|
$
|
36.1
|
|
|
$
|
(5.4
|
)
|
|
|
(15
|
)%
|
Cash used in investing activities
|
|
|
(36.2
|
)
|
|
|
(50.2
|
)
|
|
|
14.0
|
|
|
|
28
|
%
|
Cash provided by financing
activities
|
|
|
3.4
|
|
|
|
19.2
|
|
|
|
(15.8
|
)
|
|
|
(82
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
(2.1
|
)
|
|
$
|
5.1
|
|
|
$
|
(7.2
|
)
|
|
|
(141
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities of $30.7 million
decreased $5.4 million (15%) in 2005 from 2004. Cash
received from memberships increased $7.9 million, offset by
increased costs including insurance, occupancy costs, audit
fees, professional fees associated with restructuring,
restatements and securities matters and payment of a judgment
resulting from an arbitration award against the Company.
Investing
Activities and Capital Expenditures
Net cash used in investing activities totaled $36.2 million
in 2005 compared to $50.2 million in 2004, a 28% reduction,
due to a decrease in capital expenditures from
$49.7 million in 2004 to $37.9 million in 2005. We
opened a club in Huntington Park, California in March 2005. We
opened a club in Carrollton (Dallas), Texas in April 2006. Three
clubs currently in development are planned for opening in 2006
(two replace existing clubs), four are also planned to open in
2007 (three replace existing clubs) and two during 2008 (both
replace existing clubs). During 2005 we spent approximately
$10 million on new clubs and $25 million to maintain
our existing clubs. During 2006 we expect to spend approximately
$10 million on new clubs and $20-$25 million to
maintain our existing facilities. These expenditures maintain
our clubs at levels needed to attract and retain members.
44
Financing
Activities
Net cash provided by financing activities totaled
$3.4 million in 2005 compared to $19.2 million in
2004. Other than $0.25 million of capital leases, no new
debt was issued during 2005. Debt related financing activities
consisted of borrowings under the revolving credit facility and
repayments of various debt and capital lease obligations. Debt
issuance and refinancing costs of $11.3 million were related
primarily to the fees associated with the consent solicitations,
some of which were funded by the proceeds of $1.4 million
from stock issuances in November 2005 (see subsequent discussion
under Consent Solicitations).
Capital
Requirements and Contractual Obligations
Capital
Requirements
We currently anticipate that future funding needs in the near
term will principally relate to:
|
|
|
|
|
operating expenses relating to our health club facilities;.
|
|
|
|
capital expenditures, particularly for new clubs, maintenance,
equipment, and information technology;
|
|
|
|
interest and scheduled principal payments related to our
debt; and
|
|
|
|
other general corporate expenditures.
|
Future
Contractual Obligations
The following table sets forth our best estimates as to the
amounts and timing of contractual payments for our most
significant contractual obligations as of December 31, 2005
(in millions). The information in the table reflects future
unconditional payments and is based upon, among other things,
the terms of the relevant agreements, appropriate classification
of items under GAAP currently in effect and certain assumptions,
such as future interest rates. Future events, including
refinancing of our securities, could cause actual payments to
differ significantly from these amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Interest(1)
|
|
$
|
229
|
|
|
$
|
75
|
|
|
$
|
104
|
|
|
$
|
25
|
|
|
$
|
25
|
|
Capital leases
|
|
|
9
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
1,113
|
|
|
|
153
|
|
|
|
388
|
|
|
|
99
|
|
|
|
473
|
|
Long-term debt(2)
|
|
|
760
|
|
|
|
10
|
|
|
|
515
|
|
|
|
|
|
|
|
235
|
|
Other long-term liabilities
|
|
|
28
|
|
|
|
4
|
|
|
|
11
|
|
|
|
4
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future contractual
obligations
|
|
$
|
2,139
|
|
|
$
|
247
|
|
|
$
|
1,022
|
|
|
$
|
128
|
|
|
$
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest on the Senior Subordinated Notes and Senior
Notes at the stated fixed rates. Additionally, we entered into
interest rate swap agreements whereby the fixed interest
commitment on $200 million of outstanding principal on the
Senior Subordinated Notes varies based on the LIBOR rate, the
effect of which has been included based on the valuation at
December 31, 2005. The interest rate on the term loan and
the revolving credit facility under the Credit Agreement is
variable, and interest payments are based on the average rate in
effect at December 31, 2005 and the contractual payment
schedule, excluding any additional draw down or repayment on the
revolving credit facility. |
|
(2) |
|
Assumes the Credit Agreement terminates on April 15, 2007,
pursuant to the early termination provision related to the
refinancing of the Senior Subordinated Notes. |
Dividend
and Other Commitments
We have remaining authorization to repurchase up to
820,400 shares of our common stock on the open market from
time to time. The terms of our Credit Agreement generally do not
allow us to repurchase common stock or pay
45
dividends without lender approval. We do not expect to
repurchase any of our common stock in the foreseeable future. We
have not paid any cash dividends on our common stock and do not
anticipate any in the future.
Debt
Credit
Agreement
On October 14, 2004, we entered into a credit agreement
with a group of financial institutions led by JPMorgan Chase
Bank that provides for a five-year $175 million term loan
in addition to the existing $100 million revolving credit
facility that expires in June 2008. The proceeds of the term
loan were used to refinance our $100 million Securitization
Series 2001-1
which was to begin amortizing in November 2004, and to provide
approximately $75 million of additional liquidity for
general corporate purposes. The Credit Agreement is secured by
substantially all of the Companys real and personal
property, including member obligations under installment
contracts. The Credit Agreement contains restrictive covenants
that include certain interest coverage and leverage ratios, and
restrictions on use of funds; additional indebtedness; incurring
liens; certain types of payments (including, without limitation,
capital stock dividends and redemptions, payments on existing
indebtedness and intercompany indebtedness); incurring or
guaranteeing debt; capital expenditures; investments; mergers,
consolidations, sales and acquisitions; transactions with
subsidiaries; conduct of business; sale and leaseback
transactions; incurrence of judgments; changing fiscal year; and
financial reporting, all subject to certain exceptions. The
Credit Agreement will terminate on April 15, 2007 in the
event that the Senior Subordinated Notes have not been
refinanced on or before that date. As provided for in the Credit
Agreement, all of our financial reporting to the lenders,
including for the period ended December 31, 2005, will be
prepared in accordance with U.S. generally accepted
accounting principles. At December 31, 2005 there was
$35 million borrowed and $13.6 million in letters of
credit issued under the revolving credit facility. At
May 31, 2006, there was $39.5 million borrowed and
$14.1 million in letters of credit issued under the
revolving credit facility and the outstanding balance on the
term loan was $143.3 million, reflecting a $30 million
mandatory repayment from the proceeds of the Crunch Fitness sale.
As of December 31, 2004, we believed that we may have
violated certain financial ratios under our Credit Agreement. As
of March 31, 2005, we entered into an amendment to the
Credit Agreement that, among other things, excluded certain
expenses incurred in connection with the SEC and Department of
Justice investigations and other matters from the calculation of
various financial covenants, waived certain events of default
related to, among other things, delivery of financial
information and leasehold mortgages, reduced permitted capital
expenditures, and increased financial reporting requirements. In
connection with the Consent Solicitations (see below), we
entered into amendments and consents with our lenders under the
Credit Agreement effective August 24, 2005 and
March 24, 2006.
Consent
Solicitations
As a result of the Audit Committee investigation into certain
accounting issues and the retention of new independent auditors,
we were unable to timely file our financial statements for the
quarter ending June 30, 2004 with the SEC. Although the
filing delay resulted in defaults of the financial reporting
covenants under the indentures governing our Senior Subordinated
Notes and Senior Notes, it did not become an event of default
until delivery of a notice of default and expiration of a
30-day cure
period. On October 29, 2004, we were advised by the trustee
for both series of notes that it intended to send a notice of
default no later than December 15, 2004 unless we obtained
a waiver or remedied the default by that date. On
December 7, 2004, we completed consent solicitations to
amend the indentures governing the Senior Subordinated Notes and
Senior Notes to waive through July 31, 2005 any default
arising under the financial reporting covenants in the
indentures from a failure to timely file consolidated financial
statements with the SEC. In order to secure the waivers until
July 31, 2005, we paid additional consent fees on
June 3, 2005 and July 6, 2005. The fees paid to
noteholders for these consents were $2.3 million in 2004
and $2.3 million in 2005.
On July 13, 2005, we commenced a consent solicitation to
extend the waivers under the indentures. On August 4 and 5,
2005, we received notices of default under the indentures
following the expiration of the waiver of the financial
reporting covenant defaults on July 31, 2005. The notices
commenced the
30-day cure
period under the indentures and a
10-day
period after which a cross-default would have occurred under our
Credit Agreement.
46
Effective August 9, 2005, our lenders consented to extend
the 10-day
period until August 31, 2005. On August 24 and
August 30, 2005, we received consents from holders of a
majority of the Senior Subordinated Notes and Senior Notes,
respectively, to extend the waivers until November 30,
2005. Effective August 24, 2005, we further amended the
Credit Agreement to permit payment of consent fees to the
holders of the Senior Notes and Senior Subordinated Notes, to
exclude certain additional expenses from the computation of
various financial covenants and to reduce the required interest
coverage ratio for the period ending March 31, 2006 and
limits revolver borrowings under the Credit Agreement if the
Companys unrestricted cash exceeds certain levels. On
November 1, 2005, we completed a consent solicitation of
those holders of our Senior Subordinated Notes who were not
party to the August 24, 2005 consent agreement.
In connection with these consents, we paid $4.9 million in
total fees to the noteholders, issued 1,903,200 shares of
unregistered common stock and recorded $7.4 million in
deferred finance charges. Additionally, we issued
232,000 shares of unregistered common stock to the
solicitation agent as compensation, sold 409,314 shares of
unregistered common stock to the solicitation agent to fund part
of the cash portion of the fees to noteholders, and paid the
lenders under the Credit Agreement $2.9 million for their
consents and amendment.
On March 14, 2006, we announced that we would not meet the
March 16, 2006 deadline for filing our Annual Report on
Form 10-K
for the year ended December 31, 2005 with the SEC. Although
the delay in filing resulted in defaults of the financial
reporting covenants under the indentures governing our Senior
Subordinated Notes and Senior Notes, it did not constitute an
event of default without delivery of a notice of default and
expiration of a
30-day cure
period. A cross-default under our Credit Agreement would have
occurred 10 days after receipt of such notice.
Additionally, a default would also have occurred under the
Credit Agreement if we did not deliver audited financial
statements for the year ended December 31, 2005 to the
lenders thereunder by March 31, 2006.
On March 24, 2006, we announced that we would seek waivers
of the defaults of the financial reporting covenants under the
indentures governing the Senior Subordinated Notes and the
Senior Notes through a consent solicitation, which was commenced
on March 27, 2006. In connection with the consent
solicitation, we entered into agreements with approximately 53%
of the holders of the Senior Subordinated Notes to consent to
the requested waivers.
On March 30, 2006, we entered into the Third Amendment and
Waiver with the lenders under our Credit Agreement that modified
the definition of Consolidated Interest Expense,
modified permitted dispositions, clarified the definition of
Banking Day, extended the time for delivering the
audited financial statements for the year ended
December 31, 2005 and the unaudited financial statements
for the quarter ended March 31, 2006 until July 10,
2006, extended the time for delivering the unaudited financial
statements for the quarter ending June 30, 2006 until
September 11, 2006, with an option to elect to extend until
October 11, 2006, permitted payment of the consent fees to
the holders of the Senior Subordinated Notes and the Senior
Notes and excluded fees and expenses incurred in connection with
the consent solicitation from the computation of financial
covenants.
On April 10, 2006 we completed the consent solicitations to
amend the indentures governing the Senior Subordinated Notes and
the Senior Notes to waive any default arising under the
financial reporting covenants from a failure to timely file
financial statements with the SEC for the year ended
December 31, 2005 and the quarter ended March 31, 2006
through July 10, 2006, and for the quarter ended
June 30, 2006 through September 11, 2006, with an
option to elect to extend through October 11, 2006.
In connection with these consents, we issued
1,956,195 shares of unregistered common stock and paid
$0.8 million in consent fees to the holders of the Senior
Subordinated Notes and the Senior Notes, paid the lenders under
the Credit Agreement $2.5 million in fees and recorded
$22 million in deferred finance charges as of
March 31, 2006. Additionally, on April 11, 2006, the
Company entered into stock purchase agreements (the Stock
Purchase Agreements) to sell 400,000 shares of
unregistered common stock to each of Wattles Capital Management,
LLC and investment funds affiliated with Ramius Capital Group,
L.L.C. Proceeds of $5.6 million from the sales of Common
Stock were used to fund: (i) the cash portion of the
consent fees paid to holders of the Senior Subordinated Notes
and Senior Notes and related expenses; (ii) fees and
expenses relating to the Credit Agreement amendment and waiver;
and (iii) additional working capital.
47
On June 23, 2006, the Company entered into the Fourth
Amendment, which extends the 10 day period to 28 days
after which a cross-default will occur upon receipt of any
financial reporting covenant default notice under the indentures
governing the Senior Subordinated Notes or Senior Notes for the
third quarter of 2006. The Company paid the lenders under the
Credit Agreement fees of $0.5 million in connection with
the Fourth Amendment.
We are in the process of implementing new accounting processes
and technologies designed to shorten the time required to
prepare and file our financial statements. In addition, as
described above, while we have secured additional time to file
our second quarter financial statements with the SEC without
causing a default under the indentures governing the Senior
Notes and the Senior Subordinated Notes, and to file our third
quarter financial statements with the SEC without causing a
cross-default under our Credit Agreement, we cannot assure you
that we will be able to make such filings within the extended
time periods. Failure to do so will lead to further defaults
under the indebtedness and the Credit Agreement and could
require us to seek additional consents from our bondholders and
lenders.
Other
On October 17, 2005, we entered into a consent with the
lenders under our Credit Agreement which permits us to enter
into one or more stockholder rights plans subject to certain
conditions. The Board adopted a stockholder rights plan on
October 18, 2005, which will expire on July 15, 2006.
Other
Secured Debt
As of December 31, 2005, our unrestricted Canadian
subsidiary was not in compliance with the terms of its credit
agreement. As a result, the outstanding amount of
$2.4 million has been classified as current as of such
date. On May 31, 2006 there was $0.8 million
outstanding.
Off-Balance
Sheet Arrangements
The Company does not maintain any off-balance sheet
arrangements, transactions, obligations or other relationships
with unconsolidated entities that would be expected to have a
material current or future effect on the Companys
financial condition or results of operations. Pursuant to the
sale of Crunch Fitness, the Company remained liable on certain
leases
and/or lease
guarantees. See Note 19 of Notes to Consolidated Financial
Statements, Subsequent Events, Sale of Crunch Fitness, for a
discussion of such obligations.
Recently
Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R,
Share Based Payment
(SFAS No. 123R). SFAS No. 123R
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values and eliminates the
alternative method of accounting for employee share-based
payments previously available under Accounting Principles Board
Opinion No. 25 (APB 25). In April 2005,
the FASB delayed the effective date of SFAS No. 123R
to fiscal years beginning after June 15, 2005. As a result,
the Company will adopt SFAS No. 123R on
January 1, 2006. The pro forma disclosures previously
permitted under SFAS No. 123 no longer will be an
alternative to financial statement recognition. The Company will
use the modified prospective method of transition. Based on
estimates, the future compensation cost to be recognized as a
result of the adoption of SFAS No. 123R for fiscal
2006 will be approximately $1.7 million. In addition, for
any new awards that may be granted during fiscal 2006, the
Company will incur additional expense that cannot yet be
quantified.
In March 2005, the SEC issued Staff Accounting Bulletin (SAB)
No. 107, which expresses views of the SEC staff regarding
the interaction between SFAS No. 123R and certain SEC
rules and regulations and provides the staffs views
regarding the valuation of share-based payment arrangements for
public companies. The Company will consider the guidance of this
SAB as it adopts SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS No. 154), which replaced APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statement
(SFAS No. 3). Among other changes,
SFAS No. 154
48
requires retrospective application of a voluntary change in
accounting principle to prior period financial statements
presented on the new accounting principle, unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 also
requires accounting for a change in method of depreciating or
amortizing a long-lived non-financial asset as a change in
accounting estimate (prospectively) affected by a change in
accounting principle. Further, the Statement requires that
corrections of errors in previously issued financial statements
to be termed as a restatement. The new standard is
effective for accounting changes and error corrections made in
fiscal years beginning after December 15, 2005. We do not
expect the adoption of SFAS No. 154 to have a material
impact on our consolidated financial statements.
In October 2005, the FASB issued FASB Staff Position
No. FAS 13-1
(FSP 13-1)
Accounting for Rental Costs Incurred During a
Construction Period, to clarify the proper accounting
for rental costs incurred on building or ground operating leases
during a construction period.
FSP 13-1
requires that rental costs incurred during a construction period
be expensed. The statement is effective for the first reporting
period beginning after December 15, 2005. The adoption of
FSP 13-1
is not expected to have a material impact on the Companys
financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140
(SFAS No. 155). This statement simplifies
accounting for certain hybrid instruments currently governed by
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133), or SFAS No. 155,
by allowing fair value remeasurement of hybrid instruments that
contain an embedded derivative that otherwise would require
bifurcation. This statement also eliminates the guidance in
SFAS No. 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets, which
provides such beneficial interests are not subject to
SFAS No. 133. This statement amends
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a Replacement of FASB Statement
No. 125 (SFAS No. 140) by
eliminating the restriction on passive derivative instruments
that a qualifying special-purpose entity may hold. This
statement is effective for financial instruments acquired or
issued after the beginning of the fiscal year 2007. The Company
does not expect the adoption of this statement to have a
material impact on its financial condition, results of
operations or cash flows.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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We are exposed to market risk from changes in the interest rates
on certain of our outstanding debt. The outstanding loan balance
under our Credit Agreement bears interest at variable rates
based on prevailing short-term interest rates in the United
States and Europe. Based on 2005s average outstanding
balance of these variable rate obligations, a 100 basis
point change in interest rates would have changed interest
expense in 2005 by approximately $1.5 million. In September
2003, we entered into interest rate swap agreements whereby our
fixed interest commitment on $200 million of outstanding
principal on our Senior Subordinated Notes varies based on the
LIBOR rate plus 6.01%. A 100 basis point change in the
interest rate on the portion of the debt subject to the swap
agreement would change interest expense on an annual basis by
$2.0 million. For fixed rate debt, interest rate changes
affect their fair market value, but do not impact earnings or
cash flows. We presently do not use other financial derivative
instruments to manage our interest costs.
We have operations in Canada, which are denominated in local
currency. Accordingly, we are exposed to the risk of future
currency exchange rate fluctuations, which is accounted for as
an adjustment to stockholders equity until realized.
Therefore, changes from reporting period to reporting period in
the exchange rates between the Canadian currency and the
U.S. dollar have had and will continue to have an impact on
the accumulated other comprehensive income (loss) component of
stockholders equity, and such effect may be material in
any individual reporting period. In addition, exchange rate
fluctuation will have an impact on the U.S. dollar value
realized from the settlement of intercompany transactions.
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Item 8.
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Consolidated
Financial Statements and Supplementary Data
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The consolidated financial statements of the Company, including
the notes to all such statements, and other information are
included in this report beginning on
page F-1.
49
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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On March 25, 2004, the Company was notified by
Ernst & Young LLP (E&Y), our principal
accountant, that it had resigned. E&Ys resignation
became effective on May 10, 2004 with the filing of the
Companys Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004. On May 18, 2004,
the Company engaged KPMG LLP (KPMG) as its principal
accountants for the year ending December 31, 2004. The
decision to engage KPMG was made by the Audit Committee of the
Board of Directors. Subsequently, in November 2004, we engaged
KPMG to audit its consolidated financial statements for 2003 and
2002.
During the two years ended December 31, 2003, and through
March 25, 2004, there were no disagreements between us and
E&Y on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to E&Ys
satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with its
report. There were no reportable events as defined in
Item 304(a)(1)(v) of
Regulation S-K.
E&Ys reports on the Companys consolidated
financial statements as originally filed for the years ended
December 31, 2003 and 2002 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty or audit scope.
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Item 9A.
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Controls
and Procedures
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(a)
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Evaluation
of Disclosure Controls and Procedures
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Management of the Company, with the participation of the
principal executive officer and the principal financial officer,
evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act), as of December 31, 2005. Based upon this
evaluation, the principal executive officer and the principal
financial officer have concluded that the Companys
disclosure controls and procedures were not effective as of
December 31, 2005 due to the material weaknesses in
internal control over financial reporting described below
(Item 9A(b)).
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(b)
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Managements
Report on Internal Control Over Financial Reporting
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Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
A material weakness represents a significant deficiency (as
defined in the Public Company Accounting Oversight Boards
Auditing Standard No. 2), or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005 based on the framework published by the
Committee of Sponsoring Organizations of the Treadway
Commission, Internal Control Integrated
Framework. Management has identified the following material
weaknesses in the Companys internal control over financial
reporting as of December 31, 2005:
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1.
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Deficiencies in the Companys control
environment. The Company did not maintain an
effective control environment as defined in the Internal
Control-Integrated Framework published by the Committee of
Sponsoring Organizations of the Treadway Commission.
Specifically, the following control deficiencies were identified:
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The Companys finance and accounting resources were
insufficient in number, insufficiently trained, and authority
and responsibility were not properly delegated as of
December 31, 2005. Accordingly, in certain circumstances,
accounting control activities were not performed consistently,
accurately, and timely, and an effective review of technical
accounting matters was not performed;
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50
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Management did not have acceptable and clearly communicated
policies reflecting an appropriate management attitude towards
financial reporting, and the financial reporting function and
did not have sufficient controls in place to ensure the
appropriate selection of and modifications to accounting
policies;
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The Company did not establish effective polices and procedures
to address the risk of management override in the financial
reporting process; and
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Management did not have effective processes to ensure that
relevant information was communicated in a timely manner from
the Companys regional service center, property management
department, information technology group, human resources, sales
and marketing, and legal department to the Companys
corporate accounting department.
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These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected, and contributed
to the development of other material weaknesses described below.
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2.
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Deficiencies in end-user computing
controls. The Company did not maintain adequate
policies and procedures regarding end-user computing.
Specifically, controls over the access to, and completeness,
accuracy, validity, and review of, certain spreadsheet
information that supports the financial reporting process were
either not designed appropriately or did not operate as designed.
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These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected.
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3.
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Inadequate controls associated with accounting for
revenue. The Company did not maintain effective
policies and procedures related to its accounting for revenue
and did not employ personnel with the appropriate level of
technical knowledge and experience to prepare, document and
review its accounting for revenue to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement membership revenue accounting policies in
accordance with U.S. generally accepted accounting
principles;
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Effectively perform and document a periodic evaluation of the
reasonableness of assumptions with respect to the deferral of
revenue associated with personal training services;
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Establish procedures to identify and periodically assess
promotional offers to ensure that they were accounted for in
accordance with U.S. generally accepted accounting
principles;
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Establish procedures to identify and periodically assess changes
to the Companys principal member offers to ensure that
they were accounted for in accordance with U.S. generally
accepted accounting principles;
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Establish procedures to identify and assess the operational and
accounting support requirements necessary to record the effects
of new member offers on a timely basis in accordance with
U.S. generally accepted accounting principles;
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Establish procedures to identify and periodically assess revenue
collections and member attrition to ensure any changes or
adjustments were accounted for in accordance with
U.S. generally accepted accounting principles; and
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51
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to revenue
recognition were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected.
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4.
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Inadequate controls associated with accounting for fixed
assets. The Company did not maintain effective
policies and procedures related to its accounting for fixed
assets and did not employ personnel with the appropriate level
of knowledge and experience to prepare, document and review its
accounting for fixed assets to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement fixed asset accounting policies in
accordance with U.S. generally accepted accounting
principles;
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Effectively perform and document procedures to periodically
assess the valuation of fixed assets;
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Effectively perform and document controls related to the ongoing
monitoring of events that might require interim impairment
analysis;
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Effectively perform and document procedures to periodically
review the valuation of capitalized costs incurred prior to the
opening of a fitness center;
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Effectively perform and document a review of fixed asset
depreciation;
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Effectively perform and document procedures to review
capitalizable labor costs;
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Effectively reconcile the subsidiary fixed asset ledger to
consolidated fixed asset information; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to fixed assets
were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected.
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5.
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Inadequate controls associated with accounting for goodwill
and other intangible assets. The Company did not
maintain effective policies and procedures related to its
accounting for goodwill and other intangible assets and did not
employ personnel with the appropriate level of knowledge and
experience to prepare, document and review its accounting for
goodwill and other intangible assets to ensure that such
accounting complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement accounting policies in accordance with
U.S. generally accepted accounting principles;
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Effectively identify, and allocate an appropriate portion of the
cost of an acquisition to, identifiable intangible assets in
conjunction with its purchase business combinations;
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Effectively perform and document procedures to periodically
reassess the valuation of goodwill; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to goodwill and
other intangible assets were appropriately understood and
considered.
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52
As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements that were
corrected prior to the issuance of the 2005 consolidated
financial statements. These deficiencies resulted in more than a
remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not
be prevented or detected.
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6.
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Inadequate controls associated with accounting for
leases. The Company did not maintain effective
policies and procedures related to its accounting for leases and
did not employ personnel with the appropriate level of knowledge
and experience to prepare, document and review its accounting
for leases to ensure that such accounting complied with
U.S. generally accepted accounting principles. This lack of
effective policies and procedures and lack of knowledge and
experience contributed to the Companys failure to:
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Perform and document procedures to record rent expense on a
straight-line basis over the lease term, when appropriate, and
to record a related deferred rent obligation, in accordance with
U.S. generally accepted accounting principles;
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Perform and document procedures to ensure that leasehold
improvements were properly depreciated over the lesser of the
economic useful life or the lease term;
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Perform and document procedures to ensure leases were
appropriately accounted for as capital or operating leases;
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Perform procedures to periodically review the accounting for
landlord incentives;
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Design and perform policies and procedures relating to the
identification, valuation, and disclosure of contingent
liabilities related to lease guarantees; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to leases were
appropriately understood and considered.
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As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements that were
corrected prior to the issuance of the 2005 consolidated
financial statements. These deficiencies resulted in more than a
remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not
be prevented or detected.
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7.
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Inadequate controls associated with accounting for accrued
liabilities. The Company did not maintain
effective policies and procedures related to its accounting for
accrued liabilities and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for accrued liabilities to
ensure that such accounting complied with U.S. generally
accepted accounting principles. This lack of effective policies
and procedures and lack of knowledge and experience contributed
to the Companys failure to:
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Effectively perform and document procedures to periodically
evaluate the reasonableness of assumptions used to estimate
liabilities associated with workers compensation, health care,
and other insured arrangements with retained risk;
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Perform and document procedures to periodically evaluate items
that may meet the definition of unclaimed property, in order to
properly value the Companys escheatment liability;
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Perform and document procedures to periodically evaluate
liabilities related to the Companys obligation to former
members to refund member fees in a future period;
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Perform and document a periodic assessment of the Companys
risk sharing obligation associated with its transfers of
obligatory member payments to third parties;
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Effectively perform and document procedures to reconcile
commission and other payroll related liabilities to supporting
detail;
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Effectively perform and document a review of expenses incurred
in one period and paid in subsequent periods to ensure that the
related accounting is reflected in the appropriate
period; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to accrued
liabilities were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected.
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8.
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Inadequate controls associated with accounting for computer
software. The Company did not maintain adequate
policies and procedures or employ sufficiently knowledgeable and
experienced personnel to ensure appropriate application of
Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use. This lack of effective policies and procedures
and lack of knowledge and experience contributed to the
Companys failure to select and implement software
accounting policies in accordance with U.S. generally
accepted accounting principles, and effectively perform and
document procedures to periodically reassess their valuation.
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As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements that were
corrected prior to the issuance of the 2005 consolidated
financial statements. These deficiencies resulted in more than a
remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not
be prevented or detected.
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9.
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Inadequate Information Technology Development and Maintenance
Controls. The Company did not execute its
policies and procedures with respect to program development to
ensure that certain financial reports that impact the
Companys revenue recognition were developed and maintained
appropriately. Specifically, the Company failed to apply its
policies and procedures to ensure effective migration from a
testing environment into a production environment, and as a
result, controls over the access to, and completeness, accuracy
and validity of, these reports either were not designed
appropriately or did not operate as designed.
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These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected.
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10.
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Deficiencies in equity compensation monitoring and review
procedures. The Company did not maintain adequate
policies and procedures over the administration of its equity
compensation programs and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for the equity compensation
programs to ensure that such accounting complied with
U.S. generally accepted accounting principles.
Specifically, the Company did not have:
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Adequate policies and procedures to identify, periodically
assess, and respond to events that give rise to changes in the
rights or obligations of equity compensation holders; and
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Effective policies and procedures to ensure that the financial
reporting and disclosure obligations related to the acceleration
of vesting and the exercise of expired options were
appropriately understood and considered.
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As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements that were
corrected prior to the issuance of the 2005 consolidated
financial statements. These deficiencies resulted in more than a
remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not
be prevented or detected.
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11.
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Inadequate financial statement preparation and review
procedures. The Company did not maintain
effective policies and procedures related to its financial
statement preparation and review procedures and did not employ
personnel with the appropriate level of knowledge and experience
to ensure that accurate
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and reliable interim and annual consolidated financial
statements were prepared and reviewed on a timely basis.
Specifically, the Company did not have:
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Effective reconciliation of significant balance sheet accounts;
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Effective reconciliation of subsidiaries accounts to
consolidating financial information;
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Effective reconciliation and conversion of foreign financial
statements to consolidated financial information;
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Policies and procedures relating to the origination and
maintenance of contemporaneous documentation to support key
judgments made in connection with the selection of significant
accounting policies or the application of judgments within its
financial reporting process;
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Policies and procedures related to the identification and
disclosure of subsequent events;
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Policies and procedures related to the review of complex or
unusual transactions;
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Adequate policies and procedures related to the review and
approval of accounting entries;
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Sufficient retention policies with respect to historical
documentation that formed the basis of prior accounting
judgments that have continuing relevance; and
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|
Effective review of financial statement information, and related
presentation and disclosure requirements.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements,
which were corrected prior to issuance. These deficiencies
resulted in more than a remote likelihood that a material
misstatement of the Companys annual or interim financial
statements would not be prevented or detected.
As a result of the aforementioned material weaknesses,
management has concluded that the Company did not maintain
effective internal control over financial reporting as of
December 31, 2005.
KPMG LLP, the Companys independent registered public
accounting firm, has issued an audit report on managements
assessment of the Companys internal control over financial
reporting, which is included herein (Item 9A(e)).
|
|
(c)
|
Changes
in Internal Control Over Financial Reporting
|
There were no changes in the Companys internal control
over financial reporting that occurred during the fourth quarter
of 2005 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over
financial reporting.
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|
(d)
|
Remediation
Efforts to Address Material Weaknesses in Internal Control Over
Financial Reporting
|
The Company is developing a formal remediation plan and intends
to make notable progress on remediation during 2006 and to
complete the remediation of the majority of these weaknesses by
December 31, 2007. Further, remediation includes the
verification through management testing that the revised control
procedures are operating effectively, which may extend the
remediation timeline if these tests indicate that control
deficiencies remain.
The following are the more significant factors that impacted our
inability to remediate these weaknesses as of December 31,
2005:
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|
|
|
|
The priority assigned to the audit and significant effort
involved in completing the re-audit of the years ending
December 31, 2002 and 2003, and audit of the year ending
December 31, 2004, completed on November 30, 2005;
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The number and severity of the multiple material weaknesses
above, which require dramatic changes in accounting processes,
organization, and systems; and
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The understaffing of our Accounting Department.
|
55
In order to remediate the aforementioned material weaknesses in
internal control over financial reporting and improve the
integrity of financial reporting processes, management has
implemented or is in the process of implementing the following
actions:
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|
|
|
|
During 2005 and 2006, the number of personnel positions and
expenditures for the IT and Accounting Departments were
increased. However, attrition negatively impacted our staffing
level in the Accounting Department. We continue to evaluate
staffing needs and organizational structure in both areas.
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The Company plans to complete its Accounting Policies and
Procedures Manual (the Manual). Although the Manual
was improved during 2005, as of December 31, 2005 the
Manual was neither complete nor approved by the appropriate
senior financial officers.
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The Company plans to establish an accounting training program
and conduct formal performance evaluations of key personnel
during 2006.
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2)
|
Spreadsheets and End-User Computing
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The Company plans to develop policies and procedures regarding
the required controls over spreadsheets and other end-user
applications, including (but not limited to) development, change
control, access control, and record retention.
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|
The Company plans to develop an inventory of spreadsheets and
other end-user applications to help determine the scope and
priority of the necessary remediation.
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|
The Company plans to conduct an evaluation of specific end-user
applications to develop and execute specific remediation plans
necessary to comply with the above policies and procedures.
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The Company plans to further enhance its revenue recognition
methodology, specifically improving the design and operating
effectiveness of certain related controls, including the
reconciliation of the deferred revenue liability balance and
monitoring of actual versus expected collection and attrition
patterns.
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The Company plans to implement on-going monitoring of fixed
assets to identify and assess potential impairment events.
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The Company plans to enhance reconciliation procedures and
analyses related to depreciation and fixed asset accounts, to
ensure accounts are reconciled and analyzed on a timely basis,
the reconciliations are independently reviewed, and any
reconciling items are cleared on timely basis.
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5)
|
Goodwill and Intangible Assets
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The Company intends to conduct a timely review and evaluation of
the goodwill and intangible assets accounting policies and
procedures.
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The Company plans to further enhance the policies and procedures
related to the review and approval of deferred rent obligations.
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The Company plans to further enhance the policies and procedures
related to the review and approval of landlord incentives.
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The Company plans to develop a monitoring program to
periodically review its assumptions with respect to workers
compensation, health care, and general liability risk exposures.
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The Company plans to further enhance the policies and procedures
to identify and value escheatment obligations, including the
identification of escheatable property. The Company engaged a
third party to help value the escheatment obligation.
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The Company plans to further enhance the supporting analyses
regarding obligations to refund certain membership fees in
future periods.
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56
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The Company plans to establish a periodic assessment of its risk
sharing obligations regarding transfers of obligatory membership
payments to third parties.
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The Company plans to enhance the reconciliation of commission
and other payroll-related liabilities to supporting detail.
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The Company plans to further enhance its processes to help
ensure that the review and approval of supporting documentation
regarding capitalized expenses are appropriate.
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Extensive testing of the accuracy and completeness of reporting
generated from key sales systems was completed during 2006.
These reports are key inputs into the Companys deferred
revenue model and revenue recognition process. The Company plans
to enhance its review processes to help ensure that inclusions
and exclusions from these revenue reports are complete and
accurate. The Company plans to assess the degree of automation
feasible for this reporting, which presently requires
substantial manual intervention. Based on this assessment, the
degree to which the procedures currently performed in a test
environment can be migrated to a properly controlled production
environment will then be determined.
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The Company plans to develop a control checklist and additional
review procedures with respect to the equity compensation plans
to ensure that any events under the equity compensation plans
are properly recorded.
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11)
|
Financial Statement Preparation and Review Procedures
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The Company plans to modify its account reconciliation process
to ensure that accounts are reconciled on a timely basis, the
reconciliation is independently reviewed, any reconciling items
are cleared on a timely basis, and the accuracy of the
underlying supporting detail, or sub ledger, has been
substantiated and independently reviewed. Additional resources
will be deployed and work remains to ensure this process is
executed on a consistent and timely basis.
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The Company plans to enhance documentation of assumptions and
computations of critical estimates.
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The Company plans to develop a more formalized process for the
identification of subsequent events and complex or unusual
transactions. The Disclosure Committee and various ongoing
management meetings are presently used to identify and address
such topics.
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The Company plans to improve its review process for standard
journal entries. The Company is developing a process to identify
and review significant post-closing adjustments and any
quarterly or year-end adjustments. Such entries will be
specifically identified and reported to the principal financial
officer and Disclosure Committee for independent review.
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The Company plans to develop a disclosure checklist to help
ensure its disclosure requirements are met.
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The Company plans to complete the financial statements on an
expedited basis, providing additional time for the
Companys senior managers, Disclosure Committee and counsel
to review the financial statements to be included in the
Companys
Forms 10-K
and 10-Q to
help ensure appropriate disclosure.
|
Additionally, in an effort to improve internal control over
financial reporting, the Company is now emphasizing the
importance of establishing the appropriate environment in
relation to accounting, financial reporting, and internal
control over financial reporting. Management plans to formalize
its 2006 remediation plan, including specific executive
sponsorship for key deficiencies to help create and implement
new policies and procedures where material weaknesses or
significant deficiencies exist. The Audit Committee will be
updated at least quarterly on remediation progress, with
additional updates as deemed necessary.
57
It should be noted the Companys management, including the
principal executive officer and the principal financial officer,
do not expect that the Companys internal controls will
necessarily prevent all error and all fraud, even after
completion of the described remediation efforts. A control
system, no matter how well conceived or operated, can provide
only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control
system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of controls. The design of any
system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving our stated
goals under all potential future conditions; over time, controls
may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
58
|
|
(e)
|
Report of
Independent Registered Public Accounting Firm
|
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting (Item 9A(b)), that Bally Total Fitness
Holding Corporation (the Company) did not maintain
effective internal control over financial reporting as of
December 31, 2005, because of the effects of material
weaknesses identified in managements assessment, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Bally Total Fitness Holding Corporations
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment as of December 31, 2005:
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|
1.
|
Deficiencies in the Companys control
environment. The Company did not maintain an
effective control environment as defined in the Internal
Control-Integrated Framework published by the Committee of
Sponsoring Organizations of the Treadway Commission.
Specifically, the following control deficiencies were identified:
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|
The Companys finance and accounting resources were
insufficient in number, insufficiently trained, and authority
and responsibility were not properly delegated as of
December 31, 2005. Accordingly, in certain circumstances,
accounting control activities were not performed consistently,
accurately, and timely, and an effective review of technical
accounting matters was not performed;
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|
|
Management did not have acceptable and clearly communicated
policies reflecting an appropriate management attitude towards
financial reporting, and the financial reporting function and
did not have sufficient controls in place to ensure the
appropriate selection of and modifications to accounting
policies;
|
59
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|
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|
|
The Company did not establish effective polices and procedures
to address the risk of management override in the financial
reporting process; and
|
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|
Management did not have effective processes to ensure that
relevant information was communicated in a timely manner from
the Companys regional service center, property management
department, information technology group, human resources, sales
and marketing, and legal department to the Companys
corporate accounting department.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements.
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected,
and contributed to the development of other material weaknesses
described below.
|
|
|
|
2.
|
Deficiencies in end-user computing
controls. The Company did not maintain adequate
policies and procedures regarding end-user computing.
Specifically, controls over the access to, and completeness,
accuracy, validity, and review of, certain spreadsheet
information that supports the financial reporting process were
either not designed appropriately or did not operate as designed.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements.
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
|
|
|
|
3.
|
Inadequate controls associated with accounting for
revenue. The Company did not maintain effective
policies and procedures related to its accounting for revenue
and did not employ personnel with the appropriate level of
technical knowledge and experience to prepare, document and
review its accounting for revenue to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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|
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|
|
Select and implement membership revenue accounting policies in
accordance with U.S. generally accepted accounting
principles;
|
|
|
|
Effectively perform and document a periodic evaluation of the
reasonableness of assumptions with respect to the deferral of
revenue associated with personal training services;
|
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|
|
Establish procedures to identify and periodically assess
promotional offers to ensure that they were accounted for in
accordance with U.S. generally accepted accounting
principles;
|
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|
Establish procedures to identify and periodically assess changes
to the Companys principal member offers to ensure that
they were accounted for in accordance with U.S. generally
accepted accounting principles;
|
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|
|
Establish procedures to identify and assess the operational and
accounting support requirements necessary to record the effects
of new member offers on a timely basis in accordance with
U.S. generally accepted accounting principles;
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|
Establish procedures to identify and periodically assess revenue
collections and member attrition to ensure any changes or
adjustments were accounted for in accordance with
U.S. generally accepted accounting principles; and
|
|
|
|
Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to revenue
recognition were appropriately understood and considered.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have
60
been restated, and in its preliminary 2005 annual consolidated
financial statements. These deficiencies resulted in more than a
remote likelihood that a material misstatement of the
Companys annual or interim financial statements would not
be prevented or detected.
|
|
|
|
4.
|
Inadequate controls associated with accounting for fixed
assets. The Company did not maintain effective
policies and procedures related to its accounting for fixed
assets and did not employ personnel with the appropriate level
of knowledge and experience to prepare, document and review its
accounting for fixed assets to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
|
|
|
|
|
|
Select and implement fixed asset accounting policies in
accordance with U.S. generally accepted accounting
principles;
|
|
|
|
Effectively perform and document procedures to periodically
assess the valuation of fixed assets;
|
|
|
|
Effectively perform and document controls related to the ongoing
monitoring of events that might require interim impairment
analysis;
|
|
|
|
Effectively perform and document procedures to periodically
review the valuation of capitalized costs incurred prior to the
opening of a fitness center;
|
|
|
|
Effectively perform and document a review of fixed asset
depreciation;
|
|
|
|
Effectively perform and document procedures to review
capitalizable labor costs;
|
|
|
|
Effectively reconcile the subsidiary fixed asset ledger to
consolidated fixed asset information; and
|
|
|
|
Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to fixed assets
were appropriately understood and considered.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements.
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
|
|
|
|
5.
|
Inadequate controls associated with accounting for goodwill
and other intangible assets. The Company did not
maintain effective policies and procedures related to its
accounting for goodwill and other intangible assets and did not
employ personnel with the appropriate level of knowledge and
experience to prepare, document and review its accounting for
goodwill and other intangible assets to ensure that such
accounting complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
|
|
|
|
|
|
Select and implement accounting policies in accordance with
U.S. generally accepted accounting principles;
|
|
|
|
Effectively identify, and allocate an appropriate portion of the
cost of an acquisition to, identifiable intangible assets in
conjunction with its purchase business combinations;
|
|
|
|
Effectively perform and document procedures to periodically
reassess the valuation of goodwill; and
|
|
|
|
Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to goodwill and
other intangible assets were appropriately understood and
considered.
|
As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
|
|
|
|
6.
|
Inadequate controls associated with accounting for
leases. The Company did not maintain effective
policies and procedures related to its accounting for leases and
did not employ personnel with the
|
61
|
|
|
|
|
appropriate level of knowledge and experience to prepare,
document and review its accounting for leases to ensure that
such accounting complied with U.S. generally accepted
accounting principles. This lack of effective policies and
procedures and lack of knowledge and experience contributed to
the Companys failure to:
|
|
|
|
|
|
Perform and document procedures to record rent expense on a
straight-line basis over the lease term, when appropriate, and
to record a related deferred rent obligation, in accordance with
U.S. generally accepted accounting principles;
|
|
|
|
Perform and document procedures to ensure that leasehold
improvements were properly depreciated over the lesser of the
economic useful life or the lease term;
|
|
|
|
Perform and document procedures to ensure leases were
appropriately accounted for as capital or operating leases;
|
|
|
|
Perform procedures to periodically review the accounting for
landlord incentives;
|
|
|
|
Design and perform policies and procedures relating to the
identification, valuation, and disclosure of contingent
liabilities related to lease guarantees; and
|
|
|
|
Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to leases were
appropriately understood and considered.
|
As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
|
|
|
|
7.
|
Inadequate controls associated with accounting for accrued
liabilities. The Company did not maintain
effective policies and procedures related to its accounting for
accrued liabilities and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for accrued liabilities to
ensure that such accounting complied with U.S. generally
accepted accounting principles. This lack of effective policies
and procedures and lack of knowledge and experience contributed
to the Companys failure to:
|
|
|
|
|
|
Effectively perform and document procedures to periodically
evaluate the reasonableness of assumptions used to estimate
liabilities associated with workers compensation, health care,
and other insured arrangements with retained risk;
|
|
|
|
Perform and document procedures to periodically evaluate items
that may meet the definition of unclaimed property, in order to
properly value the Companys escheatment liability;
|
|
|
|
Perform and document procedures to periodically evaluate
liabilities related to the Companys obligation to former
members to refund member fees in a future period;
|
|
|
|
Perform and document a periodic assessment of the Companys
risk sharing obligation associated with its transfers of
obligatory member payments to third parties;
|
|
|
|
Effectively perform and document procedures to reconcile
commission and other payroll related liabilities to supporting
detail;
|
|
|
|
Effectively perform and document a review of expenses incurred
in one period and paid in subsequent periods to ensure that the
related accounting is reflected in the appropriate
period; and
|
|
|
|
Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to accrued
liabilities were appropriately understood and considered.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements.
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
62
|
|
|
|
8.
|
Inadequate controls associated with accounting for computer
software. The Company did not maintain adequate
policies and procedures or employ sufficiently knowledgeable and
experienced personnel to ensure appropriate application of
Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use. This lack of effective policies and procedures
and lack of knowledge and experience contributed to the
Companys failure to select and implement software
accounting policies in accordance with U.S. generally
accepted accounting principles, and effectively perform and
document procedures to periodically reassess their valuation.
|
As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
|
|
|
|
9.
|
Inadequate Information Technology Development and Maintenance
Controls. The Company did not execute its
policies and procedures with respect to program development to
ensure that certain financial reports that impact the
Companys revenue recognition were developed and maintained
appropriately. Specifically, the Company failed to apply its
policies and procedures to ensure effective migration from a
testing environment into a production environment, and as a
result, controls over the access to, and completeness, accuracy
and validity of, these reports either were not designed
appropriately or did not operate as designed.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements.
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
|
|
|
|
10.
|
Deficiencies in equity compensation monitoring and review
procedures. The Company did not maintain adequate
policies and procedures over the administration of its equity
compensation programs and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for the equity compensation
programs to ensure that such accounting complied with
U.S. generally accepted accounting principles.
Specifically, the Company did not have:
|
|
|
|
|
|
Adequate policies and procedures to identify, periodically
assess, and respond to events that give rise to changes in the
rights or obligations of equity compensation holders; and
|
|
|
|
Effective policies and procedures to ensure that the financial
reporting and disclosure obligations related to the acceleration
of vesting and the exercise of expired options were
appropriately understood and considered.
|
As a result of these deficiencies, there were misstatements in
the Companys consolidated financial statements. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
|
|
|
|
11.
|
Inadequate financial statement preparation and review
procedures. The Company did not maintain
effective policies and procedures related to its financial
statement preparation and review procedures and did not employ
personnel with the appropriate level of knowledge and experience
to ensure that accurate and reliable interim and annual
consolidated financial statements were prepared and reviewed on
a timely basis. Specifically, the Company did not have:
|
|
|
|
|
|
Effective reconciliation of significant balance sheet accounts;
|
|
|
|
Effective reconciliation of subsidiaries accounts to
consolidating financial information;
|
|
|
|
Effective reconciliation and conversion of foreign financial
statements to consolidated financial information;
|
|
|
|
Policies and procedures relating to the origination and
maintenance of contemporaneous documentation to support key
judgments made in connection with the selection of significant
accounting policies or the application of judgments within its
financial reporting process;
|
63
|
|
|
|
|
Policies and procedures related to the identification and
disclosure of subsequent events;
|
|
|
|
Policies and procedures related to the review of complex or
unusual transactions;
|
|
|
|
Adequate policies and procedures related to the review and
approval of accounting entries;
|
|
|
|
Sufficient retention policies with respect to historical
documentation that formed the basis of prior accounting
judgments that have continuing relevance; and
|
|
|
|
Effective review of financial statement information, and related
presentation and disclosure requirements.
|
These deficiencies resulted in material misstatements in the
Companys interim consolidated financial statements for the
periods ended March 31, 2005, June 30, 2005, and
September 30, 2005, all of which have been restated, and in
its preliminary 2005 annual consolidated financial statements.
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Bally Total Fitness Holding
Corporation and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of operations,
stockholders equity (deficit) and comprehensive income,
and cash flows for each of the years in the three-year period
ended December 31, 2005. The aforementioned material
weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2005
consolidated financial statements, and this report does not
affect our report dated June 27, 2006, which expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, managements assessment that Bally Total
Fitness Holding Corporation did not maintain effective internal
control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, Bally Total Fitness Holding Corporation has
not maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Chicago, Illinois
June 27, 2006
64
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The name, age and position held of each of the directors and
executive officers of the Company as of May 31, 2006 are
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
Name
|
|
Age
|
|
|
Position with the
Company
|
|
Executive/Director
Since
|
|
Expires
|
|
|
Paul A. Toback
|
|
|
42
|
|
|
Chairman, President, and Chief
Executive Officer
|
|
2003 (Chairman); 2002 (President
and Chief Executive Officer); 1998 (prior positions)
|
|
|
2006
|
|
Julie Adams
|
|
|
60
|
|
|
Senior Vice President, Membership
Services
|
|
2003
|
|
|
|
|
Marc D. Bassewitz
|
|
|
49
|
|
|
Senior Vice President, Secretary
and General Counsel
|
|
2005
|
|
|
|
|
Ronald G. Eidell
|
|
|
62
|
|
|
Senior Vice President, Finance
|
|
2006
|
|
|
|
|
William G. Fanelli
|
|
|
44
|
|
|
Senior Vice President, Planning
and Development
|
|
1997
|
|
|
|
|
Gail J. Holmberg
|
|
|
50
|
|
|
Senior Vice President, Chief
Information Officer
|
|
2006
|
|
|
|
|
Thomas S. Massimino
|
|
|
46
|
|
|
Senior Vice President, Operations
|
|
2006
|
|
|
|
|
James A. McDonald
|
|
|
53
|
|
|
Senior Vice President, Chief
Marketing Officer
|
|
2005
|
|
|
|
|
Harold Morgan
|
|
|
49
|
|
|
Senior Vice President, Chief
Administrative Officer
|
|
1995
|
|
|
|
|
John H. Wildman
|
|
|
46
|
|
|
Senior Vice President, Chief
Operating Officer
|
|
1996
|
|
|
|
|
Charles J. Burdick
|
|
|
54
|
|
|
Director
|
|
2006
|
|
|
2008
|
|
Barry M. Deutsch
|
|
|
43
|
|
|
Director
|
|
2004
|
|
|
2006
|
|
Barry R. Elson
|
|
|
65
|
|
|
Director
|
|
2006
|
|
|
2008
|
|
Don R. Kornstein
|
|
|
54
|
|
|
Director
|
|
2006
|
|
|
2008
|
|
Eric Langshur
|
|
|
42
|
|
|
Director
|
|
2004 to 2006; 2006
|
|
|
2007
|
|
James F. McAnally, M.D.
|
|
|
57
|
|
|
Director
|
|
1995
|
|
|
2007
|
|
John W. Rogers, Jr.
|
|
|
48
|
|
|
Lead Director
|
|
2003
|
|
|
2007
|
|
Steven S. Rogers
|
|
|
48
|
|
|
Director
|
|
2005
|
|
|
2006
|
|
Paul A. Toback was elected Chairman of the Board in May 2003 and
has served as a director since March 2003 and President and
Chief Executive Officer since December 2002. He was Executive
Vice President from February 2002 to December 2002, Chief
Operating Officer from June 2001 to December 2002 and Senior
Vice President, Corporate Development from March 1998 to June
2001. Mr. Toback started with the Company in September
1997. He is an attorney licensed to practice in Illinois.
Julie Adams was elected Senior Vice President, Membership
Services of the Company in February 2003. Ms. Adams was
Vice President of Membership Services from November 1997 to
February 2003.
Marc D. Bassewitz was elected Senior Vice President and General
Counsel of the Company in January 2005. Prior to joining Bally,
Mr. Bassewitz served as outside counsel for the Company in
his position as a partner at Latham & Watkins LLP.
65
Ronald G. Eidell was elected Senior Vice President, Finance in
April 2006. Prior to joining Bally, Mr. Eidell served as
interim President and CEO of NeoPharm, Inc. from March 2005 to
October 2005. Mr. Eidell has been a partner with Tatum LLC,
a national professional services firm, since October 2004. Prior
to that he served as the Chief Financial Officer of each of
Esoterix, Inc., a provider of medical testing services, from
2001-2003,
NovaMed, Inc., a healthcare provider, from
1998-2001,
and Metromail Corporation, a provider of information services,
from
1996-1998.
He also serves as a director of NeoPharm, Inc.
William G. Fanelli was elected Senior Vice President, Planning
and Development of the Company in March 2005. Mr. Fanelli
held the position of Acting Chief Financial Officer from April
2004 to March 2005, was Senior Vice President, Finance from June
2001 to April 2004 and was Senior Vice President, Operations
from November 1997 to June 2001.
Gail Holmberg was elected Senior Vice President, Chief
Information Officer in March 2006. Ms. Holmberg held the
position of Vice President, Chief Information Officer from
February 2003 to March 2006. Prior to joining Bally,
Ms. Holmberg served as Senior Director of Administrative
Systems for Sears, Roebuck and Co. from January 2001 to October
2001.
Thomas S. Massimino was elected Senior Vice President,
Operations of the Company in March 2006. Mr. Massimino held
the position of Vice President, Operations from September 2001
to March 2006.
James A. McDonald was elected Senior Vice President and Chief
Marketing Officer of the Company in May 2005. Prior to joining
Bally, Mr. McDonald most recently served as the Senior Vice
President, Chief Brand Officer of RadioShack, Inc.
Harold Morgan was elected Senior Vice President, Chief
Administration Officer in February 2003. Mr. Morgan held
the position of Senior Vice President Human Resources from
December 1996 to February 2003.
John H. Wildman was elected Senior Vice President and Chief
Operating Officer in December 2002. Mr. Wildman was Senior
Vice President, Sales and Marketing from November 1996 to
December 2002.
Charles J. Burdick has served as a director since February 2006.
Mr. Burdick is a member of the Pardus Capital Management
Advisory Board and a non-executive director of Singer &
Friedlander. Previously, Mr. Burdick was Chief Executive
Officer of HIT Entertainment Plc, a London-based production
company of childrens programming, and Chief Executive
Officer and a director at Telewest Communications Group, Ltd, a
cable company in England, where he earlier also held the post of
Chief Financial Officer.
Barry M. Deutsch has served as a director since May 2004.
Mr. Deutsch is the Chief Financial Officer and Vice
President of Business Development of Ovation Pharmaceuticals,
Inc., a fully-integrated pharmaceutical company focused on
specialty therapeutic areas. Prior to that, Mr. Deutsch
served as Director, Corporate Finance of Prudential Vector
Healthcare Group, a unit of Prudential Securities Incorporated,
where he served as an investment banker specializing in health
care industry transactions. Mr. Deutsch is a Certified
Public Accountant.
Barry R. Elson has served as a director since February 2006.
Mr. Elson was recently Chairman, then Acting Chief
Executive Officer and a director of Telewest Global, Inc., a
provider of entertainment and communication services.
Mr. Elson earlier served as Acting Chief Executive Officer
of Telewest Communications Group, Ltd., prior to that he was the
President of Pilot Associates, a management consulting firm,
Chief Operating Officer of Urban Medial Communications
Corporation, a venture capital-backed communications firm,
President of Conectiv Enterprises, a mid-Atlantic energy
company, and Executive Vice President, Operations for Cox
Communications, Inc. Earlier in his career, Mr. Elson ran
three professional sports organizations, the New York Nets, the
New York Islanders and the Colorado Rockies.
Don R. Kornstein has served as a director since February 2006.
Mr. Kornstein has been a consultant for the past five years
specializing in strategic, financial and management advisory
services. Since 2002, Mr. Kornstein has been the founder
and managing member of Alpine Advisors LLC, which provides
value-enhancing strategic management, operational and financial
consulting services to a wide range of companies with varying
needs. From 2000 until 2001, in his capacity as a consultant,
Mr. Kornstein served as the interim Chief Operating Officer
of First World Communications, Inc., a telecom and internet
company. From 1994 until 2000, Mr. Kornstein served as the
66
Chief Executive Officer, President and a director of Jackpot
Enterprises, Inc., an NYSE-listed company engaged in the gaming
industry. From 1977 until 1994, Mr. Kornstein was an
investment banker with Bear, Stearns & Co. Inc.
Eric Langshur served as a director from December 2004 to
February 7, 2006 and was unanimously reappointed by the
Board of Directors on February 9, 2006. Mr. Langshur
is the Founder and Chief Executive Officer of TLContact, Inc., a
privately held company that delivers innovative patient
communication and education services to the healthcare industry.
James F. McAnally, M.D. has served as a director since December
1995. Dr. McAnally is a private practitioner who
specializes in hypertension and kidney disease.
Dr. McAnally is also the Medical Director of Nephrology
Services at Trinitas Hospital in Elizabeth, New Jersey and a
Clinical Associate Professor of Medicine at Seton Hall
University, School of Graduate Medical Education.
John W. Rogers, Jr. has served as a director since April
2003 and as Lead Director since January 2006. Mr. Rogers is
the Chairman and Chief Executive Officer of Ariel Capital
Management, LLC, a privately held institutional money management
firm and mutual fund company which he founded in 1983. He also
serves as a director of Aon Corporation, Exelon Corporation,
McDonalds Corporation and as a trustee of Ariel Investment
Trust.
Steven S. Rogers has served as a director since December 2005.
Mr. Rogers is a professor of finance and management at the
Kellogg Graduate School of Management at Northwestern
University. He also serves as a director at AMCORE Financial,
Inc., S.C. Johnson & Son, Inc., SUPERVALU, Inc. and
Duquesne Light Holdings, Inc. where he also serves on the
Compensation, Corporate Governance and Finance Committees.
Audit
Committee
The Company has a separately designated audit committee of the
Board established in accordance with the Exchange Act.
Currently, Eric Langshur, Charles J. Burdick and Barry M.
Deutsch serve as members of the Audit Committee. Our Board has
determined that each member of the Audit Committee is
independent, as that term is defined in the Exchange Act, and
that Mr. Deutsch is also an audit committee financial
expert as defined by the SEC.
Contacting
the Board of Directors
Stockholders who wish to communicate with the Board of Directors
may do so by sending written communications to the Board of
Directors at the following address: Board of Directors,
c/o Corporate Secretary, Bally Total Fitness Holding
Corporation, 8700 West Bryn Mawr Avenue, Chicago, Illinois
60631. Stockholders who wish to direct communications to only
the independent directors of Bally may do so by sending written
communications to the independent directors at the following
address: Lead Independent Director, c/o Corporate
Secretary, Bally Total Fitness Holding Corporation,
8700 West Bryn Mawr Avenue, Chicago, Illinois 60631.
Governance
Principles
The Board of Directors Corporate Governance Guidelines,
which include guidelines for determining director independence
and qualifications for directors, are published on the Investor
Information Corporate Governance section of
Ballys website at www.ballyfitness.com. All of
Ballys other corporate governance materials, including the
committee charters and key practices, are also published on the
Investor Information Corporate Governance
section of Ballys website. These materials are also
available in print to any stockholder upon request. The Board
regularly reviews corporate governance developments and modifies
its Corporate Governance Guidelines, committee charters and key
practices as warranted. Any modifications are reflected on
Ballys website.
Director
Independence
The Board of Directors has adopted standards for director
independence for determining whether a director is independent
from management. These standards are based upon the listing
standards of the NYSE and applicable
67
laws and regulations and can be found in the Companys
Corporate Governance Guidelines. The Board of Directors has
affirmatively determined, based on these standards, that all of
the directors are independent, other than Mr. Toback, the
Companys President and Chief Executive Officer, who is not
independent. Accordingly, eight of the nine directors are
independent. The Board has also determined that all Board
standing committees are composed entirely of independent
directors.
Separate
Sessions of Non-management Directors
The Corporate Governance Guidelines of the Company provide for
regular executive sessions of the non-management directors
without management participation. Consistent with the rules of
the New York Stock Exchange, a non-management
director is a director who is not an officer
of the Company within the meaning of
Rule 16a-1(f)
under the Securities Act of 1933, as amended. The independent
directors meet in executive session at least four times
annually, and the Lead Independent Director, currently John W.
Rogers, Jr., presides over such executive sessions.
Code of
Ethics
Our Board has adopted a Code of Business Conduct, Practices and
Ethics (the Code of Ethics) applicable to the
members of our Board and our officers, including our Chief
Executive Officer and Chief Financial Officer. A copy of our
Code of Ethics can be obtained from the Company, without charge,
by written request to the Secretary at the Companys
address and is posted on the Companys website
(www.ballyfitness.com).
Section 16(a)
Beneficial Ownership Reporting Compliance
The Company is required to identify any director, executive
officer or beneficial owner of more than ten percent of the
common stock, or any other person subject to Section 16 of
the Exchange Act, that failed to file on a timely basis, as
disclosed in their forms, reports required by Section 16(a)
of the Exchange Act. Based on a review of forms submitted to us
during 2005, Mr. John W. Rogers, Jr. was late in
filing one of these forms relating to an award of options under
the Companys 1996 Non-Employee Directors Plan. All
other such filing requirements were complied with by our
directors and executive officers.
68
|
|
Item 11.
|
Executive
Compensation
|
Compensation
of Executive Officers
The following table sets forth, for each of the years indicated,
the compensation paid by the Company to our Chief Executive
Officer and the four other most highly compensated executive
officers of Bally (the Named Executive Officers).
During these years, these officers were compensated in
accordance with our plans and policies.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation Awards
|
|
|
|
|
|
|
|
|
|
Annual Compensation
|
|
|
Other Annual
|
|
|
Restricted
|
|
|
Securities
|
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation
|
|
|
Stock Awards
|
|
|
Underlying
|
|
|
Compensation
|
|
|
|
Year
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)
|
|
|
Options (#)
|
|
|
($)(4)
|
|
|
Paul A. Toback
|
|
|
2005
|
|
|
|
575,000
|
|
|
|
900,000
|
|
|
|
874,471
|
|
|
|
1,365,000
|
|
|
|
232,000
|
|
|
|
3,071
|
|
Chairman, President and
|
|
|
2004
|
|
|
|
575,000
|
|
|
|
400,000
|
|
|
|
43,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
2003
|
|
|
|
475,000
|
|
|
|
300,000
|
|
|
|
22,555
|
|
|
|
1,206,000
|
|
|
|
200,000
|
|
|
|
14,915
|
|
Marc D. Bassewitz
|
|
|
2005
|
|
|
|
350,000
|
|
|
|
225,000
|
|
|
|
31,769
|
|
|
|
770,000
|
|
|
|
73,000
|
|
|
|
5,232
|
|
Senior Vice President,
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secretary and
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William G. Fanelli(5)
|
|
|
2005
|
|
|
|
325,000
|
|
|
|
115,000
|
(6)
|
|
|
24,187
|
|
|
|
385,000
|
|
|
|
80,000
|
|
|
|
1,000
|
|
Senior Vice President,
|
|
|
2004
|
|
|
|
325,000
|
|
|
|
200,000
|
(6)
|
|
|
23,291
|
|
|
|
|
|
|
|
|
|
|
|
25,077
|
|
Planning
|
|
|
2003
|
|
|
|
325,000
|
|
|
|
138,125
|
|
|
|
21,474
|
|
|
|
361,800
|
|
|
|
120,000
|
|
|
|
21,500
|
|
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harold Morgan
|
|
|
2005
|
|
|
|
350,000
|
|
|
|
195,000
|
|
|
|
328,078
|
|
|
|
577,500
|
|
|
|
103,000
|
|
|
|
1,000
|
|
Senior Vice President,
|
|
|
2004
|
|
|
|
300,000
|
|
|
|
175,000
|
|
|
|
26,218
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Chief Administrative Officer
|
|
|
2003
|
|
|
|
300,000
|
|
|
|
146,250
|
|
|
|
23,528
|
|
|
|
361,800
|
|
|
|
120,000
|
|
|
|
1,000
|
|
John H. Wildman
|
|
|
2005
|
|
|
|
325,000
|
|
|
|
225,000
|
|
|
|
24,681
|
|
|
|
525,000
|
|
|
|
85,000
|
|
|
|
|
|
Senior Vice President,
|
|
|
2004
|
|
|
|
325,000
|
|
|
|
175,000
|
|
|
|
23,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer
|
|
|
2003
|
|
|
|
325,000
|
|
|
|
138,125
|
|
|
|
21,700
|
|
|
|
361,800
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
(1) |
|
The 2005 bonus represents the bonus earned in 2005 and paid in
March 2006, other than $200,000 of Mr. Tobacks bonus,
which was paid upon the filing of this Annual Report on
Form 10-K.
The 2004 bonus represents the bonus earned in 2004 and paid in
March 2005. The 2003 bonus represents the bonus earned in 2003
and paid in April 2004. |
|
(2) |
|
Other Annual Compensation for 2005 consists of the items set
forth in the table below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Planning;
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Executive
|
|
|
Home Security;
|
|
|
|
Tax
|
|
|
Auto
|
|
|
Medical Plan
|
|
|
Disability
|
|
|
Miscellaneous
|
|
|
|
Reimbursement*
|
|
|
Allowance
|
|
|
Premiums
|
|
|
Insurance
|
|
|
Compensation
|
|
|
Paul A. Toback
|
|
$
|
838,777
|
|
|
$
|
20,000
|
|
|
$
|
6,833
|
|
|
$
|
4,411
|
|
|
|
**
|
|
Marc D. Bassewitz
|
|
|
|
|
|
$
|
17,165
|
|
|
$
|
4,556
|
|
|
$
|
3,130
|
|
|
|
**
|
|
William G. Fanelli
|
|
|
|
|
|
$
|
15,000
|
|
|
$
|
6,833
|
|
|
$
|
2,353
|
|
|
|
**
|
|
Harold Morgan
|
|
$
|
296,641
|
|
|
$
|
17,454
|
|
|
$
|
6,833
|
|
|
$
|
4,481
|
|
|
|
**
|
|
John Wildman
|
|
|
|
|
|
$
|
15,000
|
|
|
$
|
6,833
|
|
|
$
|
2,823
|
|
|
|
**
|
|
|
|
|
|
*
|
The tax reimbursement for Messrs. Toback and Morgan related
to the vesting of restricted stock under the Companys 1996
Long-Term Incentive Plan.
|
|
|
|
|
**
|
Less than $10,000 in aggregate.
|
|
|
|
(3) |
|
This number is calculated by multiplying the closing price of a
Bally common share on the date of grant, net of consideration
paid by the executive, by the number of shares awarded. These
restricted shares were issued in the |
69
|
|
|
|
|
respective recipients name and are held by Bally until the
restrictions lapse. Bally has not paid cash dividends, however,
were we to do so, we would pay dividends on restricted shares at
the same rate paid on all other Bally common shares. The
restrictions on these shares lapse four years after the date of
issuance, upon a change in control (as defined in the 1996 Plan)
of Bally, or the respective recipients death or
termination of employment other than for cause. During 2005, the
acquisitions of Bally common stock by each of Liberation
Investment Group LLC, Liberation Investments, Ltd., Liberation
Investments, L.P. and Emanuel R. Pearlman
(Liberation) and Pardus Capital Management L.P. to
levels in excess of 10% of Ballys outstanding common stock
constituted a change in control under the 1996
Long-Term Incentive Plan and the Inducement Plan, resulting in
the lapse of the restrictions on all shares of restricted stock
issued prior to October, 2005. See
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters Stockholders Who Own at Least 5% of
Bally Common Stock. The restricted stock issued to the Named
Executive Officers on November 29, 2005 continues to be
subject to the restrictions under the 1996 Long-Term Incentive
Plan. |
On December 31, 2005, the Named Executive Officers owned
the number of restricted shares set forth in the table below.
The market value is based on the closing price of a Bally common
share of $6.28 on December 30, 2005, the last trading day
prior to the end of the 2005 fiscal year, less the par value of
$.01 paid by such executives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Toback
|
|
Mr. Bassewitz
|
|
Mr. Fanelli
|
|
Mr. Morgan
|
|
Mr. Wildman
|
|
Number of shares
|
|
|
135,000
|
|
|
|
55,000
|
|
|
|
40,000
|
|
|
|
55,000
|
|
|
|
60,000
|
|
Market value
|
|
$
|
846,450
|
|
|
$
|
344,850
|
|
|
$
|
250,800
|
|
|
$
|
344,850
|
|
|
$
|
376,200
|
|
|
|
|
(4) |
|
Represents (i) amounts matched by Bally in connection with
participation in Ballys savings plans,
and/or
(ii) amounts paid by Bally for executive life insurance
premiums. |
|
(5) |
|
From April 28, 2004 until March 28, 2005, William G.
Fanelli served as Acting Chief Financial Officer. |
|
(6) |
|
Includes a $25,000 bonus for serving as Acting Chief Financial
Officer. |
70
Employment
Agreements
Employment
Agreement with Paul Toback
On August 24, 2004, Bally entered into an employment
agreement with Mr. Toback to provide for him to continue as
Ballys President and Chief Executive Officer through
December 31, 2007. The term of this agreement will be
automatically extended each year for an additional
12 months commencing December 31, 2007, unless either
party provides notice of intent not to renew at least
90 days prior to the then-current termination date. The
agreement provides for an annual base salary of $575,000,
subject to increases at the discretion of Bally, and an annual
incentive target payment of 70% of Mr. Tobacks then
current base salary. This incentive payment shall be based on
performance criteria established by the Board. He is also
eligible for additional perquisites including, a car allowance,
security fees, tax/financial planning, and a tax
gross-up
payment for income taxes relating to the vesting of restricted
stock.
If Mr. Tobacks employment is terminated by the
Company for other than cause and other than within two years
following a change in control, he will be entitled to receive a
lump sum payment equal to (i) the full amount of the annual
bonus for the immediately preceding calendar year if such
termination occurs prior to the payment of the bonus,
(ii) a lump sum equal to two times the sum of
Mr. Tobacks annual salary and target bonus, and
(iii) compensation for any unused earned vacation days. In
addition, his outstanding options and restricted stock will
automatically become fully vested, the exercise period of his
options will continue for the period he otherwise would have
been able to exercise his options if he remained employed and he
will be entitled to continued health coverage for a period equal
to the period he was employed by the Company.
In the event that Mr. Toback terminates his employment for
good reason or the Company terminates his employment for other
than cause within two years following a change in control,
Mr. Toback will be paid (i) the full amount of the
annual bonus for the immediately preceding calendar year if such
termination occurs prior to the payment of the bonus,
(ii) a lump sum equal to three times the sum of
Mr. Tobacks annual salary and target bonus, and
(iii) compensation for any unused earned vacation days. In
addition, his outstanding options and restricted stock will
automatically become fully vested, the exercise period of his
options will continue for the period he otherwise would have
been able to exercise his options if he remained employed. He
will be entitled to continued health coverage for a period equal
to the period he was employed by the Company and he will be
entitled to outplacement services. If it is determined that any
payment, distribution or benefit received by the executive from
the Company pursuant to his agreement or any stock award or
option plan would result in the imposition of excise tax, the
Company will pay the executive an additional amount such that
Mr. Toback will have sufficient funds, after paying all
additional taxes, in order to pay that excise tax. In connection
with the vesting of restricted stock in 2005, the Company made a
tax gross-up
payment to Mr. Toback of $838,777.
In the event Mr. Toback resigns without good reason on or
after July 1, 2005, he will be entitled to receive no less
than 60% of the sum of his annual salary plus target annual
bonus for the then-current calendar year, and may, upon Board
approval, receive payment greater than 60% of the sum of his
annual salary and target annual bonus upon giving ninety
(90) days advance written notice of his resignation
date. If Mr. Tobacks employment terminates on the
expiration date of the agreement, other than for cause, he will
be entitled to receive, one times his annual salary and target
bonus. He is also entitled to receive payment of the full amount
of his annual bonus for the immediately preceding calendar year
if such termination occurs prior to the payment of the bonus,
payment of his unused vacation days and medical benefits for a
period of three years.
Effective as of November 30, 2005, the Company amended the
employment contract with Mr. Toback to (i) include
specific language regarding Company-provided disability
insurance memorializing the Companys standard policy and
(ii) eliminate an exception from the definition of
Change of Control for issuances of equity by the
Company.
Employment
Agreements with Other Senior Executives
Bally has entered into employment agreements with Harold Morgan,
Marc Bassewitz and John Wildman, with terms of January 1,
2005 through December 31, 2007 with respect to
Messrs. Morgan and Bassewitz and January 1, 2006
through December 31, 2008 with respect to Mr. Wildman.
The term of each employment agreement will be
71
automatically extended each year for an additional
12 months on the anniversary date of the respective
termination date unless either party provides notice of intent
not to renew at least ninety (90) days prior to the
then-current termination date. Bally in previous years entered
into an employment agreement with William Fanelli, effective as
of January 1, 2003 for a term of three years through
December 31, 2005. Commencing January 1, 2006, the
term of Mr. Fanellis agreement shall be extended each
day by one day to create a new one year term. At any time at or
after January 1, 2006, Bally or Mr. Fanelli may
deliver notice to the other party that the employment period
shall expire on the last day of the one year period commencing
on the date of delivery of such notice.
The foregoing agreements provide for an annual base salary
($325,000 for Mr. Fanelli; $350,000 for Messrs. Morgan
and Bassewitz; and $375,000 for Mr. Wildman), subject to
increases at the discretion of Bally, and a bonus payable at the
discretion of Bally with a target bonus of 50% of base pay. In
the event of a termination of employment by the executive for
good reason or by the Company for other than cause within two
years following a change in control of Bally, the executive will
be paid (i) the full amount of the annual bonus for the
immediately preceding calendar year if such termination occurs
prior to the payment of the bonus, plus (ii) a lump sum
equal to two times the executives annual salary and target
bonus, plus (iii) compensation for any unused earned
vacation days. If it is determined that any payment,
distribution or benefit received by the executive from the
Company pursuant to his agreement or any stock award or option
plan would result in the imposition of excise tax under
Section 4999 of the Internal Revenue Code, the Company will
pay the executive an additional amount related to the excise
tax. In addition, Mr. Morgan and Mr. Wildman may
voluntarily end their employment within 120 days after
Mr. Toback is no longer the Chief Executive Officer of the
Company and be paid a lump sum equal to no less than 60% of the
sum of annual salary plus target annual bonus for the
then-current calendar year, and may, upon Board approval,
receive payment greater than 60% of the sum of annual salary and
target annual bonus upon giving sixty (60) days
advance written notice of the resignation date. Mr. Morgan
and Mr. Wildman are also entitled to certain tax
gross-up
payments for income taxes relating to the vesting of shares of
restricted stock. In connection with the vesting of restricted
stock in 2005, the Company made a tax
gross-up
payment to Mr. Morgan of $296,641; Mr. Wildmans
contract was not yet effective at the time of such vesting.
Effective as of November 30, 2005, the Company amended the
employment agreements with Messrs. Bassewitz and Morgan to
(i) include specific language regarding Company-provided
disability insurance memorializing the Companys standard
policy and (ii) eliminate an exception from the definition
of Change of Control for issuances of equity by the
Company. Mr. Wildmans employment agreement contains
the same provisions.
Agreement
with Tatum, LLC regarding Ronald G. Eidell
On April 13, 2006, Bally Total Fitness Holding Corporation
(the Company) entered into an interim executive
services agreement with Tatum, LLC (Tatum), pursuant
to which Ronald G. Eidell, a partner of Tatum, LLC, was engaged
as Senior Vice President, Finance of the Company (the
Services Agreement). The Services Agreement provides
that Mr. Eidell will devote efforts to the Company in a
manner that is customary for senior executives of the Company,
for a salary of $38,400 per month (Salary). In
addition, under the Services Agreement the Company will pay
Tatum a fee of $9,600 per month (Fees). The
Company may terminate the Services Agreement on
30 days prior written notice, or immediately for
cause (as defined). Tatum may terminate the Services Agreement
on 60 days prior written notice. In the event that
the Company elects to terminate the Services Agreement prior to
the ninetieth day from the first date of employment, it must pay
an early termination fee such that the sum of the termination
fee and the total Salary and Fees paid shall equal
$2,700 per day worked. The Company has no obligation to
provide Mr. Eidell with any health or medical benefits,
stock or bonus payments or any other benefits, other than
coverage under the Companys existing directors and
officers insurance policies.
Employment
Agreement with former Chief Financial Officer
In March 2005, Bally entered into an employment agreement with
Carl Landeck with a term through March 31, 2008.
Mr. Landecks agreement provided for an annual base
salary of $400,000, subject to increases at the discretion of
Bally, and a bonus payable at the discretion of Bally with a
target bonus of 50% of base pay. Mr. Landeck was guaranteed
a minimum bonus for fiscal 2005 of $100,000. Effective
April 13, 2006, Mr. Landeck ceased being an employee
of the Company. Mr. Landeck and the Company have engaged in
negotiations with respect to what payments may be made to
Mr. Landeck under his employment agreement or as a
severance
72
arrangement, but no agreement has been reached. The Company
expects to record a charge in the second quarter of 2006
reflecting its best estimate of these potential payments to
Mr. Landeck.
Termination
of Payments to Lee Hillman and John Dwyer
Effective December 11, 2002, Lee Hillman resigned as
Chairman and Chief Executive Officer. Effective April 28,
2004, John Dwyer resigned as Executive Vice President, Chief
Financial Officer and Director. In connection with the
resignations of Mr. Hillman and Mr. Dwyer, each of
them entered into a severance agreement with the Company.
Mr. Hillmans agreement provided that he would receive
certain benefits through December 31, 2005.
Mr. Dwyers agreement provided that he would be
available to consult with the Company through December 31,
2005. On February 8, 2005, the Company announced that its
Audit Committee investigation found multiple accounting errors
in the Companys financial statements and concluded that
both Mr. Hillman, as the former Chief Executive Officer and
Director, and Mr. Dwyer, as the former Chief Financial
Officer and Director, were primarily responsible. In addition,
the investigation found, among other things, that certain
accounting policies and positions were suggested and implemented
without a reasonable empirical basis and concluded that
Mr. Dwyer made a false and misleading statement to the SEC.
As a result of these findings, the Company decided to make no
further payments to either Mr. Hillman or Mr. Dwyer
under each of the respective severance agreements. Effective as
of December 7, 2005, Mr. Hillman exercised options
with respect to 150,000 shares of the Companys common
stock.
1996
Long-Term Incentive Plan
In January 1996, the Board of Directors of the Company adopted
the 1996 Long-Term Incentive Plan (the Incentive
Plan). The Incentive Plan provides for the grant of
non-qualified stock options, incentive stock options and
compensatory restricted stock awards (collectively
Awards) to officers and key employees of the
Company. Initially, 2,100,000 shares of common stock were
reserved for issuance under the Incentive Plan.
In November 1997, June 1999, December 2000 and June 2002 the
Incentive Plan was amended to increase the aggregate number of
shares of common stock that may be granted under the Incentive
Plan to an aggregate of 8,600,000 shares. At
December 31, 2005, 283,965 shares of common stock were
available for future grant under the Incentive Plan; no awards
were granted under the Incentive Plan from December 31,
2005 to January 3, 2006. The Incentive Plan expired on
January 3, 2006.
Pursuant to the Incentive Plan, non-qualified stock options were
generally granted with an exercise price equal to the fair
market value of the common stock at the date of grant. Incentive
stock options were granted at not less than the fair market
value of the common stock at the date of grant. Option grants
become exercisable at the discretion of the Compensation
Committee of the Board of Directors (the Compensation
Committee), generally in three equal annual installments
commencing one year from the date of grant. Option grants in
2005, 2004 and 2003 have
10-year
terms.
Effective as of March 8, 2005, the Companys
Compensation Committee approved a grant relating to 2004 of a
total of 395,000 stock options and 245,000 shares of
restricted stock under the Incentive Plan to
Messrs. Toback, Bassewitz, Fanelli, Morgan and Wildman. The
exercise price of the stock options was set at $4.21, a 20%
premium to the closing price of the Companys common stock
on the NYSE at March 7, 2005.
Effective as of November 29, 2005, having not previously
made any grants in respect of 2005, the Companys
Compensation Committee approved the grant of a total of 153,000
stock options and 345,000 shares of restricted stock under
the Incentive Plan to Messrs. Toback, Bassewitz, Fanelli,
Morgan and Wildman. The exercise price of the stock options was
set at $7.01, the closing price of the Companys common
stock on the NYSE at November 28, 2005.
On May 4, 2005, restrictions with respect to
1,320,500 shares of restricted stock lapsed under the terms
of the Incentive Plans change in control provision, which
provides for lapsing restrictions in the event of a change in
control. For these purposes, a change in control is defined as
an Acquiring Person becoming the Beneficial Owner of Shares
representing 10% or more of the combined voting power of the
then outstanding shares other than in a transaction or series of
transactions approved by the Companys Board of Directors.
The acquisition on May 4, 2005
73
of the Companys Common Stock by Liberation Investment
Group LLC, Liberation Investments, Ltd., Liberation Investments,
L.P. and Emanuel R. Pearlman constituted such a change in
control. Accordingly, restrictions with respect to
808,000 shares of restricted stock subject to four-year
cliff vesting conditions and 512,500 shares of restricted
stock subject to certain performance-based conditions lapsed.
Existing employment agreements with certain executives contain
tax consequence
gross-up
provisions, which resulted in $976,669 of compensation reported
as general and administrative expense in the three-months ended
June 30, 2005.
Inducement
Award Equity Incentive Plan
On March 8, 2005, the Companys Compensation Committee
adopted an Inducement Award Equity Incentive Plan (the
Inducement Plan) as a means of providing equity
compensation to induce the acceptance and continuation of
employment of newly hired officers and key employees of the
Company and its Affiliates. The Company adopted the Inducement
Plan because of the 1996 Long-Term Incentive Plans
potential lack of sufficient shares available to provide
necessary equity inducement for new employees. Stockholder
approval of the Inducement Plan is not required under the rules
of the NYSE. At December 31, 2005, 62,000 shares of
common stock were available for future grant under the
Inducement Plan. On March 3, 2006, 7,500 options were
granted to new employees of the Company. On May 25, 2006,
12,000 options were granted to new employees of the Company.
Currently, 42,500 shares of common stock are available for
future grant under the Inducement Plan.
Effective as of March 8, 2005, the Companys
Compensation Committee approved a grant of a total of 25,000
stock options and 100,000 shares of restricted stock under
the Inducement Plan to Mr. Bassewitz. The exercise price of
the stock options was set at $3.51, the closing price of the
Companys common stock on the NYSE at March 7, 2005.
Effective as of May 26, 2005, the Companys
Compensation Committee approved a grant of a total of 75,000
stock options and 100,000 shares of restricted stock under
the Inducement Plan to Mr. Landeck. The exercise price of
the stock options was set at $2.91, the closing price of the
Companys common stock on the NYSE at May 25, 2005.
Effective as of November 29, 2005, in accordance with the
terms of the relevant employment agreement, the Companys
Compensation Committee approved the grant of a total of 23,000
stock options and 55,000 shares of restricted stock under
the Inducement Plan to Mr. Landeck. The exercise price of
the stock options was set at $7.01, the closing price of the
Companys common stock on the NYSE at November 28,
2005.
Under the Inducement Plan, the Company (with the approval of the
Board of Directors, the Compensation Committee
and/or their
delegates, hereinafter Administrator) may grant
common stock as a material inducement to eligible employees,
either from time to time in the discretion of the Administrator
or automatically upon the occurrence of specified events. The
Administrator in its sole discretion determines whether an award
may be granted, the number of shares of common stock awarded,
the date an award may be exercised, vesting periods, and
exercise price.
The Inducement Plan became effective upon its adoption and
continues for a
10-year term
ending March 8, 2015. The Inducement Plan provides for the
issuance of up to 600,000 shares of the Companys
common stock, and as of December 31, 2005, 385,000
restricted shares and stock options covering an additional
153,000 shares have been granted. The restrictions
applicable to 330,000 of these restricted shares lapsed in May
and September 2005 under the terms of the Plans change in
control provision, which provides for lapsing in the event of a
change in control. For these purposes, a change in control was
defined as an Acquiring Person becoming the Beneficial Owner of
Shares representing 10% or more of the combined voting power of
the then-outstanding shares other than in a transaction or
series of transactions approved by the Companys Board of
Directors. The acquisition on May 4, 2005 of the
Companys Common Stock by Liberation Investment Group LLC,
Liberation Investments, Ltd., Liberation Investments, L.P. and
Emanuel R. Pearlman and on September 6, 2005 by Pardus
Capital Management L.P. constituted such a change in control.
74
Annual
Incentive Compensation for Fiscal Year 2005
The Company provides annual cash incentive compensation (the
Cash Bonus) for executive officers and other
employees in accordance with the established methodologies
approved by the Compensation Committee. The purpose of the Cash
Bonus is to provide an additional performance incentive for
certain senior executive and other key employees of Bally (the
Participants), as determined by the Compensation
Committee and based upon the recommendation of Ballys
management.
Each Participant has an annual target Cash Bonus amount that is
a percentage of his or her base salary. For 2005, the
Compensation Committee set target Cash Bonus levels consistent
with prior years at 70% of base salary for the CEO and 50% of
base salary for all other named executive officers. A portion of
the Cash Bonus is calculated by reference to the Companys
EBITDA with respect to fifty percent of the target Cash Bonus,
while the remainder is based on achievement of personal
performance goals, in each case based on target percentages and
determined by the Compensation Committee in its discretion. The
actual Cash Bonus payments may exceed the target Cash Bonus
level, depending on the level of achievement versus the
established goals. In determining 2005 bonuses, the Compensation
Committee increased the personal performance percentages above
the maximum of 150% for three of the named executive officers,
including the Chief Executive Officer, to levels ranging from
180% to 372%. The Company paid the following Cash Bonuses for
2005 under the plan: $700,000 to Mr. Toback (plus an
additional $200,000 payable upon filing of this report);
$225,000 to Mr. Bassewitz; $90,000 to Mr. Fanelli;
$195,000 to Mr. Morgan; and $225,000 to Mr. Wildman.
The Cash Bonuses were awarded on March 8, 2006.
Stock
Option Grants
The following table sets forth certain information concerning
grants of stock options during 2005 to each of the Named
Executive Officers. No stock appreciation rights were granted by
Bally.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Percent of Total
|
|
|
|
|
|
|
|
|
Potential Realizable Value at
Assumed Annual
|
|
|
|
Underlying
|
|
|
Options Granted
|
|
|
Exercise or
|
|
|
|
|
|
Rates of Stock Price
Appreciation for
|
|
|
|
Options
|
|
|
to Employees in
|
|
|
Base Price
|
|
|
|
|
|
Options Term
|
|
Name
|
|
Granted (#)
|
|
|
Fiscal Year
|
|
|
($/Sh)
|
|
|
Expiration Date
|
|
|
5% ($)
|
|
|
10% ($)
|
|
|
Paul A. Toback
|
|
|
170,000
|
|
|
|
15.25
|
%
|
|
|
4.21
|
|
|
|
3/8/2015
|
|
|
|
256,261
|
|
|
|
831,986
|
|
|
|
|
62,000
|
|
|
|
5.56
|
%
|
|
|
7.01
|
|
|
|
11/29/2015
|
|
|
|
273,330
|
|
|
|
692,672
|
|
Marc D. Bassewitz
|
|
|
25,000
|
|
|
|
2.24
|
%
|
|
|
4.21
|
|
|
|
3/8/2015
|
|
|
|
37,686
|
|
|
|
122,351
|
|
|
|
|
25,000
|
|
|
|
2.24
|
%
|
|
|
3.51
|
|
|
|
3/8/2015
|
|
|
|
55,186
|
|
|
|
139,851
|
|
|
|
|
23,000
|
|
|
|
2.06
|
%
|
|
|
7.01
|
|
|
|
11/29/2015
|
|
|
|
101,397
|
|
|
|
256,959
|
|
William G. Fanelli
|
|
|
60,000
|
|
|
|
5.38
|
%
|
|
|
4.21
|
|
|
|
3/8/2015
|
|
|
|
90,445
|
|
|
|
293,642
|
|
|
|
|
20,000
|
|
|
|
1.79
|
%
|
|
|
7.01
|
|
|
|
11/29/2015
|
|
|
|
88,171
|
|
|
|
223,443
|
|
Harold Morgan
|
|
|
80,000
|
|
|
|
7.18
|
%
|
|
|
4.21
|
|
|
|
3/8/2015
|
|
|
|
120,594
|
|
|
|
391,523
|
|
|
|
|
23,000
|
|
|
|
2.06
|
%
|
|
|
7.01
|
|
|
|
11/29/2015
|
|
|
|
101,397
|
|
|
|
256,959
|
|
John H. Wildman
|
|
|
60,000
|
|
|
|
5.38
|
%
|
|
|
4.21
|
|
|
|
3/8/2015
|
|
|
|
90,445
|
|
|
|
293,642
|
|
|
|
|
25,000
|
|
|
|
2.24
|
%
|
|
|
7.01
|
|
|
|
11/29/2015
|
|
|
|
110,214
|
|
|
|
279,303
|
|
75
Stock
Option Exercises
The following table sets forth certain information concerning
exercises of stock options during 2005 by each of the Named
Executive Officers and their stock options outstanding as of
December 31, 2005.
Aggregated
Option Exercises in Last Fiscal Year and Option Values at End of
Last Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
|
|
|
|
|
|
Underlying Unexercised
|
|
|
In-the-Money
|
|
|
|
Shares
|
|
|
|
|
|
Options at
|
|
|
Options at
|
|
|
|
Acquired on
|
|
|
Value
|
|
|
December 31, 2005
|
|
|
December 31,
2005(1)
|
|
|
|
Exercise
|
|
|
Realized
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
($)
|
|
|
($)
|
|
|
Paul A. Toback
|
|
|
0
|
|
|
|
0
|
|
|
|
253,334
|
|
|
|
298,666
|
|
|
|
16,000
|
|
|
|
359,890
|
|
Marc D. Bassewitz
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
73,000
|
|
|
|
|
|
|
|
121,000
|
|
William G. Fanelli
|
|
|
25,000
|
|
|
|
48,319
|
|
|
|
190,000
|
|
|
|
120,000
|
|
|
|
7,200
|
|
|
|
129,000
|
|
Harold Morgan
|
|
|
36,000
|
|
|
|
99,243
|
|
|
|
159,000
|
|
|
|
143,000
|
|
|
|
9,360
|
|
|
|
170,400
|
|
John H. Wildman
|
|
|
35,000
|
|
|
|
85,730
|
|
|
|
170,000
|
|
|
|
125,000
|
|
|
|
9,600
|
|
|
|
129,000
|
|
|
|
|
(1) |
|
Based on the closing price of common stock on the New York Stock
Exchange on December 30, 2005, which was $6.28 per
share. |
Compensation
of Directors
In 2005, members of the Board who were also employees of Bally
did not receive any additional compensation for service on the
Board or any committees of the Board. Members of the Board who
were not employees of Bally received an annual retainer of
$30,000, a special retainer for the 2005 fiscal year of $50,000,
a $2,000 stipend for each Board meeting attended and $1,000 for
each committee meeting attended (providing such committee
meeting was not scheduled in conjunction with a Board meeting).
Non-employee directors also received additional stipends for
service on committees of the Board of $1,000 per year for
committee members or $7,500 per year for committee chairman
other than the Chairman of the Audit Committee, who receives
$25,000 per year. The Board met thirty-four times in 2005.
In addition, the Company was unable to issue the equity
compensation awarded to the directors, effective upon the filing
of the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, as the 2006
Omnibus Equity Compensation Plan was not approved by the
Companys stockholders at its January 26, 2006 Annual
Meeting. Accordingly, on March 10, 2006, the Board of
Directors approved an additional cash stipend, to commence in
2006, for non-employee directors of $40,000 per year in
lieu of equity compensation. On March 10, 2006, the Board
of Directors approved the following fees (retroactive to
February 1, 2006 through June 2006): (i) stipends for
each Co-Chairman of the Strategic Alternatives Committee of
$15,000 per month, (ii) stipends for each other member
of the Strategic Alternatives Committee of $5,000 per
month, (iii) per meeting fees of $1,500 for each
Co-Chairman, and (iv) per meeting fees of $1,000 per
member. The meeting fees and monthly stipends will be reviewed
by the Board in June 2006.
The following non-employee directors who were directors on
February 28, 2006, earned the compensation as set forth in
the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
Non-Stock
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Stock Awards
|
|
|
Option Awards
|
|
|
Incentive Plan
|
|
|
All Other
|
|
Name
|
|
Total ($)
|
|
|
in Cash ($)
|
|
|
($)
|
|
|
($)
|
|
|
Compensation ($)
|
|
|
Compensation ($)
|
|
|
Barry M. Deutsch
|
|
|
183,911
|
|
|
|
183,911
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Eric L. Langshur
|
|
|
217,072
|
|
|
|
217,072
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
James F. McAnally
|
|
|
183,492
|
|
|
|
183,492
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
John W. Rogers, Jr.
|
|
|
198,303
|
|
|
|
185,903
|
|
|
|
0
|
|
|
|
12,400
|
*
|
|
|
0
|
|
|
|
0
|
|
Steven S. Rogers
|
|
|
37,117
|
|
|
|
10,667
|
|
|
|
0
|
|
|
|
25,450
|
|
|
|
0
|
|
|
|
0
|
|
|
|
* |
Award forfeited as of December 31, 2005 (see below).
|
76
Pursuant to Ballys 1996 Non-Employee Directors Stock
Option Plan (the Directors Plan), each
non-employee director of Bally was granted an option to purchase
5,000 shares of common stock upon the commencement of
service on the Board, with another option to purchase
5,000 shares of common stock granted on the second
anniversary thereof. The Directors Plan expired on
January 3, 2006 and no further options may be issued
thereunder. Options under the Directors Plan were
generally granted with an exercise price equal to the fair
market value of the common stock at the date of grant. Option
grants under the Directors Plan become exercisable in
three equal annual installments commencing one year from the
date of grant, or upon a change in control, as defined in the
Directors Plan, and have a
10-year
term. All of the options granted under the Directors Plan
prior to May 4, 2005 became exercisable for a period of
90 days on May 4, 2005 as a result of a change in
control event; at the end of the
90-day
period the options terminated according to the terms of the
Directors Plan. For these purposes, a change in control
was defined as an Acquiring Person becoming the Beneficial Owner
of Shares representing 10% or more of the combined voting power
of the then-outstanding shares other than in a transaction or
series of transactions approved by the Companys Board of
Directors. The acquisition on May 4, 2005 of the
Companys Common Stock by Liberation Investment Group LLC,
Liberation Investments, Ltd., Liberation Investments, L.P. and
Emanuel R. Pearlman constituted such a change in control.
Due to an administrative error, directors were not apprised of
the vesting and subsequent expiration of their options during
2005, and thus did not have an opportunity to exercise their
options. Accordingly, on March 10, 2006, the Board of
Directors, with affected directors abstaining, awarded a cash
payment for each expired option to each director equal to the
difference between (i) the average of the high and low
prices of Bally common stock on the NYSE on December 2,
2005 (the first available trading date under the Companys
insider trading policy following expiration of the options) and
(ii) the exercise price of such option. The amounts awarded
to the directors were as follows:
Mr. Deutsch $14,300;
Mr. Langshur $16,500;
Mr. Looloian $10,950;
Dr. McAnally $10,950; Mr. John
Rogers $26,100. In the case of
Messrs. Looloian and McAnally, the actual amount paid,
$3,396 and $2,704, respectively, was net of proceeds received
upon a cashless exercise of certain options that the Company
erroneously permitted to be exercised in December 2005
(Messrs. Looloian and McAnally paid the Company the par
value with respect to the shares received on exercise of the
options).
Compensation
Committee Interlocks and Insider Participation
During 2005, the following directors (none of whom was or had
been an officer or employee of the Company or any of its
subsidiaries) served on the Companys Compensation
Committee: John W. Rogers, Jr., Barry M. Deutsch, J.
Kenneth Looloian (did not stand for re-election in January
2006), James F. McAnally, Steven Rogers (since December
2005) and Stephen C. Swid (resigned August 2005). There
were no interlocks during 2005 with other companies within the
meaning of the SECs rules.
77
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
In general, beneficial ownership includes those
shares a stockholder has the power to vote or transfer and stock
options or warrants that are exercisable currently or within
60 days. Unless otherwise indicated, all information with
respect to ownership of common stock is as of May 31, 2006.
On May 31, 2006, Bally had outstanding
41,310,827 shares of common stock.
Beneficial
Ownership of Directors and Executive Officers
The following table shows the number of shares of Bally common
stock beneficially owned by the directors, Named Executive
Officers and all directors and executive officers as a group as
of May 31, 2006. The Common Shares Owned
column includes, in certain circumstances, shares of common
stock held in the name of the directors or executive
officers spouse, minor children, or relatives sharing the
directors or executive officers home, the reporting
of which is required by applicable rules of the SEC, but as to
which shares of common stock the director or executive officer
may have disclaimed beneficial ownership. As used in the
following tables, an asterisk in the Percentage of Outstanding
Stock column means less than 1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Options
|
|
|
Total
|
|
|
Percentage of
|
|
|
|
Shares
|
|
|
Exercisable
|
|
|
Beneficial
|
|
|
Outstanding
|
|
Beneficial Owner
|
|
Owned
|
|
|
Within 60 Days
|
|
|
Ownership
|
|
|
Stock*
|
|
|
Paul A. Toback
|
|
|
135,000
|
|
|
|
343,334
|
|
|
|
478,334
|
|
|
|
1.2
|
%
|
Marc D. Bassewitz
|
|
|
130,000
|
|
|
|
16,668
|
|
|
|
146,668
|
|
|
|
**
|
|
William Fanelli
|
|
|
40,000
|
|
|
|
230,000
|
|
|
|
270,000
|
|
|
|
**
|
|
Harold Morgan
|
|
|
55,921
|
|
|
|
205,667
|
|
|
|
261,588
|
|
|
|
**
|
|
John H. Wildman
|
|
|
60,000
|
|
|
|
210,000
|
|
|
|
270,000
|
|
|
|
**
|
|
Charles J. Burdick
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
**
|
|
Barry M. Deutsch
|
|
|
5,300
|
|
|
|
0
|
|
|
|
5,300
|
|
|
|
**
|
|
Barry R. Elson
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
**
|
|
Eric Langshur
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
**
|
|
Don R. Kornstein
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
**
|
|
James F. McAnally, M.D.
|
|
|
12,500
|
|
|
|
0
|
|
|
|
12,500
|
|
|
|
**
|
|
John W. Rogers, Jr.
|
|
|
10,000
|
|
|
|
0
|
|
|
|
10,000
|
|
|
|
**
|
|
Steven S. Rogers
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
**
|
|
All directors and executive
officers as a group (19 persons)
|
|
|
658,071
|
|
|
|
1,171,337
|
|
|
|
1,829,408
|
|
|
|
4.4
|
%
|
|
|
|
* |
|
Based on 41,310,827 shares of common stock outstanding. |
|
** |
|
Less than 1% of the outstanding common stock. |
78
Stockholders
Who Own at Least 5% of Bally Common Stock
The following table shows all persons we know to be the
beneficial owners of more than 5% of Bally common stock as of
May 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Total Beneficial
|
|
|
Percent of
|
|
Name and Address of Beneficial
Owner
|
|
Ownership
|
|
|
Outstanding Stock(1)
|
|
|
Pardus Capital Management
L.P.(2)(3)
|
|
|
5,602,221
|
|
|
|
13.6
|
%
|
1001 Avenue of the Americas,
Suite 1100
New York, New York 10018
|
|
|
|
|
|
|
|
|
Emanuel R. Pearlman(2)(4)
|
|
|
4,419,450
|
|
|
|
10.7
|
%
|
Liberation Investment Group
LLC(2)(4)
|
|
|
|
|
|
|
|
|
Liberation Investments, Ltd.(2)(4)
|
|
|
|
|
|
|
|
|
Liberation Investments, L.P.(2)(4)
|
|
|
|
|
|
|
|
|
11766 Wilshire Blvd.
Suite #870
Los Angeles, CA 90025
|
|
|
|
|
|
|
|
|
Mark J. Wattles(2)(5)
|
|
|
3,825,100
|
|
|
|
9.3
|
%
|
Wattles Capital Management,
LLC(2)(5)
|
|
|
|
|
|
|
|
|
7945 W. Sahara #205
Las Vegas, NV 89117
|
|
|
|
|
|
|
|
|
Dimensional Fund Advisors
Inc.(2)(6)
|
|
|
3,113,500
|
|
|
|
7.5
|
%
|
1299 Ocean Ave, 11th Flr,
Santa Monica, CA 90401
|
|
|
|
|
|
|
|
|
Morgan Stanley(2)(7)
|
|
|
3,023,132
|
|
|
|
7.3
|
%
|
1585 Broadway
New York, NY 10036
|
|
|
|
|
|
|
|
|
S.A.C. Capital Advisors LLC(2)(8)
|
|
|
2,439,200
|
|
|
|
5.9
|
%
|
72 Cummings Point Road
Stamford, CT 06902
|
|
|
|
|
|
|
|
|
Everest Capital Limited(2)(9)
|
|
|
2,414,778
|
|
|
|
5.8
|
%
|
The Bank of Butterfield
Building
65 Front Street, 6th Floor,
P.O. Box HM2458
Hamilton HMJX Bermuda
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company had 41,310,827 common shares outstanding as of
May 31, 2006. The Percent of Outstanding Stock
was calculated by using the disclosed number of beneficially
owned shares by the applicable beneficial owner and related
entities, as a group, as the numerator and the number of the
Companys outstanding common shares as of May 31, 2006
as the denominator. |
|
(2) |
|
Represents a beneficial owner of more than 5% of the common
stock based on the owners reported ownership of shares of
common stock in filings made with the Securities and Exchange
Commission pursuant to Section 13(d), 13(g) and 16(a) of
the Securities Exchange Act of 1934, as amended and the
attendant regulations. Information with respect to each
beneficial owner is generally as of the date of the most recent
filing by the beneficial owner with the SEC and is based solely
on information contained in such filings. |
|
(3) |
|
Pardus European Special Opportunities Master Fund L.P., a
limited partnership formed under the laws of the Cayman Islands
(the Fund), is the holder of 5,602,221 shares
of common stock. Pardus Capital Management, L.P.
(PCM), a Delaware limited partnership, serves as the
investment manager of the Fund and possesses sole power to vote
and direct the disposition of all the shares held by the Fund.
PCM is deemed to beneficially own 5,602,221 shares of
common stock. |
|
(4) |
|
Liberation Investments, L.P. (LILP), a Delaware
limited partnership, is the beneficial owner of
2,848,213 shares of common stock. Liberation Investments,
Ltd. (LILtd), a private offshore investment
corporation, is the beneficial owner of 1,536,237 shares of
common stock. Mr. Pearlman is the direct beneficial owner
of 35,000 shares of common stock, which vested upon the
acquisition by Liberation of in excess of 10% of the common
stock of the Company on May 4, 2005. Liberation Investment
Group LLC (LIG), the general |
79
|
|
|
|
|
partner of LILP and discretionary investment adviser to LILtd,
and Mr. Pearlman, the General Manager, Chief Investment
Officer and majority member of LIG, are indirect beneficial
owners of the shares held by LILP and LILtd. |
|
(5) |
|
Mark J. Wattles is the sole member and manager of Wattles
Capital Management, LLC, a Delaware limited liability company,
and owns 100% of its membership interests. |
|
(6) |
|
Dimensional Fund Advisors Inc. (Dimensional),
an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940, furnishes investment advice to
four investment companies registered under the Investment
Company Act of 1940, and serves as investment manager to certain
other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the
Funds. In its role as investment advisor or manager,
Dimensional possesses voting
and/or
investment power and may be deemed to be the beneficial owner of
the shares. Dimensional disclaims beneficial ownership of such
securities. |
|
(7) |
|
Morgan Stanley, a Delaware parent holding company, is the holder
of 2,957,732 shares of common stock. Morgan
Stanley & Co. Incorporated, a Delaware corporation, is
a broker dealer registered under Section 15 of the
Securities Exchange Act of 1934 and is the holder of
2,854,632 shares of common stock. |
|
(8) |
|
S.A.C. Capital Advisors, LLC (SAC Capital Advisors)
has shared voting power and shared investment power with respect
to 2,439,200 shares of common stock; S.A.C. Capital
Advisors, S.A.C. Capital Management, LLC (SAC Capital
Management), and Mr. Steven Cohen do not directly own
any shares. Pursuant to investment agreements, each of SAC
Capital Advisors and SAC Capital Management share all investment
and voting power with respect to the securities held by S.A.C.
Capital Associates, LLC, S.A.C. Meridian Fund, LLC and S.A.C.
MultiQuant Fund, LLC. Mr. Cohen controls each of SAC
Capital Advisors and SAC Capital Management. Each of SAC Capital
Advisors, SAC Capital Management and Mr. Cohen may be
deemed to own beneficially 2,349,200 shares. Each of SAC
Capital Advisors, SAC Capital Management, and Mr. Cohen
disclaim beneficial ownership of any of these securities. |
|
(9) |
|
Everest Capital Limited is a Bermuda company. |
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table sets forth, as of December 31, 2005,
information concerning compensation plans under which our
securities are authorized for issuance. The table does not
reflect exercises, terminations or expirations since that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Plans approved by stockholders(1)
|
|
|
3,985,514
|
|
|
$
|
13.63
|
|
|
|
358,965
|
|
Plans not approved by
stockholders(2)
|
|
|
153,000
|
|
|
$
|
3.66
|
|
|
|
62,000
|
|
Total
|
|
|
4,138,514
|
|
|
$
|
13.26
|
|
|
|
420,965
|
|
|
|
|
(1) |
|
The number of securities remaining for future issuance at
December 31, 2005 consisted of 283,965 shares issuable
under the Companys 1996 Long-Term Incentive Plan and
75,000 shares under the Companys 1996 Non-Employee
Directors Stock Option Plan (which plans expired on
January 3, 2006). In November 1997, June 1999, December
2000 and June 2002, the 1996 Long-Term Incentive Plan was
amended to increase the aggregate amount of shares outstanding
that may be granted to an aggregate of 8,600,000. The
Companys stockholders approved the first two amendments,
which increased the number of shares subject to the plan by a
total of 2,500,000. There have been no grants or awards since
December 31, 2005. |
|
(2) |
|
The number of securities remaining for future issuance at
December 31, 2005 consisted of 62,000 shares issuable
under the Companys Inducement Award Equity Incentive Plan.
Since December 31, 2005, a total of 19,500 options have
been granted under the Inducement Award Equity Incentive Plan.
See Note 15 of the Notes to Consolidated Financial
Statements, Stock Plans, for a description of the material terms
of the Plan. |
80
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Certain
Transactions
During 2005, Bally paid approximately $6.3 million for
goods and services from a company which employed a relative of
Mr. Wildman. Bally believes that the terms of these
arrangements were at least as favorable to Bally as those which
could be obtained from unrelated parties.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Fees Paid
to the Principal Accountant-2005
The table below sets forth the fees billed for the services of
KPMG LLP for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Audit fees(1)
|
|
$
|
5,141,300
|
|
|
$
|
7,988,800
|
|
Audit-related fees(2)
|
|
|
10,000
|
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
Total audit and audit-related fees
|
|
$
|
5,151,300
|
|
|
$
|
8,026,550
|
|
Tax fees(3)
|
|
|
60,000
|
|
|
|
0
|
|
All other fees
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
5,211,300
|
|
|
$
|
8,026,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees include work performed in connection with the audit
of the 2005 consolidated financial statements, the reports on
managements assessment regarding the effectiveness of
internal control over financial reporting and the effectiveness
of internal control over financial reporting, and the reviews of
the financial statements included in our 2005
Forms 10-Q.
It also includes fees for professional services that are
normally provided by our registered public accounting firm in
connection with statutory and regulatory filings. |
|
(2) |
|
Audit related fees include work performed in connection with
separate audits of subsidiaries and affiliated entities not
required by statute or regulation. |
|
(3) |
|
Tax fees include services performed in connection with the
Companys assessment of the implications of an ownership
change for purposes of Internal Revenue Code Section 382. |
Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Registered Public Accounting
Firm
The Audit Committee has responsibility for retaining, setting
fees, and overseeing the work of the registered public
accounting firm. The retention of the firm is subject to
stockholder ratification. In recognition of this responsibility,
the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the
registered public accounting firm. The Audit Committee has
delegated pre-approval authority to the chairman of the
committee. The chairman must report any pre-approval decisions
to the Audit Committee at its next scheduled meeting for
approval by the Audit Committee as a whole.
81
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
Financial
Statements
An Index to Financial Statements and Financial Statement
Schedules has been filed as a part of this Report
beginning on
page F-1
and is incorporated in this Item 15 by reference.
Exhibits
An Exhibit Index has been filed as a part of
this Report beginning on
page E-1
and is incorporated herein by reference.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
|
BALLY TOTAL FITNESS HOLDING
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
By:
|
|
/s/ Paul
A. Toback
Paul
A. Toback
Chairman, President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated. This report may be signed in multiple identical
counterparts all of which, taken together, shall constitute a
single document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Paul
A.
Toback
|
|
|
By:
|
|
Paul A. Toback
Chairman, President and Chief Executive Officer
(principal executive officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ David
S. Reynolds
|
|
|
By:
|
|
David S. Reynolds
Vice President and Controller
(principal financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Charles
J. Burdick
|
|
|
By:
|
|
Charles J. Burdick
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Barry
M. Deutsch
|
|
|
By:
|
|
Barry M. Deutsch
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Barry
R. Elson
|
|
|
By:
|
|
Barry R. Elson
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Don
R. Kornstein
|
|
|
By:
|
|
Don R. Kornstein
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Eric
Langshur
|
|
|
By:
|
|
Eric Langshur
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ James
F. McAnally, M.D.
|
|
|
By:
|
|
James F. McAnally, M.D.
Director
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ John
W. Rogers, Jr.
|
|
|
By:
|
|
John W. Rogers, Jr.
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 27, 2006
|
|
|
|
/s/ Steven
S. Rogers
|
|
|
By:
|
|
Steven S. Rogers
Director
|
84
BALLY
TOTAL FITNESS HOLDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation:
We have audited the accompanying consolidated balance sheets of
Bally Total Fitness Holding Corporation and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders deficit and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2005.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Bally Total Fitness Holding Corporation and
subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Bally Total Fitness Holding Corporations
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated June 27,
2006 expressed an unqualified opinion on managements
assessment of, and an adverse opinion on the effective operation
of, internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
June 27, 2006
F-2
BALLY
TOTAL FITNESS HOLDING CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,454
|
|
|
$
|
19,177
|
|
Deferred income taxes
|
|
|
151
|
|
|
|
471
|
|
Prepaid expenses
|
|
|
20,846
|
|
|
|
15,995
|
|
Other current assets
|
|
|
17,736
|
|
|
|
14,244
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
56,187
|
|
|
|
49,887
|
|
Property and equipment, net
|
|
|
326,724
|
|
|
|
364,753
|
|
Goodwill, net
|
|
|
41,731
|
|
|
|
41,698
|
|
Trademarks, net
|
|
|
9,376
|
|
|
|
9,933
|
|
Intangible assets, net
|
|
|
5,018
|
|
|
|
7,909
|
|
Deferred financing costs, net
|
|
|
29,501
|
|
|
|
17,790
|
|
Other assets
|
|
|
11,557
|
|
|
|
10,489
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
480,094
|
|
|
$
|
502,459
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
57,832
|
|
|
$
|
51,373
|
|
Income taxes payable
|
|
|
1,697
|
|
|
|
1,399
|
|
Accrued liabilities
|
|
|
97,013
|
|
|
|
113,210
|
|
Current maturities of long-term
debt
|
|
|
13,018
|
|
|
|
22,127
|
|
Deferred revenues
|
|
|
306,634
|
|
|
|
321,921
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
476,194
|
|
|
|
510,030
|
|
Long-term debt, less current
maturities
|
|
|
756,304
|
|
|
|
737,432
|
|
Deferred rent liability
|
|
|
101,605
|
|
|
|
107,126
|
|
Deferred income taxes
|
|
|
1,737
|
|
|
|
1,637
|
|
Other liabilities
|
|
|
28,112
|
|
|
|
18,981
|
|
Deferred revenues
|
|
|
579,828
|
|
|
|
599,378
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,467,586
|
|
|
|
1,464,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,943,780
|
|
|
|
1,974,584
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $.10 par
value; 10,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Series A Junior
Participating; 602,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Series B Junior
Participating; 100,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value;
60,200,000 shares authorized; 39,172,090 and
34,682,344 shares issued at December 31, 2005 and
2004, respectively; and 38,503,551 and 34,013,805 outstanding at
December 31, 2005 and 2004, respectively
|
|
|
392
|
|
|
|
347
|
|
Contributed capital
|
|
|
669,089
|
|
|
|
647,367
|
|
Accumulated deficit
|
|
|
(2,113,854
|
)
|
|
|
(2,104,240
|
)
|
Unearned compensation (restricted
stock)
|
|
|
(5,534
|
)
|
|
|
(1,567
|
)
|
Common stock in treasury, at cost,
668,539 shares at December 31, 2005 and 2004
|
|
|
(11,635
|
)
|
|
|
(11,635
|
)
|
Accumulated other comprehensive
loss
|
|
|
(2,144
|
)
|
|
|
(2,397
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,463,686
|
)
|
|
|
(1,472,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
480,094
|
|
|
$
|
502,459
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
BALLY
TOTAL FITNESS HOLDING CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share
data)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
1,003,897
|
|
|
$
|
975,982
|
|
|
$
|
929,866
|
|
Retail products
|
|
|
50,685
|
|
|
|
53,340
|
|
|
|
55,266
|
|
Miscellaneous
|
|
|
16,451
|
|
|
|
18,666
|
|
|
|
17,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071,033
|
|
|
|
1,047,988
|
|
|
|
1,002,871
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
726,937
|
|
|
|
732,741
|
|
|
|
726,231
|
|
Retail products
|
|
|
52,004
|
|
|
|
54,496
|
|
|
|
57,493
|
|
Advertising
|
|
|
55,014
|
|
|
|
61,602
|
|
|
|
53,503
|
|
General and administrative
|
|
|
87,513
|
|
|
|
75,977
|
|
|
|
53,646
|
|
Impairment of goodwill and other
intangibles
|
|
|
1,220
|
|
|
|
405
|
|
|
|
54,505
|
|
Asset impairment charges
|
|
|
10,115
|
|
|
|
14,772
|
|
|
|
19,605
|
|
Depreciation and amortization
|
|
|
62,571
|
|
|
|
69,779
|
|
|
|
76,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
995,374
|
|
|
|
1,009,772
|
|
|
|
1,041,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
75,659
|
|
|
|
38,216
|
|
|
|
(38,879
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(85,329
|
)
|
|
|
(67,201
|
)
|
|
|
(62,585
|
)
|
Foreign exchange gain (loss)
|
|
|
869
|
|
|
|
1,578
|
|
|
|
2,371
|
|
Other, net
|
|
|
89
|
|
|
|
(1,998
|
)
|
|
|
(2,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,371
|
)
|
|
|
(67,621
|
)
|
|
|
(62,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(8,712
|
)
|
|
|
(29,405
|
)
|
|
|
(101,572
|
)
|
Income tax provision
|
|
|
(902
|
)
|
|
|
(851
|
)
|
|
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(9,614
|
)
|
|
|
(30,256
|
)
|
|
|
(102,674
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(981
|
)
|
Loss on disposal
|
|
|
|
|
|
|
|
|
|
|
(1,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(2,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
changes in accounting principles
|
|
|
(9,614
|
)
|
|
|
(30,256
|
)
|
|
|
(105,354
|
)
|
Cumulative effect of change in
accounting principle, net
|
|
|
|
|
|
|
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
(105,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.28
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(3.14
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.08
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(3.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
|
|
32,654,738
|
|
See accompanying notes to consolidated financial statements.
F-4
BALLY
TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS DEFICIT
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Other
|
|
|
Total
|
|
|
|
Shares
|
|
|
Par
|
|
|
Contributed
|
|
|
Accumulated
|
|
|
Unearned
|
|
|
Stock in
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Compensation
|
|
|
Treasury
|
|
|
Loss
|
|
|
Deficit
|
|
|
|
(In thousands, except share
data)
|
|
|
Balance at December 31, 2002
(as previously reported)
|
|
|
33,193,425
|
|
|
$
|
338
|
|
|
$
|
642,742
|
|
|
$
|
(1,970,155
|
)
|
|
$
|
|
|
|
$
|
(11,635
|
)
|
|
$
|
(346
|
)
|
|
$
|
(1,339,056
|
)
|
Adjustment to previously reported
amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
(restated)
|
|
|
33,193,425
|
|
|
|
338
|
|
|
|
642,742
|
|
|
|
(1,968,004
|
)
|
|
|
|
|
|
|
(11,635
|
)
|
|
|
(346
|
)
|
|
|
(1,336,905
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,980
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,411
|
)
|
|
|
(1,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,391
|
)
|
Restricted stock activity
|
|
|
707,500
|
|
|
|
7
|
|
|
|
4,360
|
|
|
|
|
|
|
|
(3,760
|
)
|
|
|
|
|
|
|
|
|
|
|
607
|
|
Issuance of common stock under
stock purchase and option plans
|
|
|
134,809
|
|
|
|
2
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
34,035,734
|
|
|
|
347
|
|
|
|
647,832
|
|
|
|
(2,073,984
|
)
|
|
|
(3,760
|
)
|
|
|
(11,635
|
)
|
|
|
(1,757
|
)
|
|
|
(1,442,957
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,256
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(640
|
)
|
|
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,896
|
)
|
Restricted stock activity
|
|
|
(137,500
|
)
|
|
|
(1
|
)
|
|
|
(1,071
|
)
|
|
|
|
|
|
|
2,193
|
|
|
|
|
|
|
|
|
|
|
|
1,121
|
|
Issuance of common stock under
stock purchase and option plans
|
|
|
115,571
|
|
|
|
1
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
34,013,805
|
|
|
|
347
|
|
|
|
647,367
|
|
|
|
(2,104,240
|
)
|
|
|
(1,567
|
)
|
|
|
(11,635
|
)
|
|
|
(2,397
|
)
|
|
|
(1,472,125
|
)
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,614
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,361
|
)
|
Restricted stock activity
|
|
|
1,420,000
|
|
|
|
14
|
|
|
|
9,026
|
|
|
|
|
|
|
|
(3,967
|
)
|
|
|
|
|
|
|
|
|
|
|
5,073
|
|
Issuance of common stock under
stock purchase and option plans
|
|
|
525,232
|
|
|
|
6
|
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,371
|
|
Shares issued to noteholders
|
|
|
1,903,200
|
|
|
|
19
|
|
|
|
7,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,394
|
|
Shares issued to accredited investor
|
|
|
409,314
|
|
|
|
4
|
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
Shares issued to agent
|
|
|
232,000
|
|
|
|
2
|
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
38,503,551
|
|
|
$
|
392
|
|
|
$
|
669,089
|
|
|
$
|
(2,113,854
|
)
|
|
$
|
(5,534
|
)
|
|
$
|
(11,635
|
)
|
|
$
|
(2,144
|
)
|
|
$
|
(1,463,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
BALLY
TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
(105,354
|
)
|
Adjustments to reconcile to cash
provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
71,258
|
|
|
|
73,198
|
|
|
|
80,370
|
|
Changes in operating assets and
liabilities
|
|
|
(52,094
|
)
|
|
|
(25,315
|
)
|
|
|
35,225
|
|
Deferred income taxes, net
|
|
|
420
|
|
|
|
420
|
|
|
|
413
|
|
Write-off of debt issuance costs
|
|
|
|
|
|
|
1,589
|
|
|
|
2,562
|
|
Write-off of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
1,699
|
|
Write-off of long-term assets
|
|
|
4,618
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
11,335
|
|
|
|
15,177
|
|
|
|
74,110
|
|
Loss on disposal of assets
|
|
|
274
|
|
|
|
925
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
(869
|
)
|
|
|
(1,578
|
)
|
|
|
(2,371
|
)
|
Equity in losses of unconsolidated
subsidiaries, net
|
|
|
300
|
|
|
|
842
|
|
|
|
962
|
|
Stock-based compensation
|
|
|
5,073
|
|
|
|
1,122
|
|
|
|
607
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
30,701
|
|
|
|
36,124
|
|
|
|
89,877
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
(37,854
|
)
|
|
|
(49,740
|
)
|
|
|
(47,942
|
)
|
Proceeds from sales and disposals
of property
|
|
|
2,043
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated
subsidiaries
|
|
|
(394
|
)
|
|
|
(501
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(36,205
|
)
|
|
|
(50,241
|
)
|
|
|
(48,211
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under
credit agreement
|
|
|
33,250
|
|
|
|
154,000
|
|
|
|
(28,500
|
)
|
Borrowings of other long-term debt
|
|
|
|
|
|
|
|
|
|
|
242,191
|
|
Repayments of other long-term debt
|
|
|
(21,581
|
)
|
|
|
(130,521
|
)
|
|
|
(242,151
|
)
|
Debt issuance and refinancing costs
|
|
|
(11,307
|
)
|
|
|
(4,862
|
)
|
|
|
(10,414
|
)
|
Proceeds from sale of common stock
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
Stock purchase and option plans
|
|
|
1,604
|
|
|
|
606
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
3,399
|
|
|
|
19,223
|
|
|
|
(38,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
(2,105
|
)
|
|
|
5,106
|
|
|
|
3,524
|
|
Effect of exchange rate changes on
cash balance
|
|
|
382
|
|
|
|
431
|
|
|
|
(2,011
|
)
|
Cash, beginning of year
|
|
|
19,177
|
|
|
|
13,640
|
|
|
|
12,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
17,454
|
|
|
$
|
19,177
|
|
|
$
|
13,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities, net of effects from acquisitions or sales, were as
follows
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other
current and other assets
|
|
$
|
(8,433
|
)
|
|
$
|
24,816
|
|
|
$
|
8,371
|
|
Increase (decrease) in accounts
payable
|
|
|
6,457
|
|
|
|
(11,859
|
)
|
|
|
10,846
|
|
Increase (decrease) in income taxes
payable
|
|
|
298
|
|
|
|
1,399
|
|
|
|
(1,019
|
)
|
Increase (decrease) in accrued
liabilities
|
|
|
(16,446
|
)
|
|
|
(18,681
|
)
|
|
|
5,470
|
|
Increase in other liabilities
|
|
|
867
|
|
|
|
1,820
|
|
|
|
389
|
|
Increase (decrease) in deferred
revenues
|
|
|
(34,837
|
)
|
|
|
(22,810
|
)
|
|
|
11,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(52,094
|
)
|
|
$
|
(25,315
|
)
|
|
$
|
35,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest and
income taxes were as follows
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
75,937
|
|
|
$
|
62,301
|
|
|
$
|
48,230
|
|
Interest capitalized
|
|
|
(309
|
)
|
|
|
(855
|
)
|
|
|
(1,086
|
)
|
Income taxes (refund)/paid, net
|
|
|
184
|
|
|
|
(1,045
|
)
|
|
|
1,964
|
|
Investing and financing activities
exclude the following non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and
equipment through capital leases/borrowings
|
|
|
252
|
|
|
$
|
5,384
|
|
|
$
|
9,474
|
|
Payment of consents with common
stock
|
|
|
7,394
|
|
|
|
|
|
|
|
|
|
Stock issued to accredited investor
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
Stock issued to agent
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
BALLY
TOTAL FITNESS HOLDING CORPORATION
(All dollar amounts in thousands, except share data)
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Description of Business: Bally Total Fitness
Holding Corporation (the Company), through its
subsidiaries, is a nationwide commercial operator of fitness
centers. As of December 31, 2005, the Company operated four
hundred nine facilities, located in twenty-nine states and
Canada. Additionally, twenty-nine clubs were operated pursuant
to franchise and joint venture agreements in the United States,
Mexico, Asia, and the Caribbean. All significant revenues arise
from the commercial operation of fitness centers, primarily in
major metropolitan areas in the United States and Canada. Unless
otherwise specified in the text, references to the Company
include the Company and its subsidiaries.
Principles of Presentation and
Consolidation: The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries and other controlled entities. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The Company has prepared the consolidated financial statements
on the basis that the Company will continue as a going concern.
The Company has retained J.P. Morgan Securities Inc. and
The Blackstone Group L.P. to explore strategic alternatives,
including potential equity transactions or the sale of
businesses or assets.
Use of Estimates: The preparation of
consolidated financial statements in accordance with
U.S. generally accepted accounting principles
(GAAP) requires management to make extensive use of
certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenues and
expenses during the reporting periods. Significant estimates in
these consolidated financial statements include estimates of
future cash flows associated with assets, useful lives of
depreciable and amortizable assets, expected member attrition,
future taxable income, future cash flows resulting from retained
risk arrangements and contingencies and litigation. Management
bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances in making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
Cash: The Company considers all highly liquid
investments with maturities of three months or less when
purchased to be cash equivalents. The carrying amount of cash
equivalents approximates fair value due to the short maturity of
those instruments.
Property and Equipment: Property and equipment
are stated at cost. Property and equipment acquired in business
combinations are recorded at their estimated fair values on the
date of acquisition under the purchase method of accounting.
Equipment under capital leases is stated at the present value of
the minimum lease payments. Improvements are capitalized, while
repair and maintenance costs are charged to operations when
incurred.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the
related assets. Buildings and related improvements are
depreciated over 5 to 35 years and useful lives for
equipment and furnishings range from 5 to 10 years.
Equipment held under capital leases and leasehold improvements
are amortized on the straight-line method over the shorter of
the estimated useful life of the asset or the remaining lease
term. Depreciation of construction in progress is not recorded
until the assets are placed into service. Depreciation of
property and equipment amounted to $60,451, $67,306 and $70,092
for 2005, 2004 and 2003, respectively.
The Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long Lived Assets
(SFAS No. 144) on January 1, 2002.
This standard addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (SFAS No. 121). However,
SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for (a) recognition and measurement
of impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by
sale. It also supercedes
F-7
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of
Operations Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for
segments of a business to be disposed of; however, it maintains
APB Opinion No. 30s requirement to report
discontinued operations separately from continuing operations
and extends that reporting to a component of a company that
either has been disposed of or is classified as held for sale.
Although it expanded the use of discontinued operations, the
Statement eliminates the previous practice of accruing all
future operating losses associated with the disposal. It also
amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to
eliminate the exception of not consolidating a subsidiary for
which control is likely to be temporary.
Under SFAS No. 144, the Company assesses the
recoverability of long-lived assets (excluding goodwill) and
identifiable acquired intangible assets with finite useful
lives, whenever events or changes in circumstances indicate that
the Company may not be able to recover the assets carrying
amount. The Company measures the recoverability of assets to be
held and used by a comparison of the carrying amount of the
asset to the expected net future cash flows to be generated by
that asset, or, for identifiable intangibles with finite useful
lives, by determining whether the amortization of the intangible
asset balance over its remaining life can be recovered through
undiscounted future cash flows. The amount of impairment of
identifiable intangible assets with finite useful lives, if any,
to be recognized is measured based on projected discounted
future cash flows. The Company measures the amount of impairment
of other long-lived assets (excluding goodwill) by the amount by
which the carrying value of the asset exceeds the fair market
value of the asset, which is generally determined based on
projected discounted future cash flows. The Company presents an
impairment charge as a separate line item within income (loss)
from continuing operations in the Companys consolidated
statements of operations, unless the impairment is associated
with a discontinued operation. In that case, the Company
includes the impairment charge, on a
net-of-tax
basis, within the results of discontinued operations. The
Company classifies long-lived assets to be disposed of other
than by sale as held and used until they are disposed.
Primary indicators of impairment include significant declines in
the operating results or an expectation that a long-lived asset
may be disposed of before the end of its useful life. Impairment
is assessed at a club operation level, which is the lowest level
at which identifiable cash flows are largely independent of the
cash flows of other assets. Costs to reduce the carrying value
of long-lived assets are separately identified in the Statements
of Operations as Asset impairment charges. See
Note 5 for a description of asset impairment charges
recorded in 2005, 2004 and 2003.
Asset Retirement Obligations: The Company
adopted SFAS No. 143, Accounting for Asset
Retirement Obligations
(SFAS No. 143) in 2003. This statement
requires that the fair value of a legal liability for an asset
retirement obligation be recorded in the period in which it is
incurred if a reasonable estimate of fair value can be made.
Upon recognition of a liability, the asset retirement cost is
recorded as an increase in the carrying value of the related
long-lived asset and then depreciated over the life of the
asset. The Company determined that certain obligations under
lease agreements for club locations meet the scope requirements
of SFAS No. 143 and, accordingly, determined the fair
value of the Companys obligation in accordance with the
statement. The ongoing expense on an annual basis resulting from
the initial adoption of SFAS No. 143 is not
significant.
FASB Interpretation No. 47
(FIN No. 47), Accounting for
Conditional Asset Retirement Obligations (an interpretation of
FASB Statement No. 143) was issued in March 2005.
FIN No. 47 provides clarification with respect to the
timing of liability recognition for legal obligations associated
with the retirement of tangible long-lived assets when the
timing
and/or
method of settlement of the obligation are conditional on a
future event. The Company adopted FIN 47 in the fourth
quarter of fiscal 2005 and the effect on the Companys
consolidated financial statements was not material.
Deferred Lease Liabilities and Noncash Rental
Expense: The Company recognizes rental expense
for leases with scheduled rent increases on the straight-line
basis over the life of the lease beginning upon the commencement
of the lease.
F-8
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Software for Internal Use: Certain costs
incurred related to software developed for internal use are
accounted for in accordance with the American Institute of
Certified Public Accountants Statement of Position
No. 98-1
(SOP 98-1),
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. In accordance with
SOP 98-1,
costs incurred in the planning and post-implementation stages
are expensed as incurred, while costs relating to application
development are capitalized. Qualifying software development
costs are included as an element of property and equipment in
the consolidated balance sheets. The Company amortizes such
software costs over the shorter of the estimated useful life of
the software or five years.
Goodwill and Other Intangible Assets: The
Companys intangible assets are comprised principally of
goodwill, member relationships, leasehold rights and certain
trademarks. Goodwill represents the excess of cost over fair
value of assets of businesses acquired. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142) goodwill
and other intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life,
which consist of certain trademarks, are not amortized, but
instead tested for impairment at least annually.
The Company is required to test goodwill for impairment on an
annual basis for each of its reporting units. The Company is
also required to evaluate goodwill for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Certain indicators of potential impairment
that could impact the Companys reporting units include,
but are not limited to, a significant long-term adverse change
in the business climate that is expected to cause a substantial
decline in membership, or a significant change in the delivery
of health and fitness services that results in a substantially
more cost effective method of delivery than health clubs. The
Company tested to determine if the fair value of each of its
reporting units was in excess of its respective carrying values
at December 31, 2005, 2004 and 2003, for purposes of the
annual impairment test. In 2003, it identified that the carrying
values of three of its reporting units were greater than their
fair value. Accordingly, the goodwill attributable to these
reporting units was written down by $42,062 (net of tax of nil),
and has been reflected in the 2003 consolidated statement of
operations.
Effective January 1, 2002, the Company had unamortized
goodwill in the amount of $80,740, which is no longer being
amortized. This amount is inclusive of the transitional
impairment of $5,036.
Income Taxes: Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that includes the enactment date.
The Company considers future taxable income, the scheduled
reversal of deferred tax liabilities, and ongoing tax strategies
in assessing the need for a valuation allowance with respect to
its deferred tax assets. The Company records a valuation
allowance to reduce deferred tax assets to a level which
management believes more likely than not will be realized.
Deferred Financing Costs: The costs related to
the issuance of debt are capitalized and amortized to interest
expense over the life of the related debt instrument using the
effective interest method. The costs incurred in 2005 and 2004
related to the execution of waivers with respect to certain of
the Companys debt covenants. During the years ended
December 31, 2005, 2004, and 2003, the Company recognized
related amortization expense of $8,500, $3,400, and $3,600,
respectively. Accumulated amortization of deferred financing
costs amounted to $16,238 and $9,649 as of December 31,
2005 and 2004, respectively.
Prepaid Expenses: Prepaid expenses consist of
prepaid rent and prepaid advertising expenses.
F-9
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Other Current Assets: Other current assets
consist primarily of inventory and other prepaid expenses,
including insurance expenses and other. Inventory consists
primarily of nutritional products, apparel and other retail
products. Inventory is valued at the lower of cost or market.
Fair Values of Financial
Instruments: SFAS No. 107,
Fair Value of Financial Instruments,
(SFAS No. 107) requires certain
disclosures regarding the fair value of financial instruments.
The Companys financial instruments consist mainly of
accounts payable, income taxes payable, accrued liabilities, and
long-term debt. The carrying amounts of these items exclusive of
the Companys
97/8% Senior
Subordinated Notes due 2007 (Senior Subordinated
Notes) approximate fair market value due to either the
short-term maturity of these instruments or the close
approximation between current fair market value and carrying
value.
The Company determined by using quoted market prices that the
fair value of the Senior Subordinated Notes at December 31,
2005 was $288,507 compared to a carrying value of $295,905, and
the fair value at December 31, 2004 was $256,065 compared
to a carrying value of $297,750. Since considerable judgment is
required in interpreting market information, the fair value of
the Senior Subordinated Notes is not necessarily indicative of
the amount which could be realized in a current market exchange.
Revenue Recognition: The Companys
principal sources of revenue include membership services,
principally health club memberships and personal training
services, and the sale of nutritional products. The Company
recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements, as amended by SEC Staff
Accounting Bulletin No. 104, Revenue
Recognition. As a general principle, revenue is
recognized when the following criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable and,
(iv) collectability is reasonably assured. With respect to
health club memberships and personal training, the Company
relies upon a signed contract between the Company and the
customer as the persuasive evidence of a sales arrangement.
Delivery of health club services extends throughout the term of
membership. Delivery of personal training services occurs when
individual personal training sessions have been rendered.
The Company receives membership fees and monthly dues from its
members. Membership fees, which customers often finance, become
customer obligations upon contract execution and after a
cooling off period of three to fifteen calendar days
depending on jurisdiction, while monthly dues become customer
obligations on a
month-to-month
basis as services are provided. Membership fees and monthly dues
are recognized at the later of when collected or earned.
Membership fees and monthly dues collected but not earned are
included in deferred revenue. The majority of members commit to
a membership term of between 12 and 36 months. The majority
of these contracts are 36 month contracts. Typically,
contracts include a members right to renew the membership
at a discount compared to the payments made during the initial
contractual term.
Additional members may be added to the primary joining
members contract. These additional members may be added as
obligatory members that commit to the same membership term as
the primary member, or nonobligatory members that can
discontinue their membership at any time.
Membership revenue is earned on a straight-line basis over the
longer of the contractual term or the estimated membership term.
Membership life is estimated at time of contract execution based
on historical trends of actual attrition, and these estimates
are updated quarterly to reflect actual membership attrition.
The Companys estimates of membership life were up to three
hundred sixty months during 2005, 2004 and 2003. As of
December 31, 2005, the weighted average membership life for
members that commit to a membership term of between 12 and
36 months is 39 months. Members with these terms that
finance their initial membership fee have a weighted average
membership life of 37 months, while those members that pay
their membership fee in full at point of sale have a weighted
average membership life of 56 months. Because of the
discount in monthly payments made during the renewal term when
compared to payments made in the initial contractual term, the
estimate of membership term impacts the amount of revenue
deferred in the initial contractual term. Changes in member
behavior, competition,
F-10
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
and Company performance may cause actual attrition to differ
significantly from estimated attrition. A resulting change in
estimated attrition may have a material effect on reported
revenues in the period in which the change of estimate is made.
At December 31, 2005, 2004 and 2003, approximately 61% of
members were in the non-obligatory renewal period of membership.
Renewal members can cancel their membership at any time prior to
their monthly or annual due date. Membership revenue from
members in renewal include monthly dues paid to maintain their
membership, as well as amounts paid during the obligatory period
that have been deferred as described above, to be recognized
over the estimated term of membership, including renewal periods.
Month-to-month
members may cancel their membership prior to their monthly due
date. Membership revenue for these members is earned on a
straight-line basis over the estimated membership life.
Membership life for
month-to-month
members is currently estimated at between 4 and 41 months,
with an average of 15 months.
Paid-in-full
members who purchase nonrenewable memberships must repurchase
the same membership plan to continue membership beyond the
initial contractual term. Such membership fees are deferred and
amortized over the contract term.
Personal training and other services are provided at most of the
Companys fitness centers. Revenue related to personal
training services is recognized when the four criteria of
recognition described above are met. Personal training services
contracts are either
paid-in-full
at the point of origination, or are financed and collected over
periods generally through three months after an initial payment.
Collections of amounts related to
paid-in-full
personal training services contracts, are deferred and
recognized as personal training services are rendered. Revenue
related to personal training contracts that have been financed
is recognized at the later of cash receipt, or the rendering of
personal training services.
Sales of nutritional products and other fitness-related products
occur primarily through the Companys in-club retail stores
and are recognized upon delivery to the customer, generally at
point of sale. Revenue recognized in the accompanying
consolidated statement of operations as
miscellaneous includes amounts earned as commissions
in connection with a long-term licensing agreement related to
the third-party sale of Bally branded fitness equipment. Such
amounts are recognized prior to collection based on commission
statements from the licensee. Other amounts included in
miscellaneous revenue are recorded upon receipt and include
franchising fees, facility rental fees, locker fees, late
charges and other marketing fees pursuant to in-club promotion
agreements.
The Company enters into contracts that include a combination of
(i) health club services (which may include two or more
members on a single contract), (ii) personal training
services, and (iii) nutritional products. In these multiple
element arrangements, health club services are typically the
last delivered service. The Company accounts for these
arrangements as single units of accounting because they do not
have objective and reliable evidence of the fair value of health
club services. Revenue related to these multiple element
arrangements is earned on a straight-line basis over the longer
of the contractual term or the estimated membership term.
In November 2002, the Emerging Issues Task Force
(EITF) issued a final consensus on
Issue 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(Issue 00-21).
In May 2003, the EITF issued additional interpretive guidance
regarding the application of
Issue 00-21.
Issue 00-21,
which provides guidance on how and when to recognize revenues on
arrangements requiring delivery of more than one product or
service, is effective prospectively for arrangements entered
into in fiscal periods beginning after June 15, 2003.
Effective July 1, 2003, the Company adopted
Issue 00-21
on a prospective basis. Under
Issue 00-21,
elements qualify for separation when the services have value on
a stand-alone basis, fair value of the separate elements exists
and, in arrangements that include a general right of refund
relative to the delivered element, performance of the
undelivered element is considered probable and substantially in
the Companys control. As the Company does not have
objective and reliable evidence of the fair value of health club
services and treats these arrangements as single units of
accounting, the adoption of
Issue 00-21
did not have an impact on the Companys financial
statements.
F-11
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Costs related to acquiring members and delivering membership
services are expensed as incurred. Advertising costs are charged
to expense as incurred, or in the case of television commercial
productions, upon the first airing.
Derivative Financial Instruments: The Company
is a limited user of derivative financial instruments to manage
risks generally associated with interest rate volatility. The
Company does not hold or issue derivative financial instruments
for trading purposes. Derivative financial instruments are
accounted for in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) as
amended by SFAS No. 149, Amendment of
SFAS No. 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). This
standard requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not
classified as qualifying hedging instruments are adjusted to
fair value through earnings. Changes in the fair value of
derivatives that are designated and qualify as effective hedges
are recorded either in accumulated other comprehensive loss or
through earnings, as appropriate. The ineffective portion of
derivatives that are classified as hedges is immediately
recognized in earnings.
Investments: Investments in the common stock
of entities for which the Company has significant influence over
the investees operating and financial policies, but less
than a controlling interest, are accounted for using the equity
method. Under the equity method, the Companys investment
in an investee is included in the consolidated balance sheet
under the caption other assets and the Companys share of
the investees earnings or loss is included in the
consolidated statements of operations under the caption
other, net.
Discontinued Operations: Effective
January 1, 2002, the Company accounts for discontinued
operations under SFAS No. 144, which requires that a
component of an entity that has been disposed of or is
classified as held for sale after January 1, 2002 and has
operations and cash flows that can be clearly distinguished from
the rest of the entity be reported as discontinued operations.
In the period that a component of an entity has been disposed of
or classified as held for sale, the Company reclassifies the
results of operations for current and prior periods into a
single caption titled discontinued operations.
Commitments and
Contingencies Litigation: The
Company accounts for contingencies in accordance with
SFAS 5, Accounting for Contingencies, which
requires the Company to accrue loss contingencies when the loss
is both probable and estimable. All legal costs expected to be
incurred in connection with loss contingencies are expensed as
incurred.
Comprehensive Loss: SFAS No. 130,
Reporting Comprehensive Income
(SFAS No. 130), establishes standards for
reporting comprehensive income. Comprehensive income includes
net income as currently reported under GAAP, and also considers
the effects of additional economic events that are not required
to be reported in determining net income, but rather are
reported as a separate component of stockholders deficit.
The Company reports the effects of currency translation as
components of comprehensive income (loss).
Insurance Proceeds: Insurance proceeds for
reimbursement of costs incurred as a result of investigations,
disputes and legal proceedings pursuant to the Companys
director and officer insurance policies are recorded upon
receipt and are a reduction of selling, general and
administrative costs in the statement of operations.
Loss Per Share: Loss per share is computed in
accordance with SFAS No. 128, Earnings per
Share (SFAS No. 128). Basic loss
per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted loss per share is
computed on the basis of the weighted average number of common
shares outstanding plus the effect of outstanding stock options,
certain restricted stock, and warrants using the treasury
F-12
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
stock method. The per share amounts presented in the
Consolidated Statements of Operations are based on the following
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Numerator for basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
(105,980
|
)
|
Denominator for basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
|
|
32,654,738
|
|
Numerator for diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
(105,980
|
)
|
Denominator for diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
|
|
32,654,738
|
|
The following potentially dilutive shares were not included in
the computation of diluted loss for the years ended
December 31 as their effects would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Options to purchase common stock
|
|
|
2,622,107
|
|
|
|
4,080,223
|
|
|
|
3,593,691
|
|
Stock-based Compensation: In December 2002,
the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and
Disclosure, an Amendment of FASB Statement No. 123
(SFAS No. 148) to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123) to require prominent
disclosure in both annual and interim financial statements about
the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The
Company adopted the disclosure requirements of
SFAS No. 148 as of December 31, 2002.
The Company accounts for stock-based employee compensation
arrangements using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), and related interpretations
including FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25,
(FIN No. 44) issued in March 2000, to
account for its fixed plan stock options and restricted stock.
Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying
stock exceeded the exercise price of the stock option.
SFAS No. 123 established accounting and disclosure
requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to
apply the intrinsic value-based method of accounting described
above, and has adopted only the disclosure requirements of
SFAS No. 123. Included in the pro forma table is the
impact of stock options for retirement eligible and
non-retirement eligible employees. The Companys practice
for retirement eligible employees is identical to non-retirement
eligible employees. Upon the Companys adoption of
SFAS No. 123R Share Based Payment
(see below), the practice for retirement eligible employees will
change to reflect the vesting terms of stock options granted
subsequent to January 1, 2006, taking into account
retirement eligibility. For the current periods, such change in
accounting would have no material impact on pro forma results.
On December 16, 2004, the FASB issued
SFAS No. 123R (revised 2004), Share-Based
Payment (SFAS No. 123R), which
is a revision of SFAS No. 123. SFAS No. 123R
supersedes APB No. 25, and amends SFAS No. 95,
Statement of Cash Flows
(SFAS NO. 95). Generally, the approach in
SFAS No. 123R is similar to the approach described in
SFAS No. 123. However, SFAS No. 123R
requires all share-based payments to
F-13
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
On April 14, 2005, the U.S. Securities and Exchange
Commission announced a deferral of the effective date of
SFAS No. 123R for calendar year companies until the
first quarter of 2006. The Company will adopt
SFAS No. 123R in the first quarter of 2006 under the
modified prospective method in which compensation cost is
recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123R for all share-based
payments granted after the effective date and (b) based on
the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of
SFAS No. 123R that remain unvested on the effective
date.
As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using the APB
No. 25 intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options.
The following table illustrates the pro forma effect on net loss
attributable to common stockholders if the fair value-based
method had been applied to all outstanding and unvested awards
in each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net loss, as reported
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
(105,980
|
)
|
Plus: stock-based compensation
expense included in net loss
|
|
|
6,132
|
|
|
|
1,122
|
|
|
|
607
|
|
Less: stock-based compensation
expense determined under fair value based method(1)
|
|
|
(8,175
|
)
|
|
|
(5,030
|
)
|
|
|
(7,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(11,657
|
)
|
|
$
|
(34,164
|
)
|
|
$
|
(112,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.28
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(3.24
|
)
|
Pro forma
|
|
|
(0.34
|
)
|
|
|
(1.04
|
)
|
|
|
(3.45
|
)
|
Diluted loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(0.28
|
)
|
|
|
(0.92
|
)
|
|
|
(3.24
|
)
|
Pro forma
|
|
|
(0.34
|
)
|
|
|
(1.04
|
)
|
|
|
(3.45
|
)
|
|
|
|
(1) |
|
These amounts reflect a change to an expected life of six years
from ten years, which was reflected in the prior year
presentation. |
The per-share weighted average fair value of options granted
during the years ended December 31, 2005, 2004, and 2003
was $2.34, $2.87, and $3.40, respectively. The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants:
|
|
|
|
|
2005 Option Grants: expected volatility of 51.9% for 2005;
risk-free interest rate of 4.21%; dividend yield of 0% and
expected lives of six years from the date of grant.
|
|
|
|
2004 Option Grants: expected volatility of 51.2% for 2004;
risk-free interest rate of 3.88%; dividend yield of 0% and
expected lives of six years from the date of grant.
|
|
|
|
2003 Option Grants: expected volatility of 52.8% for 2003;
risk-free interest rate of 3.11%; dividend yield of 0% and
expected lives of six years from the date of grant.
|
Foreign Currency Translation: Foreign
operations of
non-U.S. subsidiaries
whose functional currency is not the U.S. dollar have been
translated into U.S. dollars in accordance with the principles
prescribed in SFAS No. 52, Foreign Currency
Translation (SFAS No. 52). All
assets, liabilities, and minority interests are translated at
the
F-14
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
period end exchange rates, stockholders equity is
translated at historical rates, and revenues and expenses are
translated at the average rates of exchange prevailing during
the year. Translation adjustments are included in the
accumulated other comprehensive loss component of
stockholders deficit. Gains and losses resulting from
foreign currency transactions are reflected in net loss.
Reclassifications: In the 2005 presentation of
property and equipment, the Company reclassified in the 2004
consolidated balance sheet approximately $28,665 to equipment
from leaseholds and buildings. The reclassification had no
impact on the net property and equipment. See Note 2 for a
description of an adjustment to the 2002 property and equipment
balances. The Company also reclassified $148 of foreign exchange
from other to inventory in the 2004 balance sheet. The Company
reclassified $4,092 of deferred rent liabilities, $1,541 of
goodwill impairment expenses between the guarantor and
non-guarantor financial statements, and $3,160 of deferred
finance costs from guarantor to parent in the 2004 balance sheet
presented in Note 21 to correct classification errors.
Certain presentation adjustments have been recorded as of
December 31, 2004 to Note 13 to conform to adjustments
to accumulated deficit as of December 31, 2002, as
discussed in Note 2.
|
|
Note 2
|
Adjustment
to Accumulated Deficit as of December 31, 2002
|
During 2005, certain errors in the application of GAAP were
identified that affected the Companys accumulated deficit
balance as of December 31, 2002. The first item related to
the Companys calculation of and related accounting for
deferred revenue. The Company determined that its calculations
of deferred revenue with respect to certain corporate membership
offers, offers that include zero dues for life, and offers in
which the membership term exceeds the related financing term
contained errors, that this liability was overstated by
approximately $3,861 and that the misstatement did not relate to
2003, 2004 or 2005. The second item related to the accounting
for insured liabilities with retained risk. The Company
determined that its methods for estimating its ultimate
obligations under these arrangements were higher than those
previously calculated using less precise data, and determined
that an increase in the liability of approximately $4,600 was
required at December 31, 2002. The third item related to
the accounting for capital asset activity and related
depreciation. The Company determined that its calculations of
depreciation expense and capitalized interest with respect to
certain assets contained errors, that this asset was understated
by approximately $2,890 and that the misstatement did not relate
to 2003, 2004 or 2005. The net impact of these adjustments,
totaling approximately $2,151 has been recorded as an adjustment
to decrease the Companys accumulated deficit balance as of
December 31, 2002. No adjustments were made to the
Companys consolidated statements of operations related to
these matters for 2003 or 2004 as such amounts were not deemed
material. Adjustments were made to the Companys 2005
consolidated statement of operations for certain of these items,
the impacts of which were not deemed material.
|
|
Note 3
|
Other
Current Assets
|
Other current assets consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Inventory
|
|
$
|
9,160
|
|
|
$
|
9,457
|
|
Other
|
|
|
8,576
|
|
|
|
4,787
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,736
|
|
|
$
|
14,244
|
|
|
|
|
|
|
|
|
|
|
F-15
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
Note 4
|
Property
and Equipment
|
Property and equipment consists of the following at
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
|
2005
|
|
|
2004
|
|
|
Land
|
|
|
|
|
|
$
|
32,974
|
|
|
$
|
34,684
|
|
Buildings and improvements
|
|
|
5 to 35 years
|
|
|
|
147,204
|
|
|
|
147,477
|
|
Leasehold improvements
|
|
|
12 to 15 years (1
|
)
|
|
|
635,550
|
|
|
|
610,712
|
|
Equipment
|
|
|
5 to 10 years
|
|
|
|
286,000
|
|
|
|
274,496
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(775,004
|
)
|
|
|
(702,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
326,724
|
|
|
$
|
364,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shorter of lease term or estimated useful life, not to exceed
15 years. |
Depreciation of property and equipment amounted to $60,451,
$67,306 and $70,092 in 2005, 2004, and 2003, respectively. The
Company capitalized interest of $309 and $855 for the years
ended December 31, 2005 and 2004, respectively, related to
the construction and equipping of clubs.
|
|
Note 5
|
Asset
Impairment Charges
|
In accordance with SFAS No. 144, all long-lived assets
are reviewed when events or changes in circumstances indicate
that the carrying value of the asset may not be recoverable. The
Company reviews assets at the lowest level for which there are
identifiable cash flows, which is at the club level. The
carrying amount of the club assets is compared to the expected
undiscounted future cash flows to be generated by those assets
over the estimated remaining useful life of the club. Cash flows
are projected for each club based upon historical results and
expectations. In cases where the expected future cash flows are
less than the carrying amount of the assets, those clubs are
considered impaired and the assets are written down to fair
value. For purposes of estimating fair value, the Company has
discounted the projected future cash flows of the impaired clubs
at a weighted average cost of capital. The Company recorded
impairment losses of $10,115, $14,772 and $19,605 in the years
ended December 31, 2005, 2004 and 2003, respectively.
The 2005, 2004 and 2003 charges related to club locations with
operating performance that deteriorated subsequent to the 2001
review or which had additions during the subsequent period that
were found to additionally be impaired. The 2003 charge related
primarily to the Crunch Fitness International acquisition in
2001, which was found to perform at a level below expectations
during 2002 and 2003. The impairment charges in 2005, 2004 and
2003 related primarily to the carrying values of land, buildings
and leasehold improvements that will, with the exception of
Crunch (See Note 19), continue to be operated by the
Company.
|
|
Note 6
|
Insurance
Proceeds
|
Costs incurred as a result of the Audit Committee investigation,
costs of cooperating with the various government agencies
investigating accounting-related matters, attorneys and
other professional fees advanced by the Company to various
current and former Company officers, directors and employees, as
provided in the Companys by-laws, subject to the
undertaking of the recipients to repay the advanced fees should
it ultimately be determined by a court of law that they were not
entitled to be indemnified, and related class action litigation
are reflected in General and Administrative expenses
in the Consolidated Statements of Operations. The Company
received payments of $7,270 during the year ended
December 31, 2005 for reimbursement of costs incurred in
this period and in prior periods pursuant to the Companys
Director and Officer insurance policies.
F-16
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
Note 7
|
Goodwill
and Other Intangible Assets
|
The Companys intangible assets are comprised principally
of goodwill, member relationships, leasehold rights and certain
trademarks. Goodwill represents the excess of cost over fair
value of assets of businesses acquired. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142) goodwill
and other intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life,
which consist of certain trademarks, are not amortized, but
instead tested for impairment at least annually.
The Company adopted SFAS No. 142 effective
January 1, 2002.
The Company is required to test goodwill for impairment on an
annual basis for each of its reporting units. The Company is
also required to evaluate goodwill for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Certain indicators of potential impairment
that could impact the Companys reporting units include,
but are not limited to, a significant long-term adverse change
in the business climate that is expected to cause a substantial
decline in membership, or a significant change in the delivery
of health and fitness services that results in a substantially
more cost effective method of delivery than health clubs. The
Company tested to determine if the fair values of each of its
reporting units were in excess of their respective carrying
values at December 31, 2005, 2004 and 2003, for purposes of
the annual impairment test. In 2003, it identified that the
carrying values of three of its reporting units were greater
than their fair value. Accordingly, the goodwill attributable to
these reporting units was written down by $42,062 (net of tax of
nil), and has been reflected in the 2003 consolidated statement
of operations.
As a result of the adoption of SFAS No. 142, the
Company ceased amortization of goodwill in 2002 in accordance
with the provisions of this standard. As stated above, the
Companys intangible assets other than goodwill consist
primarily of member relationships, leasehold rights, and certain
trademarks. The Company has determined member relationships and
leasehold rights have finite useful lives of six and ten years,
respectively, and are amortized on a straight-line basis over
these useful lives. The Company also evaluates other intangible
assets on an annual basis to determine if the carrying values of
these assets exceed their respective fair values. This
evaluation utilizes an expected cash flow technique to determine
fair value. Certain acquired clubs estimated future cash
flow were found to be insufficient to recover the carrying value
of acquired intangible assets. As a result of this evaluation,
the Company recorded an impairment charge against other
intangible assets of $1,220, $380 and $12,443 in the years ended
December 31, 2005, 2004 and 2003, respectively. This charge
is reported as an element of operating expenses under the
caption Impairment of goodwill and other intangibles
in the consolidated statement of operations.
In 2003, the Company wrote off $1,130 of goodwill associated
with discontinued operations from the liquidation of an
internet-based
start-up
company.
F-17
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The following table summarizes the changes in the Companys
net goodwill balance during 2005, 2004 and 2003:
|
|
|
|
|
Balance at December 31, 2002
|
|
$
|
84,801
|
|
Goodwill acquired
|
|
|
313
|
|
Goodwill impairment charge
|
|
|
(42,062
|
)
|
Discontinued operations charge
|
|
|
(1,130
|
)
|
Other
|
|
|
(263
|
)
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
41,659
|
|
Goodwill acquired
|
|
|
40
|
|
Goodwill impairment charge
|
|
|
(25
|
)
|
Other
|
|
|
24
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
41,698
|
|
Goodwill impairment charge
|
|
|
|
|
Other
|
|
|
33
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
41,731
|
|
|
|
|
|
|
The following tables summarize the December 31, 2005 and
2004 gross carrying amounts and accumulated amortization of
amortizable and unamortizable intangible assets, intangible
additions, intangible impairments, amortization expense for the
years ended December 31, 2005, 2004 and 2003, and the
estimated amortization expense for the five succeeding years:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Amortizable Intangible Assets:
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Membership relations
|
|
$
|
13,173
|
|
|
$
|
13,285
|
|
Non-compete agreements
|
|
|
598
|
|
|
|
598
|
|
Leasehold rights
|
|
|
14,157
|
|
|
|
15,592
|
|
Trademarks
|
|
|
13,171
|
|
|
|
13,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,099
|
|
|
|
42,494
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Membership relations
|
|
|
(12,835
|
)
|
|
|
(12,455
|
)
|
Non-compete agreements
|
|
|
(598
|
)
|
|
|
(568
|
)
|
Leasehold rights
|
|
|
(9,477
|
)
|
|
|
(8,543
|
)
|
Trademarks
|
|
|
(3,795
|
)
|
|
|
(3,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,705
|
)
|
|
|
(24,652
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
14,394
|
|
|
$
|
17,842
|
|
|
|
|
|
|
|
|
|
|
F-18
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
Aggregate additions to intangible
asset cost (principally leasehold rights and membership
relations):
|
|
|
|
|
Year ended December 31, 2003
|
|
|
150
|
|
Year ended December 31, 2004
|
|
|
20
|
|
Year ended December 31, 2005
|
|
|
|
|
Aggregate impairment charges to
intangible asset cost:
|
|
|
|
|
Year ended December 31, 2003
|
|
|
12,443
|
|
Year ended December 31, 2004
|
|
|
380
|
|
Year ended December 31, 2005
|
|
|
1,220
|
|
Aggregate amortization for
amortized intangible assets:
|
|
|
|
|
Year ended December 31, 2003
|
|
|
6,675
|
|
Year ended December 31, 2004
|
|
|
2,479
|
|
Year ended December 31, 2005
|
|
|
2,120
|
|
Estimated amortization expense:
|
|
|
|
|
Year ending December 31, 2006
|
|
|
1,817
|
|
Year ending December 31, 2007
|
|
|
1,605
|
|
Year ending December 31, 2008
|
|
|
1,415
|
|
Year ending December 31, 2009
|
|
|
1,254
|
|
Year ending December 31, 2010
|
|
|
947
|
|
|
|
Note 8
|
Accrued
Liabilities
|
Accrued liabilities consist of the following as of
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Payroll and benefit-related
liabilities
|
|
$
|
28,382
|
|
|
$
|
28,283
|
|
Interest
|
|
|
20,407
|
|
|
|
19,596
|
|
Deferred rent liability
|
|
|
12,019
|
|
|
|
11,740
|
|
Advertising
|
|
|
1,327
|
|
|
|
2,796
|
|
Taxes other than income taxes
|
|
|
8,241
|
|
|
|
6,852
|
|
Other
|
|
|
26,637
|
|
|
|
43,943
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,013
|
|
|
$
|
113,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
|
Derivative
Instruments
|
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133. This standard requires
the Company to recognize all derivatives on the balance sheet at
fair value. Fair value changes are recorded in income for any
contracts not classified as qualifying hedging instruments. For
derivatives qualifying as interest rate hedging instruments, the
effective portion of the derivative fair value change must be
recorded through other comprehensive income, a component of
stockholders equity (deficit). For hedges qualifying as
fair value hedges, both the swap and the hedged portion of the
debt are recorded in the balance sheets.
The Company entered into two interest rate swap agreements in
2003 which change the fixed-rate interest rate exposure on
$200,000 of the Companys
97/8% Senior
Subordinated Notes due 2007, to variable-rate based on the
six-month Eurodollar rate plus 6.01%, by entering into a
receive-fixed, pay-variable interest rate swap. Under the swap,
the
F-19
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Company receives fixed rate payments and makes variable rate
payments, thereby creating variable-rate long-term debt. These
swap agreements are accounted for as qualifying interest rate
hedges of the future fixed-rate interest payments in accordance
with SFAS No. 133, whereby changes in the fair market
value are reflected as adjustments to the fair value of the
derivative instrument as reflected on the accompanying
consolidated balance sheets. The change in fair value of the
swaps exactly offsets the change in fair value of the hedged
debt, with no impact on earnings.
The fair values of the interest rate swap agreements are
determined periodically by obtaining quotations from the
financial institution that is the counterparty to the Company
swap arrangements. The fair value represents an estimate of the
net amounts that the Company would receive or pay if the
agreements were transferred to another party or cancelled as of
the date of the valuation. During the years ended
December 31, 2005 and 2004, approximately $1,472 and
$3,128, respectively, related to the swaps were reported as an
addition and offset, respectively, to interest expense and
represent a yield adjustment of the hedged debt obligation. The
balance sheets at December 31, 2005 and 2004 reflect other
long-term liabilities of $3,798 and $1,784, respectively, to
reflect the fair value of the swap agreements.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Nonsubordinated:
|
|
|
|
|
|
|
|
|
Term loan, due 2009
|
|
$
|
173,250
|
|
|
$
|
175,000
|
|
Revolving credit facility
|
|
|
35,000
|
|
|
|
|
|
101/2% Senior
Notes due 2011
|
|
|
235,242
|
|
|
|
235,286
|
|
Capital lease obligations
|
|
|
9,080
|
|
|
|
16,990
|
|
Other secured and unsecured
obligations
|
|
|
20,845
|
|
|
|
34,533
|
|
Subordinated:
|
|
|
|
|
|
|
|
|
97/8%
Series D Senior Subordinated Notes due 2007, less
unamortized discount of $297 and $466
|
|
|
295,669
|
|
|
|
297,514
|
|
97/8%
Series B Senior Subordinated Notes due 2007
|
|
|
236
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
769,322
|
|
|
|
759,559
|
|
Current maturities of long-term
debt (nonsubordinated and subordinated)
|
|
|
(13,018
|
)
|
|
|
(22,127
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current
maturities
|
|
$
|
756,304
|
|
|
$
|
737,432
|
|
|
|
|
|
|
|
|
|
|
2004 Term
Loan and Revolving Credit Agreement
On October 14, 2004, the Company entered into a new credit
agreement (the Credit Agreement) with a group of
financial institutions that amended and restated its revolving
credit agreement. The Credit Agreement provides for a $175,000
term loan expiring in October 2009 in addition to the existing
$100,000 revolving credit facility which expires in June 2008.
The term loan is payable in quarterly installments of $437.5
beginning March 31, 2005, with a final installment of
$166,687.5 due on October 14, 2009. The rate of interest on
borrowings under the revolving credit facility is, at the
Companys option, either the reference rate (higher of the
prime rate or the federal funds rate plus 0.50%) plus a margin
of 2.25% to 3.0% per annum, or a Eurodollar rate plus a
margin of 3.25% to 4.0% per annum. The margins applicable
to the reference rate and Eurodollar rate loans are determined
by reference to a pricing matrix based on total leverage of the
Company. A commitment fee of 0.75% or 0.50% per annum,
based on utilization, is payable on the unused portion of the
revolving credit facility. The rate of interest on the term loan
is, at the Companys option, either the reference rate plus
3.75% per annum or a Eurodollar rate plus 4.75% per
annum. At December 31, 2005 and 2004, the average rates on
borrowings under the Credit Agreement were 9.02%
F-20
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
and 6.94%, respectively. The proceeds of the term loan were used
to repay the Companys $100,000 Securitization
Series 2001-1
and to provide approximately $75,000 of additional liquidity for
general corporate purposes. The Credit Agreement is secured by
substantially all of the Companys real and personal
property, including member obligations under installment
contracts. The Companys obligations under the Credit
Agreement remain guaranteed by most of its domestic
subsidiaries. The Credit Agreement contains restrictive
covenants that include certain interest coverage and leverage
ratios, and restrictions on use of funds; capital expenditures;
additional indebtedness; incurring liens; certain types of
payments (including without limitation, capital stock dividends
and redemptions, payments on existing indebtedness and
intercompany indebtedness); incurring or guaranteeing debt;
investments; mergers, consolidations, sales and acquisitions;
transactions with subsidiaries; conduct of business; sale and
leaseback transactions; incurrence of judgments; changing fiscal
year; and financial reporting, and all subject to certain
exceptions. The Credit Agreement will terminate early in the
event that the
97/8% Senior
Subordinated Notes due 2007 have not been repaid or refinanced
on or before April 15, 2007. As of December 31, 2004,
the Company believed that it may have been in violation of
certain financial covenants contained in the Credit Agreement.
On March 31, 2005, the Company entered into an amendment
and waiver to the Credit Agreement that, among other things,
excluded certain expenses incurred by the Company in connection
with the SEC and Department of Justice investigations and other
matters, from the calculation of various financial covenants,
waived certain events of default related to, among other things,
delivery of financial information and leasehold mortgages,
reduced permitted capital expenditures, and increased financial
reporting requirements. Effective August 9, 2005, the
Company entered into a consent with its lenders under the Credit
Agreement to extend the
10-day
period until August 31, 2005. On August 24 and
August 30, the Company received consents from holders of a
majority of its Senior Subordinated Notes and its Senior Notes,
respectively, to extend the waivers until November 30,
2005. Effective August 24, 2005, the Company further
amended the Credit Agreement to permit payment of consent fees
to the holders of the Senior Subordinated Notes and Senior
Notes, to exclude certain additional expenses from the
computation of various financial covenants and to reduce the
required interest coverage ratio for the period ending
March 31, 2006 and to limit revolver borrowings under the
Credit Agreement if the Companys unrestricted cash exceeds
certain levels. On October 17, 2005, the Company entered
into a consent under the Credit Agreement which permits entering
into stockholders rights plans, subject to certain
conditions. The amount available under the revolving credit
facility is reduced by any outstanding letters of credit
($13,605 and $8,678 at December 31, 2005 and 2004,
respectively), which cannot exceed $30,000. A fee of 2.25% to
3.0% per annum and a fronting fee of one-fourth of 1% is
paid on outstanding letters of credit. At December 31,
2005, the Company was in compliance with all covenants under the
Credit Agreement. At May 31, 2006, $39,500 was borrowed and
$14,133 letters of credit were outstanding under the revolving
credit facility. The term loan balance at May 31, 2006 was
$143,250, reflecting a $30,000 mandatory payment from the
proceeds of the sale of Crunch Fitness which was applied to
remaining installments in direct order of maturity.
See Note 19 for a description of the March 2006 and June
2006 waivers and amendments.
101/2% Senior
Notes
In July 2003, the Company issued $235,000 in aggregate principal
of
101/2% Senior
Notes due 2011 (Senior Notes) in two offerings under
Rule 144A and Regulation S under the Securities Act of
1933, as amended. The Senior Notes are jointly and severally
guaranteed by substantially all of the domestic subsidiaries of
the Company, on an unsecured basis. Proceeds from the note
issuances were used to refinance the Companys $131,990
term loan and $56,000 outstanding on the revolving credit
facility, and to repay $25,000 on the
series 2001-1.
As a result, the Company wrote off $1,669 of unamortized
issuance costs from the extinguished debt in the third quarter
of 2003. Prior to July 2006, Bally may redeem up to 35% of the
Senior Notes at a redemption price of 110.5% with the proceeds
from one or more equity offerings. Beginning in July 2007, the
Senior Notes may be redeemed at the Companys option, in
whole or in part, with premiums ranging from 5.25% in 2007 to
zero in 2009 and thereafter. Upon a change of control, as
defined in the indenture, holders may require the Company to
purchase the Senior
F-21
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Notes at a price of 101%. The indenture governing the Senior
Notes contains certain covenants which are described in the
following paragraph.
97/8% Senior
Subordinated Notes
The
97/8%
Series B Senior Subordinated Notes and the
97/8%
Series D Senior Subordinated Notes (collectively, the
Senior Subordinated Notes) mature on
October 15, 2007. The Series D Notes are not subject
to any sinking fund requirement but may be redeemed at the
Companys option, in whole or in part, with premiums
ranging from 3.29% in December 2003 to zero as of October 2005
and thereafter. Upon a change of control, as defined in the
indenture, holders may require the Company to purchase the
Senior Subordinated Notes at a price of 101%. The payment of the
Senior Subordinated Notes is subordinated to the payment in full
of all senior indebtedness of the Company, as defined
(approximately $473,117 at December 31, 2005). The
indentures governing the Senior Subordinated Notes and the
Senior Notes contain covenants including restrictions on use of
funds; additional indebtedness; incurring liens; certain types
of payments (including without limitation, capital stock
dividends and redemptions, payments on existing indebtedness and
intercompany indebtedness); incurring or guaranteeing debt of an
affiliate; capital expenditures; making certain investments;
mergers, consolidations, sales and acquisitions; transactions
with subsidiaries; conduct of business; sale and leaseback
transactions; incurrence of judgments; changing fiscal year; and
financial reporting, and all subject to certain exceptions.
The Company did not comply with its covenant obligations under
the indentures governing the Senior Subordinated Notes and the
Senior Notes to file its 2005 Annual Report on
Form 10-K
and its Quarterly Report on Form 10-Q for the three months
ended March 31, 2006 with the SEC by the required filing
dates. See Note 19 for a description of the March 2006
consent solicitation waiving for limited periods defaults so
arising under the financial reporting covenant obligations.
Consent
Solicitations
As a result of the Audit Committee investigation into certain
accounting issues and the retention of new independent auditors,
the Company announced on August 9, 2004 that it was unable
to timely file its consolidated financial statements for the
quarter ending June 30, 2004 with the SEC. Although the
filing delay constituted a default of the financial reporting
covenants under the indentures, it did not result in an event of
default until delivery to the Company of a default notice and
the expiration of a
30-day cure
period. On October 29, 2004, the trustee advised the
Company that it would notify holders of the Senior Subordinated
Notes and the Senior Notes of the defaults in accordance with
the indentures and indicated its intention to send the Company a
notice of default no later than December 15, 2004 unless
the default was cured or waived prior to that date. On
December 7, 2004, the Company completed consent
solicitations to amend the indentures governing its Senior
Subordinated Notes and its Senior Notes to waive through
July 31, 2005 any default arising under the financial
reporting covenants in the indentures from a failure to timely
file its consolidated financial statements with the SEC. In
order to secure the waiver until July 31, 2005, the Company
was required to pay additional consent fees on or before
June 3, 2005 and July 6, 2005. The Company paid fees
to the noteholders for these consents of $2,340 in each of 2004
and 2005.
On July 13, 2005, the Company commenced the solicitation of
consents to extend the original waivers of defaults obtained on
December 7, 2004 from holders of its Senior Notes and
Senior Subordinated Notes (Noteholders) under the
indentures governing the notes. On August 4 and 5, 2005,
the Company received notices of default under the indentures
following the expiration of the waiver of the financial
reporting covenant default on July 31, 2005. The notices
commenced a
30-day cure
period and a
10-day
period after which a cross-default would have occurred under the
Companys Credit Agreement. Effective August 9, 2005,
the Company entered into a consent with its lenders under the
Credit Agreement to extend the
10-day
period until August 31, 2005. On August 24 and
August 30, the Company received consents from holders of a
majority of its Senior Subordinated Notes and its Senior Notes,
respectively, to extend the waivers until November 30,
2005. Effective
F-22
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
August 24, 2005, the Company further amended the Credit
Agreement to permit payment of consent fees to the holders of
the Senior Subordinated Notes and Senior Notes, to exclude
certain additional expenses from the computation of various
financial covenants and to reduce the required interest coverage
ratio for the period ending March 31, 2006 and to limit
revolver borrowings under the Credit Agreement if the
Companys unrestricted cash exceeds certain levels. On
November 1, 2005, the Company completed a consent
solicitation of those holders of Senior Subordinated Notes who
were not party to the August 24, 2005 consent agreement.
Fees paid for these consents to the Noteholders consisted of
cash payments of $4,866 and issuance of 1,903,200 shares of
unregistered Common Stock (for which we recorded $7,394 in
deferred finance charges). The solicitation agent was issued
232,000 shares of unregistered Common Stock as compensation
for services rendered, while the lenders under the Credit
Agreement were paid $2,926 in cash for their consents and
amendment. In addition, on November 28, 2005, the Company
entered into a Stock Purchase Agreement with the solicitation
agent pursuant to which 409,314 shares of unregistered
Common Stock were issued to the solicitation agent in exchange
for $1,433, which equaled the consent fee the Company paid in
cash to holders of the Senior Subordinated Notes in connection
with the consent solicitation.
See Note 19 for a description of the March 2006 consent
solicitation.
Other
Secured Debt
As of December 31, 2005, the Companys unrestricted
Canadian subsidiary was not in compliance with the terms of its
credit agreement. As a result, the outstanding amounts of $2,428
and $4,604 as of December 31, 2005 and 2004, respectively,
has been classified as current as of such date. As of
May 31, 2006, there was $787 outstanding under this
agreement.
Capital
Leases
The Company leases certain equipment under capital leases
expiring in periods ranging from one to five years. Included in
Property and Equipment at December 31, 2005 and
2004 were assets under capital leases of $9,860 and $24,180,
respectively, net of accumulated amortization of $29,556 and
$37,058, respectively.
Liquidity
The Company requires operating cash flow to fund its capital
spending and working capital requirements. The Company maintains
a substantial amount of debt, the terms of which require
significant interest payments each year. The Company currently
anticipates that cash flow and availability under the $100,000
revolving credit facility pursuant to the Credit Agreement will
be sufficient to meet its expected needs for working capital and
other cash requirements through the first quarter of 2007.
However, the Companys cash flows and liquidity may be
negatively impacted by various items, including changes in terms
or other requirements by vendors, regulatory fines, penalties,
settlements or adverse results in securities or other
litigations, future consent payments to lenders or bondholders
if required and unexpected capital requirements.
The Credit Agreement will terminate if the Senior Subordinated
Notes are not repaid or refinanced on or before April 15,
2007. The Company does not believe that its cash flow and
availability under the $100,000 revolving credit facility will
be sufficient to meet its needs in 2007 when the Senior
Subordinated Notes come due. Therefore, the Company may need to
raise additional funds through private or public debt or equity
financings. There is no assurance that funds will be available
to the Company on favorable terms or at all. If such funds are
unavailable to the Company, the Company may default on its
Senior Notes, its Senior Subordinated Notes and its Credit
Agreement. In addition, upon a default under the Credit
Agreement, whether directly or as a result of a cross-default to
other indebtedness, the Company will not be able to draw on the
revolving credit facility and may not be able to continue to
operate its business.
F-23
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Maturities of long-term debt and future minimum payments under
capital leases, together with the present value of future
minimum rentals as of December 31, 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Capital
|
|
|
|
|
|
|
Debt
|
|
|
Leases
|
|
|
Total
|
|
|
2006
|
|
$
|
10,001
|
|
|
$
|
5,479
|
|
|
$
|
15,480
|
|
2007
|
|
|
509,735
|
|
|
|
1,991
|
|
|
|
511,726
|
|
2008
|
|
|
2,502
|
|
|
|
1,381
|
|
|
|
3,883
|
|
2009
|
|
|
2,762
|
|
|
|
909
|
|
|
|
3,671
|
|
2010
|
|
|
|
|
|
|
187
|
|
|
|
187
|
|
Thereafter
|
|
|
235,242
|
|
|
|
|
|
|
|
235,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
760,242
|
|
|
$
|
9,947
|
|
|
$
|
770,189
|
|
Less amount representing interest
|
|
|
|
|
|
|
(867
|
)
|
|
|
(867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
760,242
|
|
|
$
|
9,080
|
|
|
$
|
769,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above maturities present amounts under the Credit Agreement
as due in 2007, pursuant to the early termination provisions
related to the refinancing of the Senior Subordinated Notes.
The Company has failed to comply with certain financial
reporting covenants in 2004, 2005 and 2006 and has obtained
waivers with respect to its non-compliance. Any breach of any
covenants will result in a default
and/or
cross-default under the Credit Agreement or the indentures
governing the Senior Notes and the Senior Subordinated Notes.
Deferred revenue represents cash received from members, but not
yet earned. The summary set forth below of the activity and
balances in deferred revenue at December 31, 2004 and 2005
and for the years then ended includes as cash additions all cash
received for membership services. Revenue recognized includes
all revenue earned during the periods from membership services.
Financed members are those members who have financed their
initial membership fee to be paid monthly. Advanced payments
from financed members are included within this table as advanced
payments of periodic dues and membership fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Cash
|
|
|
Revenue
|
|
|
December 31,
|
|
|
|
2004
|
|
|
Additions
|
|
|
Recognized
|
|
|
2005
|
|
|
Deferral of receipts from financed
members:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments
|
|
$
|
535,680
|
|
|
$
|
272,855
|
|
|
$
|
(289,484
|
)
|
|
$
|
519,051
|
|
Down payments
|
|
|
105,614
|
|
|
|
49,316
|
|
|
|
(54,921
|
)
|
|
|
100,009
|
|
Deferral of receipts representing
advance payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full
membership fees collected upon origination
|
|
|
124,884
|
|
|
|
43,915
|
|
|
|
(45,160
|
)
|
|
|
123,639
|
|
Advance payments of periodic dues
and membership fees
|
|
|
133,612
|
|
|
|
129,541
|
|
|
|
(141,413
|
)
|
|
|
121,740
|
|
Receipts collected and earned
without deferral during period
|
|
|
|
|
|
|
338,324
|
|
|
|
(338,324
|
)
|
|
|
|
|
Deferral of receipts for personal
training services
|
|
|
21,509
|
|
|
|
135,109
|
|
|
|
(134,595
|
)
|
|
|
22,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
921,299
|
|
|
$
|
969,060
|
|
|
$
|
(1,003,897
|
)
|
|
$
|
886,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Cash
|
|
|
Revenue
|
|
|
December 31,
|
|
|
|
2003
|
|
|
Additions
|
|
|
Recognized
|
|
|
2004
|
|
|
Deferral of receipts from financed
members:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments
|
|
$
|
528,186
|
|
|
$
|
294,756
|
|
|
$
|
(287,262
|
)
|
|
$
|
535,680
|
|
Down payments
|
|
|
111,788
|
|
|
|
52,213
|
|
|
|
(58,387
|
)
|
|
|
105,614
|
|
Deferral of receipts representing
advance payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full
membership fees collected upon origination
|
|
|
135,082
|
|
|
|
40,399
|
|
|
|
(50,597
|
)
|
|
|
124,884
|
|
Advance payments of periodic dues
and membership fees
|
|
|
149,151
|
|
|
|
120,012
|
|
|
|
(135,551
|
)
|
|
|
133,612
|
|
Receipts collected and earned
without deferral during period
|
|
|
|
|
|
|
318,744
|
|
|
|
(318,744
|
)
|
|
|
|
|
Deferral of receipts for personal
training services
|
|
|
19,818
|
|
|
|
127,132
|
|
|
|
(125,441
|
)
|
|
|
21,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
944,025
|
|
|
$
|
953,256
|
|
|
$
|
(975,982
|
)
|
|
$
|
921,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12
|
Stockholders
Deficit
|
Preferred Stock: The Company is authorized to
issue 10,000,000 shares, $.10 par value, of preferred
stock in one or more series and to designate the rights,
preferences, limitations, and restrictions of and upon shares of
each series, including voting, redemption, and conversion
rights. 100,000 shares of Series B Junior
Participating Preferred Stock have been authorized; no shares
are issued or outstanding.
On October 17, 2005, the Company entered into a consent
agreement with its lenders under its Credit Agreement to permit
the Company to enter into Rights Plan Transactions (as defined).
On October 18, 2005, the Companys Board of Directors
adopted a Stockholder Rights Plan (Rights Plan),
authorized a new class of and issuance of up to
100,000 shares of Series B Junior Participating
Preferred Stock, and declared a dividend of one preferred share
purchase right (the Right) for each share of Common
Stock held of record at the close of business on
October 31, 2005. Each Right, if and when exercisable,
entitles its holder to purchase one one-thousandth of a share of
Series B Junior Participating Preferred Stock at a price of
$13.00 per one one-thousandth of a Preferred Share subject
to certain anti-dilution adjustments.
The Rights Plan provides that the Rights become exercisable only
after a triggering event, including a person or group acquiring
15% or more of the Companys Common Stock. The
Companys Board of Directors is entitled to redeem the
Rights for $0.001 per Right at any time prior to a person
acquiring 15% or more of the outstanding Common Stock.
Should a person or group acquire more than 15% of the
Companys Common Stock, each Right will entitle its holder
to purchase, at the Rights then-current exercise price and
in lieu of receiving shares of preferred stock, a number of
shares of Common Stock of the Company having a market value at
that time of twice the Rights exercise price. In the same
regard, the Rights of the acquiring person or group will become
void and will not be exercisable. If the Company is acquired in
a merger or other business combination transaction not approved
by the Board of Directors, each Right will entitle its holder to
purchase, at the Rights then-current exercise price and in
lieu of receiving shares of preferred stock, a number of the
acquiring companys common shares having a market value at
that time of twice the Rights exercise price.
The Rights Plan will terminate on July 15, 2006 unless the
issuance of the Rights is ratified by Company stockholders prior
to that time. The Company will not seek ratification of the
Rights Plan by stockholders.
F-25
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Common Stock: The Company is authorized to
issue 60,200,000 shares of Common Stock, $.01 par
value. Each share of Common Stock is entitled to one vote per
share. At December 31, 2005, 5,310,945 shares of
Common Stock were reserved for future issuance;
735,701 shares in connection with outstanding warrants and
4,575,244 shares in connection with certain stock plans.
Restrictions on Net Assets: The Companys
ability to meet its future financial obligations is dependent on
the availability of cash flows from its subsidiaries. As further
described in Note 10, the Companys subsidiaries are
subject to contractual restrictions that limit their ability to,
among other things, incur additional indebtedness, pay dividends
or other distributions on or redeem or repurchase their capital
stock, make investments, enter into transactions with
affiliates, issue stock, engage in unrelated lines of business,
create liens to secure debt, and transfer or sell assets or
merge with other companies. As a result, substantially all of
the net assets of the Companys subsidiaries were
restricted at December 31, 2005.
Accumulated Deficit: As discussed in
Note 2, the accumulated deficit as of December 31,
2002 was adjusted in order to correct certain errors in the
application of GAAP identified that affected the Companys
accumulated deficit balance.
The income tax provision (benefit) applicable to income (loss)
from continuing operations before income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Deferred taxes
|
|
$
|
347
|
|
|
$
|
(15,422
|
)
|
|
$
|
(40,079
|
)
|
Change in valuation allowance
|
|
|
73
|
|
|
|
15,842
|
|
|
|
40,499
|
|
Foreign (all current)
|
|
|
35
|
|
|
|
75
|
|
|
|
72
|
|
State (all current)
|
|
|
447
|
|
|
|
356
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
902
|
|
|
$
|
851
|
|
|
$
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial accounting and income tax purposes.
Significant components of the Companys deferred tax assets
and liabilities as of December 31, 2005 and 2004, along
with their classification, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Installment contract revenues
|
|
$
|
358,069
|
|
|
$
|
|
|
|
$
|
394,742
|
|
|
$
|
|
|
Amounts not yet deducted for tax
purposes
|
|
|
37,989
|
|
|
|
|
|
|
|
18,246
|
|
|
|
|
|
Depreciation and capitalized costs
|
|
|
122,267
|
|
|
|
|
|
|
|
141,154
|
|
|
|
|
|
Tax loss carryforwards
|
|
|
340,339
|
|
|
|
|
|
|
|
304,259
|
|
|
|
|
|
Acquired intangibles
|
|
|
|
|
|
|
2,722
|
|
|
|
|
|
|
|
3,284
|
|
Other, net
|
|
|
|
|
|
|
3,474
|
|
|
|
|
|
|
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
858,664
|
|
|
$
|
6,196
|
|
|
$
|
858,401
|
|
|
$
|
5,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(854,054
|
)
|
|
|
|
|
|
|
(853,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,610
|
|
|
$
|
6,196
|
|
|
$
|
4,420
|
|
|
$
|
5,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
913
|
|
|
$
|
762
|
|
|
$
|
936
|
|
|
$
|
465
|
|
Long-term
|
|
|
3,697
|
|
|
|
5,434
|
|
|
|
3,484
|
|
|
|
5,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,610
|
|
|
$
|
6,196
|
|
|
$
|
4,420
|
|
|
$
|
5,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company has estimated federal
Alternative Minimum Tax (AMT) credits and tax loss
carryforwards of $5,896 and $708,303, respectively. The AMT
credits can be carried forward indefinitely, while the tax loss
carryforwards expire beginning in 2011 through 2025. In
addition, the Company has substantial state tax loss
carryforwards that began to expire in 2005 and fully expire
through 2025. On September 28, 2005, the Company underwent
an ownership change for purposes of IRC Section 382. Due to
the ownership change that occurred, the utilization of the
Companys federal tax loss carryforwards is subject to an
annual limitation under Section 382, which will
significantly limit their use. The amount of the limitation may,
under certain circumstances, be increased by built-in gains held
by the Company at the time of the change that are recognized in
the five-year period after the ownership change.
Based upon the Companys past performance and the
expiration dates of its carryforwards, the ultimate realization
of all of the Companys deferred tax assets cannot be
assured. Accordingly, a valuation allowance has been recorded to
reduce deferred tax assets to a level which, more likely than
not, will be realized. Included in the deferred tax asset and
valuation allowance is $7,037 resulting from the exercise of
stock options and the Company-sponsored stock purchase plan. The
related benefit will be included as additional paid-in capital
when realized. Also included in the deferred tax asset and
valuation allowance is $795 resulting from loss carryovers
acquired. The related benefit will be credited to goodwill when
realized.
F-27
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
A reconciliation of the income tax provision with amounts
determined by applying the U.S. statutory tax rate to
income (loss) from continuing operations before income taxes is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Provision (benefit) at
U.S. statutory tax rate (35%)
|
|
$
|
(3,049
|
)
|
|
$
|
(10,292
|
)
|
|
$
|
(35,550
|
)
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for change in valuation
allowance
|
|
|
73
|
|
|
|
15,842
|
|
|
|
40,498
|
|
Deferred state income taxes, net
of related federal income tax effect
|
|
|
2,020
|
|
|
|
(4,647
|
)
|
|
|
(19,331
|
)
|
Current state income taxes, net of
related federal income tax effect
|
|
|
291
|
|
|
|
231
|
|
|
|
397
|
|
Foreign withholding taxes
|
|
|
35
|
|
|
|
75
|
|
|
|
72
|
|
Amortization and impairment of
cost in excess of acquired assets
|
|
|
0
|
|
|
|
|
|
|
|
14,339
|
|
Non-deductible executive
compensation
|
|
|
1,045
|
|
|
|
208
|
|
|
|
|
|
Other, net
|
|
|
487
|
|
|
|
(566
|
)
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision from
continuing operations
|
|
$
|
902
|
|
|
$
|
851
|
|
|
$
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14
|
Warrants
and Stock Transactions
|
The Company issued warrants in 1996, which as of
December 31, 2005, were held by the former Chairman of the
Board of Directors, President and Chief Executive Officer of the
Company, Lee Hillman, entitling him to acquire
735,701 shares of Common Stock at an exercise price of
$5.26 per share, subject to possible reduction of the
exercise price by a maximum of $1.00 per share based on the
closing price of Common Stock on the day immediately prior to
exercise of the warrant. The warrants expire December 31,
2007.
In January 1996, the Board of Directors of the Company adopted
the 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan). The Directors Plan
provides for the grant of non-qualified stock options to
non-employee directors of the Company.
Initially, 100,000 shares of Common Stock were reserved for
issuance under the Directors Plan and, at
December 31, 2005, 75,000 shares of Common Stock were
available for future grant under the Directors Plan. The
Directors Plan expired as of January 3, 2006. As
such, stock options may no longer be granted under the
Directors Plan.
Pursuant to the Directors Plan, non-employee directors of
the Company are granted an option to purchase 5,000 shares
of Common Stock upon the commencement of service on the Board of
Directors, with another option to purchase 5,000 shares of
Common Stock granted on the second anniversary thereof.
Additional grants of options may be made from time to time
pursuant to the Directors Plan. Options under the
Directors Plan are generally granted with an exercise
price equal to the fair market value of the Common Stock at the
date of grant. Option grants under the Directors Plan
become exercisable in three equal annual installments commencing
one year from the date of grant and have a
10-year
term. All of the options granted under the Directors Plan
prior to May 4, 2005 became exercisable for a period of
90 days on May 4, 2005 as a result of a change in
control event; at the end of the
90-day
period the options terminated according to the terms of the
Directors Plan. For these purposes, a change in control
was defined as an Acquiring Person becoming the Beneficial Owner
of Shares representing 10% or more of the combined voting power
of the then-outstanding shares other than in a transaction or
series of transactions approved by the Companys Board of
Directors. The acquisition on May 4, 2005 of the
Companys Common Stock by
F-28
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Liberation Investment Group LLC, Liberation Investments, Ltd.,
Liberation Investments, L.P. and Emanuel R. Pearlman constituted
such a change in control.
Due to an administrative error, directors were not apprised of
the vesting and subsequent expiration of their options during
2005, and thus did not have an opportunity to exercise their
options. Accordingly, on March 3, 2006, the Nominating and
Corporate Governance Committee, with affected directors
abstaining, awarded a cash payment for each expired option to
each director equal to the difference between (i) the
average of the high and low prices of Bally common stock on the
NYSE on December 2, 2005 (the first available trading date
under the Companys insider trading policy following
expiration of the options) and (ii) the exercise price of
such option. The amounts awarded to the directors were as
follows: Mr. Deutsch $14;
Mr. Langshur $17;
Mr. Looloian $11;
Dr. McAnally $11; Mr. John
Rogers $26. In the case of
Messrs. Looloian and McAnally, the actual amount paid, $3
and $3, respectively, was net of proceeds received upon a
cashless exercise of certain options that the Company
erroneously permitted to be exercised in December 2005
(Messrs. Looloian and McAnally paid the Company the par
value with respect to the shares received on exercise of the
options).
Also in January 1996, the Board of Directors of the Company
adopted the 1996 Long-Term Incentive Plan (the Incentive
Plan). The Incentive Plan provides for the grant of
non-qualified stock options, incentive stock options and
compensatory restricted stock awards (collectively
Awards) to officers and key employees of the
Company. In addition, the restricted stock awards to Paul A.
Toback and Harold Morgan were modified as of August 24,
2004 and January 1, 2005, respectively, by the employment
agreements entered into with such individuals, granting a
gross-up
payment for taxes in connection with any income tax imposed on
such person as a result of any stock award. Initially,
2,100,000 shares of Common Stock were reserved for issuance
under the Incentive Plan. In November 1997, June 1999, December
2000 and June 2002 the Incentive Plan was amended to increase
the aggregate number of shares of Common Stock that may be
granted under the Incentive Plan to an aggregate of
8,600,000 shares. At December 31, 2005,
283,965 shares of Common Stock were available for future
grant under the Incentive Plan. The Incentive Plan expired as of
January 3, 2006. As such, awards may no longer be granted
under the Incentive Plan.
Pursuant to the Incentive Plan, non-qualified stock options are
generally granted with an exercise price equal to the fair
market value of the Common Stock at the date of grant. Incentive
stock options must be granted at not less than the fair market
value of the Common Stock at the date of grant. Options are
granted at the discretion of the Compensation Committee of the
Board of Directors (the Compensation Committee).
Option grants become exercisable generally in three equal annual
installments commencing one year from the date of grant. Option
grants in 2005, 2004 and 2003 have
10-year
terms.
On March 8, 2005, the Company adopted the Inducement Award
Equity Incentive Plan (the Inducement Plan) as a
means of providing equity compensation in order to induce
individuals to become employed by the Company. The Inducement
Plan provides for the issuance of up to 600,000 shares of
the Companys Common Stock in the form of stock options and
restricted shares, subject to various restrictions. At
December 31, 2005, 62,000 shares of common stock were
available for future grant under the Inducement Plan.
Pursuant to the Inducement Plan, non-qualified stock options are
generally granted with an exercise price equal to the fair
market value of the Common Stock at the date of grant.
Inducement stock options must be granted at not less than the
fair market value of the Common Stock at the date of grant.
Options are granted at the discretion of the Compensation
Committee of the Board of Directors (the Compensation
Committee). Option grants become exercisable generally in
three equal annual installments commencing one year from the
date of grant. Option grants in 2005, 2004 and 2003 have
10-year
terms.
F-29
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
A summary of 2005, 2004 and 2003 stock option activity under the
Directors Plan, Incentive Plan and Inducement Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
|
|
shares
|
|
|
-average
|
|
|
|
|
|
|
represented
|
|
|
exercise
|
|
|
Range of Exercise
|
|
|
|
by options (#)
|
|
|
price ($)
|
|
|
Prices ($)
|
|
|
Outstanding at December 31,
2002 2,788,843 of which were exercisable
|
|
|
3,631,513
|
|
|
|
20.48
|
|
|
|
4.13 36.00
|
|
Granted
|
|
|
1,715,000
|
|
|
|
6.41
|
|
|
|
4.97 7.62
|
|
Exercised
|
|
|
(3,919
|
)
|
|
|
4.13
|
|
|
|
4.13 4.13
|
|
Forfeited
|
|
|
(144,529
|
)
|
|
|
21.07
|
|
|
|
4.13 32.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003 3,162,983 of which were exercisable
|
|
|
5,198,065
|
|
|
|
15.83
|
|
|
|
4.13 36.00
|
|
Granted
|
|
|
85,000
|
|
|
|
5.41
|
|
|
|
3.67 7.80
|
|
Exercised
|
|
|
(12,190
|
)
|
|
|
4.13
|
|
|
|
4.13 4.13
|
|
Forfeited
|
|
|
(818,534
|
)
|
|
|
16.93
|
|
|
|
4.13 36.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004 3,349,738 of which were exercisable
|
|
|
4,452,341
|
|
|
|
15.47
|
|
|
|
3.67 36.00
|
|
Granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
At market
|
|
|
495,500
|
|
|
|
5.86
|
|
|
|
2.91 7.72
|
|
Above market
|
|
|
673,000
|
|
|
|
4.21
|
|
|
|
4.21 4.21
|
|
Exercised
|
|
|
(496,904
|
)
|
|
|
4.58
|
|
|
|
4.12 6.04
|
|
Forfeited
|
|
|
(985,423
|
)
|
|
|
17.69
|
|
|
|
3.04 36.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005 2,587,736 of which are exercisable
|
|
|
4,138,514
|
|
|
|
13.26
|
|
|
|
2.91 36.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of options outstanding and options exercisable as of
December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
Shares
|
|
|
Contractual Life
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
Exercise Prices
|
|
Outstanding
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$
|
2.91 - 7.80
|
|
|
2,386,907
|
|
|
|
8.4
|
|
|
$
|
5.71
|
|
|
|
836,129
|
|
|
$
|
6.38
|
|
|
12.00 - 18.50
|
|
|
605,732
|
|
|
|
2.9
|
|
|
|
17.47
|
|
|
|
605,732
|
|
|
|
17.47
|
|
|
20.20 - 29.00
|
|
|
785,575
|
|
|
|
5.3
|
|
|
|
23.86
|
|
|
|
785,575
|
|
|
|
23.86
|
|
|
32.94 - 36.00
|
|
|
360,300
|
|
|
|
3.7
|
|
|
|
33.09
|
|
|
|
360,300
|
|
|
|
33.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.91 - 36.00
|
|
|
4,138,514
|
|
|
|
6.6
|
|
|
|
13.26
|
|
|
|
2,587,736
|
|
|
|
18.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has elected to follow APB No. 25 and related
Interpretations in accounting for its stock options. Under APB
No. 25, because the exercise price of the Companys
stock options equals the market price of the Common Stock on the
date of grant, no compensation expense is recognized.
The weighted-average fair value of options granted was $2.34,
$2.87 and $3.40 for 2005, 2004 and 2003, respectively. The fair
value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2005, 2004 and 2003: risk-free
interest rate of 4.21%, 3.88% and 3.11%, respectively; no
dividend yield; volatility factor of the expected market price
of the
F-30
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Common Stock of 51.9%, 51.2% and 52.8%, respectively; and a
weighted-average expected life of the options of six years for
each period.
Restricted
Stock
The Company grants restricted stock awards to certain employees.
Restricted stock awards are valued at the closing market value
of the Companys common stock on the day prior to the
grant, and the total value of the award is recognized as expense
ratably over the vesting period of the employees receiving the
grants.
A summary of restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Grant Date Fair Value
|
|
|
Outstanding at December 31,
2002
|
|
|
607,500
|
|
|
$
|
20.75
|
|
Granted
|
|
|
720,000
|
|
|
|
6.08
|
|
Forfeited
|
|
|
(12,500
|
)
|
|
|
14.11
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
1,315,000
|
|
|
|
12.78
|
|
Vested
|
|
|
(100,000
|
)
|
|
|
6.04
|
|
Forfeited
|
|
|
(137,500
|
)
|
|
|
16.23
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
1,077,500
|
|
|
|
12.96
|
|
Granted
|
|
|
1,573,000
|
|
|
|
5.24
|
|
Vested
|
|
|
(1,660,500
|
)
|
|
|
8.57
|
|
Forfeited
|
|
|
(153,000
|
)
|
|
|
14.28
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
837,000
|
|
|
$
|
6.92
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the Incentive Plan and the Inducement Plan,
restricted stock awards are rights granted to an employee to
receive shares of stock without payment but subject to
forfeiture and other restrictions as set forth in the Incentive
Plan or the Inducement Plan, as applicable. Generally, the
restricted stock awarded, and the right to vote such stock or to
receive dividends thereon, may not be sold, exchanged or
otherwise disposed of during the restricted period. Except as
otherwise determined by the Compensation Committee, the
restrictions and risks of forfeiture generally lapse four years
after the date of grant.
The restrictions on the shares issued in 2002 lapse upon a
change in control of the Company (defined as an Acquiring Person
becoming the Beneficial Owner of Shares representing 10% or more
of the combined voting power of the then outstanding shares
other than in a transaction or series of transactions approved
by the Companys Board of Directors), the employees
death, termination of employment due to disability or the first
date prior to December 31, 2005 which follows seven
consecutive trading days on which the trading price equals or
exceeds the targeted stock price of $42 per share. The
weighted average fair value of the 2002 grant cannot be
determined due to its variable nature. The restrictions on the
shares issued in 2003 lapse four years after the date of
issuance, upon a change in control of the Company (as previously
defined), the employees death or termination of employment
other than for cause. Vesting on the shares issued in 2003 can
accelerate based on the attainment of certain performance goals.
The Company is recognizing compensation expense on these shares
over the four-year vesting period. In addition,
100,000 shares were granted in 2003 to Paul A. Toback with
restrictions that
F-31
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
lapse upon a change in control of the Company, his death or
termination of employment due to disability. The weighted
average fair value of this grant cannot be determined due to the
variable nature of the grant. Upon the resignation of the
Companys former CFO in April 2004, the Company recognized
$465 of additional compensation expense relating to the
conversion of 100,000 shares of restricted stock at a
market price of $6.03 per share. In the eleven month period
prior to the resignation, $138 of compensation expense was
recognized on the shares which converted. Unearned compensation
of $1,567 relating to all restricted stock as of
December 31, 2004 is included in stockholders equity
for the remaining unvested shares.
On May 4, 2005, 1,320,500 shares of restricted stock
became vested under the terms of the 1996 Long-Term Incentive
Plans change in control provision, which provides for
accelerated vesting in the event of a change in control. For
these purposes, a change in control is defined as an Acquiring
Person becoming the Beneficial Owner of Shares representing 10%
or more of the combined voting power of the then outstanding
shares other than in a transaction or series of transactions
approved by the Companys Board of Directors. The
acquisition on May 4, 2005 of the Companys Common
Stock by Liberation Investment Group LLC, Liberation
Investments, Ltd., Liberation Investments, L.P. and Emanuel R.
Pearlman constituted such a change in control. Accordingly,
808,000 shares of restricted stock subject to four-year
cliff vesting conditions and 512,500 shares of restricted
stock subject to certain performance-based conditions lapsed. In
connection with this event, $2,201 of unearned compensation was
reported as general and administrative expense in the
three-month period ended June 30, 2005 which related to the
time-based restricted shares, and $1,609 in compensation was
reported as general and administrative expense in the
three-month period ended June 30, 2005 which related to the
performance-based restricted shares. Existing employment
agreements with certain executives contain tax consequence
gross-up
provisions the effects of which resulted in $977 in compensation
reported as general and administrative expense in the
three-months ended June 30, 2005.
As of December 31, 2005, 385,000 restricted shares and
stock options covering an additional 153,000 shares have
been granted under the Inducement Plan. 330,000 shares of
restricted stock became vested in May and September 2005 under
the terms of the Inducement Plans change in control
provision, which provides for accelerated vesting in the event
of a change in control. For these purposes, a change in control
was defined as an Acquiring Person becoming the Beneficial Owner
of Shares representing 10% or more of the combined voting power
of the then-outstanding shares other than in a transaction or
series of transactions approved by the Companys Board of
Directors. The acquisition on May 4, 2005 of the
Companys Common Stock by Liberation Investment Group LLC,
Liberation Investments, Ltd., Liberation Investments, L.P. and
Emanuel R. Pearlman and on September 6, 2005 by Pardus
Capital Management L.P. constituted such a change in control. In
the three-month periods ended June 30, 2005 and
September 30, 2005, $397 and $618 respectively, in
compensation was reported as general and administrative expense,
related to these time-based awards.
In November 1997, the Board of Directors of the Company adopted
the Bally Total Fitness Holding Corporation Employee Stock
Purchase Plan (the Stock Purchase Plan). The Stock
Purchase Plan provides for the purchase of Common Stock by
eligible employees (as defined) electing to participate in the
plan. The stock can generally be purchased semi- annually at a
price equal to the lesser of: (i) 95% of the fair market
value of the Common Stock on the date when a particular offering
commences or (ii) 95% of the fair market value of the
Common Stock on the date when a particular offering expires. For
each offering made under the Stock Purchase Plan, each eligible
employee electing to participate in the Stock Purchase Plan will
automatically be granted shares of Common Stock equal to the
number of full shares which may be purchased from the
employees elected payroll deduction, with a maximum
payroll deduction equal to 10% of eligible compensation, as
defined. The first offering under the Stock Purchase Plan
commenced on January 1, 1998 and expired on March 31,
1998. Thereafter, offerings commence on each April 1 and
October 1 and expire on the following September 30 and
March 31, respectively, until the Stock Purchase Plan is
terminated or no additional shares are available for purchase.
In December 2002, an additional 250,000 shares were
reserved for future issuance. At December 31, 2004,
28,778 shares of Common Stock were available for future
purchases under the Stock Purchase Plan. Pursuant to APB
No. 25, no expense was
F-32
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
recorded by the Company in connection with this plan. In April
2005, the Company terminated the Stock Purchase Plan.
|
|
Note 16
|
Defined
Contribution Plan
|
The Company sponsored several defined contribution plans,
including a 401(k), that provided retirement benefits for
certain full-time employees. Eligible employees elected to
participate by contributing a percentage of their pre-tax
earnings to the plans. Employee contributions to the plans, up
to certain limits, were matched in various percentages by the
Company. The Companys matching contributions related to
the plans totaled $827, $862 and $1,300 for 2005, 2004 and 2003,
respectively. In the third quarter of 2004, the Company
terminated the Management Retirement Savings Plan
(MRSP), a non-qualified deferred compensation plan
(rabbi trust) and paid out the entire amount to the
key employees who participated in the plan.
In accordance with Emerging Issues Task Force 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Are Held in a Rabbi Trust and Invested, assets
of rabbi trusts are to be consolidated with those of the
employer. In addition, the changes in fair value of the
investments held in the rabbi trust are charged to expense in a
matter similar to the treatment of trading securities. The
investments are included in other current assets and a deferred
compensation liability is recorded in other current liabilities.
The investment balance included in other current assets was $0
and $216 as of December 31, 2005 and 2004, respectively.
The deferred compensation liability was $0 and $120 as of
December 31, 2005 and 2004, respectively.
|
|
Note 17
|
Related
Party Transactions
|
The Company has regular transactions in the normal course of
business for fitness equipment and services with a company that
employs a relative of John Wildman, Senior Vice President and
Chief Operating Officer. During 2005 and 2004, the Company paid
$6,167 and $3,279 to that company, respectively, for providing
such goods and services.
|
|
Note 18
|
Commitments
and Contingencies
|
Operating leases: The Company leases various
fitness center facilities, office facilities, and equipment
under operating leases expiring in periods ranging from one to
25 years, excluding optional renewal periods. Certain
leases contain contingent rental provisions generally related to
cost-of-living
criteria or revenues of the respective fitness centers. Rent
expense under operating leases was $139,237, $136,719 and
$134,362 for 2005, 2004 and 2003, respectively.
Minimum future rent payments under long-term noncancellable
operating leases in effect as of December 31, 2005,
exclusive of taxes, insurance, other expenses payable directly
by the Company and contingent rent, are $152,581, $142,954,
$130,893, $113,775 and $99,635 for 2006 through 2010,
respectively, and $472,777 thereafter.
In connection with the Companys January 2006 sale of its
Crunch Fitness brand along with certain additional
health clubs located in San Francisco, California the
Company
and/or
certain of its subsidiaries remain liable for the obligations
(including rent) on certain leases transferred to the purchaser
in the amount of $90,228 and may remain liable for the
obligations on three additional leases that have not yet
transferred to purchaser in an additional amount of $8,487. The
amount of foregoing liabilities will reduce over time as
obligations are paid by the purchaser under these leases.
However, certain of the leases possess renewal options which, if
exercised by purchaser, will again increase the amount of
liability of the Company
and/or
certain of its subsidiaries under such
F-33
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
lease existing as of the date of such exercise by purchaser but
for no more than the obligations for a 5 year period under
any such lease.
The Companys exposure for these retained liabilities is
mitigated by two letters of credit naming the Company as
beneficiary, aggregating $3,228 and having a term equal to the
longer of three years or the time the purchaser has a Debt to
EBITDA Ratio of less than 3 to 1.
The Company will record a liability on its balance sheet for the
estimated fair value of these retained liabilities equal to $600
based upon an analysis prepared by an independent third party
valuation company.
Litigation:
Putative
Securities Class Actions
Between May and July 2004, ten putative securities class
actions, now consolidated and designated In re Bally Total
Fitness Securities Litigation were filed in the United
States District Court for the Northern District of Illinois
against the Company and certain of its former and current
officers and directors. Each of these substantially similar
lawsuits alleged that the defendants violated
Sections 10(b)
and/or 20(a)
of the Securities Exchange Act of 1934, as amended, as well as
the associated
Rule 10b-5,
in connection with the Companys proposed restatement.
On March 15, 2005, the Court appointed a lead plaintiff and
on May 23, 2005 the Court appointed lead plaintiffs
counsel. By stipulation of the parties, the consolidated lawsuit
was stayed pending restatement of the Companys financial
statements in November 2005. On December 30, 2005,
plaintiffs filed an amended consolidated complaint, asserting
claims on behalf of a putative class of persons who purchased
Bally stock between August 3, 1999 and April 28, 2004.
The various defendants filed motions to dismiss the amended
consolidated complaint on February 24, 2006, which motions
are currently pending. It is not yet possible to determine the
ultimate outcome of these actions.
Stockholder
Derivative Lawsuits in Illinois State Court
On June 8, 2004, two stockholder derivative lawsuits were
filed in the Circuit Court of Cook County, Illinois, by two
Bally stockholders, David Schacter and James Berra, purportedly
on behalf of the Company against Paul Toback, James McAnally and
John Rogers, Jr., who are current directors
and/or
officers, and Lee Hillman, John Dwyer, J. Kenneth Looloian,
Stephen Swid, George Aronoff, Martin Franklin and Liza Walsh,
who are now former officers
and/or
directors. These lawsuits allege claims for breaches of
fiduciary duty against those individuals in connection with the
Companys restatement regarding the timing of recognition
of prepaid dues. The two actions were consolidated on
January 12, 2005. By stipulation of the parties, the
consolidated lawsuit was stayed pending restatement of the
Companys financial statements in November 2005. An amended
consolidated complaint was filed on February 27, 2006. The
Company filed a motion to dismiss on May 20, 2006, directed
solely to the issue of whether plaintiffs have adequately
alleged demand futility as required by applicable Delaware law
in order to establish standing to sue derivatively. That motion
is currently pending. It is not yet possible to determine the
ultimate outcome of these actions.
Stockholder
Derivative Lawsuits in Illinois Federal Court
On April 5, 2005, a stockholder derivative lawsuit was
filed in the United States District Court for the Northern
District of Illinois, purportedly on behalf of the Company
against certain current and former officers and directors of the
Company by another of the Companys stockholders, Albert
Said. This lawsuit asserts claims for breaches of fiduciary duty
in failing to supervise properly its financial and corporate
affairs and accounting practices. Plaintiff also requests
restitution and disgorgement of bonuses and trading proceeds
under Delaware law and the Sarbanes-Oxley Act of 2002. By
stipulation of the parties, the lawsuit was stayed pending
restatement of the Companys financial statements in
November 2005. An amended consolidated complaint was filed on
February 27, 2006. Bally
F-34
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
filed a motion to dismiss on May 30, 2006, directed solely
to the issues of whether the court has subject matter
jurisdiction and whether plaintiffs have adequately alleged
demand futility as required by applicable Delaware law in order
to establish standing to sue derivatively. That motion is
currently pending. It is not yet possible to determine the
ultimate outcome of this action.
Lawsuit
in Oregon
On September 17, 2004, a lawsuit captioned Jack Garrison
and Deane Garrison v. Bally Total Fitness Holding
Corporation, Lee S. Hillman and John W. Dwyer, CV 04 1331,
was filed in the United States District Court for the District
of Oregon. The plaintiffs alleged that the defendants violated
certain provisions of the Oregon Securities Act, breached the
contract of sale, and committed common-law fraud in connection
with the acquisition of the plaintiffs business in
exchange for shares of Bally stock.
On April 7, 2005, all defendants joined in a motion to
dismiss two of the four counts of plaintiffs complaint,
including plaintiffs claims of breach of contract and
fraud. On November 28, 2005, the District Court granted the
motion to dismiss plaintiffs claims for breach of contract
and fraud against all parties. Motions for summary judgment were
filed on April 21, 2006 and are currently pending. It is
not yet possible to determine the ultimate outcome of this
action.
Lawsuit
in Massachusetts
On March 11, 2005, plaintiffs filed a complaint in the
matter of Fit Tech Inc., et al. v. Bally Total
Fitness Holding Corporation, et al., Case No.
05-CV-10471
MEL, pending in the United States District Court for the
District of Massachusetts. This action is related to an earlier
action brought in 2003 by the same plaintiffs in the same court
alleging breach of contract and violation of certain earn-out
provisions of an agreement whereby the Company acquired certain
fitness centers from plaintiffs in return for shares of Bally
stock. The 2005 complaint asserted new claims against the
Company for violation of state and federal securities laws on
the basis of allegations that misrepresentations in Ballys
financial statements resulted in Ballys stock price to be
artificially inflated at the time of the Fit-Tech transaction.
Plaintiffs also asserted additional claims for breach of
contract and common law claims. Certain employment disputes
between the parties to this litigation are also subject to
arbitration in Chicago.
Plaintiffs claims are brought against the Company and its
current Chairman and CEO Paul Toback, as well as former Chairman
and CEO Lee Hillman and former CFO John Dwyer. Plaintiffs have
voluntarily dismissed all claims under the federal securities
laws, leaving breach of contract, common law and state
securities claims pending. On April 4, 2006, the Court
granted motions to dismiss all claims against defendants Hillman
and Dwyer for lack of jurisdiction. Under the current schedule,
motions to dismiss on other grounds are to be filed on
July 19, 2006. It is not yet possible to determine the
ultimate outcome of this action.
Securities
and Exchange Commission Investigation
In April 2004, the Division of Enforcement of the SEC commenced
an investigation in connection with the Companys
restatement. The Company continues to fully cooperate in the
ongoing SEC investigation. It is not yet possible to determine
the ultimate outcome of this investigation.
Department
of Justice Investigation
In February 2005, the United States Justice Department commenced
a criminal investigation in connection with the Companys
restatement. The investigation is being conducted by the United
States Attorney for the Northern District of Illinois. The
Company is fully cooperating with the investigation. It is not
yet possible to determine the ultimate outcome of this
investigation.
F-35
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Demand
Letters
On December 27, 2004, the Company received a stockholder
demand that it bring actions or seek other remedies against
parties potentially responsible for the Companys
accounting errors. The Board appointed a Special Demand
Evaluation Committee consisting of three independent directors
to evaluate that request. On June 21, 2005, the Company
received a second, substantially similar, stockholder demand,
which the Special Demand Evaluation Committee also evaluated
along with the other stockholder demand. The Special Demand
Evaluation Committee retained independent counsel,
Sidley & Austin LLP, to assist it in evaluating the
demands.
On March 10, 2006, the Companys Board of Directors
accepted the recommendation of its Special Demand Evaluation
Committee that no further action be taken at this time against
any current or former officers or directors of the Company
regarding the matters raised in the two shareholder demand
letters. The Committees recommendation, based on the
report of its independent counsel and adopted by the Board of
Directors, was based on consideration of a variety of factors,
including (i) the nature and strength of the Companys
potential claims; (ii) defenses available to the officers
and directors; (iii) potential damages and resources
available to satisfy any damages award; (iv) the
Companys indemnification and advancement obligations under
its charter, bylaws, and individual agreements;
(v) potential expenses to the Company and potential
counterclaims arising from the pursuit of potential civil
claims; and (vi) business disruption and employee morale
issues.
Insurance
Lawsuits
On November 10, 2005, two of the Companys excess
directors and officers liability insurance providers filed a
complaint captioned Travelers Indemnity Company and ACE
American Insurance Company v. Bally Total Fitness Holding
Corporation; Holiday Universal, Inc, n/k/a Bally Total Fitness
of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John
W. Dwyer; Lee S. Hillman; Stephen C. Swid; James McAnally; J.
Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of
the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff
Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin
E. Franklin, Case No. 05C 6441, in the United States
District Court for the Northern District of Illinois. The
complaint alleged that financial information included in the
Companys applications for directors and officers liability
insurance in the
2002-2004
policy years was materially false and misleading. Plaintiff
requests the Court to declare two of the Companys excess
policies for the year 2002-2003 void, voidable
and/or
subject to rescission, and to declare that the exclusions
and/or
conditions of a separate excess policy for the year
2003-2004
bar coverage with respect to certain of the Companys
claims. Firemans Fund, another excess carrier, was allowed to
join in the case on January 4, 2006. Defendants filed
motions to dismiss or stay the proceedings on February 10,
2006, which motions are currently pending. On April 6,
2006, an additional excess directors and officers liability
insurance provider filed a complaint captioned RLI Insurance
Company v. Bally Total Fitness Holding Corporation; Holiday
Universal, Inc.; George N. Aronoff; Paul Toback; John H. Dwyer;
Lee S. Hillman; Stephen C. Swid; James McAnally; J. Kenneth
Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of the
Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff
Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin
E. Franklin, Case No. 06CH06892 in the circuit court of
Cook County, Illinois, County Department Chancery Division. The
complaint alleged that financial information included in the
Companys applications for directors and officers liability
insurance in the
2002-2003
policy year was materially false and misleading. Plaintiff
requests the Court to declare the Companys excess policy
for the year 2002-2003 void, voidable
and/or
subject to rescission. The Company and the individual defendants
have not yet responded to the complaint.
Other
The Company is also involved in various other claims and
lawsuits incidental to its business, including claims arising
from accidents at its fitness centers. In the opinion of
management, the Company is adequately insured against such
claims and lawsuits, and any ultimate liability arising out of
such claims and lawsuits should not have a material adverse
effect on the financial condition or results of operations of
the Company. In addition, from time to
F-36
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
time, customer complaints are investigated by various
governmental bodies. In the opinion of management, none of these
other complaints or investigations currently pending should have
a material adverse effect on the Companys financial
condition or results of operations.
In addition, the Company is, and has been in the past, named as
defendant in a number of purported class action lawsuits based
on alleged violations of state and local consumer protection
laws and regulations governing the sale, financing and
collection of membership fees. To date the Company has
successfully defended or settled such lawsuits without a
material adverse effect on its financial condition or results of
operation. However, the Company cannot assure you that it will
be able to successfully defend or settle all pending or future
purported class action claims, and its failure to do so may have
a material adverse effect on the Companys financial
condition or results of operations. See
Item 1 Business Government
Regulation and Item 1A Risk Factors.
|
|
Note 19
|
Subsequent
Events
|
Sale of
Crunch Fitness
On September 16, 2005, the Company entered into a Purchase
Agreement to sell all of its health clubs operating under the
Crunch Fitness brand along with certain additional
health clubs operating under the Gorilla Sports and
Pinnacle Fitness brands located in
San Francisco, California as well as the Gorilla Sports
brand, for a total purchase price of $45,000, subject to certain
purchase price adjustments including, but not limited to,
adjustments for taxes, insurance and rent. Closing of the
transaction was subject to a number of significant closing
conditions set forth in the Purchase Agreement, including
consent to the transfer and release of the Companys
guarantee obligations by the lessors under the various leases
for the facilities to be sold. While negotiations with all
landlords were ongoing and the Company continued to diligently
pursue obtaining consents, the limited progress made to and
through December 31, 2005 in securing consents raised
substantial doubt about the ability of both parties to
successfully close the transaction. Furthermore, under the
Purchase Agreement, either the Company or the purchaser could
have terminated the transaction if the closing had not occurred
by December 31, 2005. On December 13, 2005, both
parties to the potential transaction agreed to extend the
deadline for closing the sale to January 17, 2006. As of
December 31, 2005, managements opinion was that the
sale was reasonably possible but not probable as defined by
Statement of Financial Accounting Standards No. 5,
Accounting For Contingencies. Accordingly, the
Company determined that classifying the health clubs in the
Purchase Agreement as discontinued operations as of
December 31, 2005 was not appropriate.
On January 20, 2006, the Company completed the transaction.
Currently, two health clubs constituting part of the Crunch
Fitness chain that could not be transferred to the purchaser at
closing are being managed by the purchaser as part of the
acquired business until the parties secure consents necessary to
complete the transfers. The Company received the $45,000
purchase price at closing (less $2,250 deposited in an escrow
account to cover any required purchase price adjustments), plus
$455 in purchase price adjustments, as consideration for the
transaction. In connection with the transaction, the Company
sold property and equipment with a net book value of
approximately $12,700 and goodwill and intangibles with a net
book value of approximately $26,600 as of December 31,
2005. Deferred revenue and deferred rent associated with the
sold health clubs was approximately $20,550 and $14,900,
respectively, at December 31, 2005. The Company expects to
record a gain of approximately $38,375 in the first quarter of
2006 as a result of the sale. After escrow, transaction costs
and expenses, in accordance with the Credit Agreement, the
Company retained $10,000 of the sale proceeds and paid $30,000
to reduce outstanding indebtedness under the term loan. On
June 6, 2006, $1,812 was released from the escrow account,
all of which was used to reduce outstanding indebtedness under
the term loan. The remaining funds held in the escrow account
will be released upon satisfaction of the terms and conditions
of the escrow agreement.
The Company
and/or
certain of its subsidiaries remain liable for the obligations
(including rent) on certain leases transferred to the purchaser
in the amount of $90,228 and may remain liable for the
obligations on three additional leases that have not yet
transferred to purchaser in an additional amount of $8,487.
F-37
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The amount of foregoing liabilities will reduce over time as
obligations are paid by the purchaser under these leases.
However, certain of the leases possess renewal options which, if
exercised by purchaser, will again increase the amount of
liability of the Company
and/or
certain of its subsidiaries under such lease existing as of the
date of such exercise by purchaser but for no more than the
obligations for a 5 year period under any such lease.
The Companys exposure for these retained liabilities is
mitigated by two letters of credit naming the Company as
beneficiary, aggregating $3,228 and having a term equal to the
longer of three years or the time the purchaser has a Debt to
EBITDA Ratio of less than 3 to 1.
The Company will record a liability on its balance sheet for the
estimated fair value of these retained liabilities equal to $600
based upon an analysis prepared by an independent third party
valuation company.
Credit
Agreement Waiver and Consent Solicitation
On March 14, 2006, the Company announced that it would not
meet the March 16, 2006 deadline for filing its Annual
Report on
Form 10-K
for the year ended December 31, 2005 with the SEC. Although
the delay in filing resulted in defaults of the financial
reporting covenants under the indentures governing the Senior
Subordinated Notes and Senior Notes, it did not constitute an
event of default without delivery of a notice of default and
expiration of a
30-day cure
period. A cross-default under the Credit Agreement occurs
10 days after receipt of such notice. Additionally, a
default would also occur under the Credit Agreement if the
Company did not deliver audited financial statements for the
year ended December 31, 2005 to the lenders by
March 31, 2006.
On March 24, 2006, the Company announced that it would seek
waivers of the defaults of the financial reporting covenants
under the indentures governing the Senior Subordinated Notes and
the Senior Notes through a consent solicitation, which was
commenced on March 27, 2006. In connection with the consent
solicitation, the Company entered into agreements with
approximately 53% of the holders of the Senior Subordinated
Notes to consent to the requested waivers.
On March 30, 2006, the Company entered into the Third
Amendment and Waiver with the lenders under the Credit Agreement
that modified the definition of Consolidated Interest
Expense, modified permitted dispositions, clarified the
definition of Banking Day, extended the time for
delivering the audited financial statements for the year ended
December 31, 2005 and the unaudited financial statements
for the quarter ended March 31, 2006 until July 10,
2006, extended the time for delivering the unaudited financial
statements for the quarter ending June 30, 2006 until
September 11, 2006, with an option to elect to extend until
October 11, 2006, permitted payment of the consent fees to
the holders of the Senior Subordinated Notes and the Senior
Notes and excludes fees and expenses incurred in connection with
the consent solicitation from the computation of financial
covenants.
On April 10, 2006, the Company completed the consent
solicitations to amend the indentures governing the Senior
Subordinated Notes and the Senior Notes to waive any default
arising under the financial reporting covenants from a failure
to timely file financial statements with the SEC for the year
ended December 31, 2005 and the quarter ended
March 31, 2006 through July 10, 2006, and for the
quarter ended June 30, 2006 through September 11,
2006, with an option to elect to extend through October 11,
2006.
In connection with these consents, the Company issued
1,956,195 shares of unregistered common stock and paid $769
in fees to the holders of the Senior Subordinated Notes and the
Senior Notes, paid the lenders under the Credit Agreement $2,474
in fees and recorded $22,016 in deferred finance charges as of
March 31, 2006. Additionally, on April 11, 2006, the
Company entered into stock purchase agreements (the Stock
Purchase Agreements) to sell 400,000 shares of
unregistered common stock to each of Wattles Capital Management,
LLC and investment funds affiliated with Ramius Capital Group,
L.L.C. Proceeds of $5,600 from the sales of Common Stock were
used to fund: (i) the cash portion of the consent fees paid
to holders of the Senior Subordinated Notes and Senior Notes and
related expenses; (ii) fees and expenses relating to the
Credit Agreement amendment and waiver; and (iii) additional
working capital.
F-38
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
On June 23, 2006, the Company entered into the Fourth
Amendment to the Credit Agreement, which extends the 10 day
period to 28 days after which a cross-default will occur
upon receipt of any financial reporting covenant default notice
under the indentures governing the Senior Subordinated Notes or
Senior Notes for the third quarter of 2006. The Company paid the
lenders under the Credit Agreement fees of $493 in connection
with the Fourth Amendment.
The Company is in the process of implementing new accounting
processes and technologies designed to shorten the time required
to prepare and file its financial statements. In addition, as
described above, while the Company has secured additional time
to file its second quarter financial statements with the SEC
without causing a default under the indentures governing the
Senior Notes and the Senior Subordinated Notes, and to file its
third quarter financial statements with the SEC without causing
a cross-default under the Credit Agreement, there can be no
assurance that the Company will be able to make such filings
within the extended time periods. Failure to do so will lead to
further defaults under the indentures and the Credit Agreement
and could require the Company to seek additional consents from
its bondholders and lenders.
On March 31, 2006, the Company was not in compliance with
two credit agreements with the same lender. These agreements
represented debt of restricted subsidiaries in the amount of
$3,147 and debt of an unrestricted subsidiary in the amount of
$1,703. On April 13, 2006, these agreements were amended
and the Company was in compliance with the amended agreements.
Management
Changes
On April 17, 2006, the Company announced that Carl J.
Landeck, Senior Vice President and Chief Financial Officer, was
no longer an employee of the Company and that Ronald G. Eidell
of Tatum, LLC had joined the Company as Senior Vice President,
Finance, with responsibility for all accounting and finance
functions.
|
|
Note 20
|
Quarterly
Financial Data (Unaudited)
|
Quarterly financial data for the years ended December 31,
2005 and 2004 is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
(As originally
reported)
|
|
|
Net revenues
|
|
$
|
269.0
|
|
|
$
|
276.7
|
|
|
$
|
261.8
|
|
Operating expenses
|
|
|
249.3
|
|
|
|
253.5
|
|
|
|
243.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19.7
|
|
|
|
23.2
|
|
|
|
18.8
|
|
Net income (loss)
|
|
|
1.4
|
|
|
|
2.0
|
|
|
|
(1.6
|
)
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per common share
|
|
|
0.04
|
|
|
|
0.06
|
|
|
|
(0.05
|
)
|
Diluted per common share
|
|
|
0.04
|
|
|
|
0.06
|
|
|
|
(0.05
|
)
|
F-39
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(As Restated)
|
|
|
|
|
|
(As Restated)
|
|
|
|
|
|
Net revenues
|
|
$
|
271.6
|
|
|
$
|
259.0
|
|
|
$
|
276.4
|
|
|
$
|
265.5
|
|
Operating expenses
|
|
|
248.9
|
|
|
|
258.6
|
|
|
|
253.3
|
|
|
|
252.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
22.7
|
|
|
|
.4
|
|
|
|
23.1
|
|
|
|
13.1
|
|
Net income (loss)
|
|
|
4.6
|
|
|
|
(15.8
|
)
|
|
|
1.6
|
|
|
|
(4.3
|
)
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per common share
|
|
|
0.14
|
|
|
|
(0.48
|
)
|
|
|
0.05
|
|
|
|
(0.13
|
)
|
Diluted per common share
|
|
|
0.14
|
|
|
|
(0.48
|
)
|
|
|
0.05
|
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(As Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
264.7
|
|
|
$
|
264.8
|
|
|
$
|
258.3
|
|
|
$
|
258.7
|
|
Operating expenses
|
|
|
244.1
|
|
|
|
241.8
|
|
|
|
249.1
|
|
|
|
256.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
20.6
|
|
|
|
23.0
|
|
|
|
9.2
|
|
|
|
1.8
|
|
Net income (loss)
|
|
|
(.2
|
)
|
|
|
6.8
|
|
|
|
(15.6
|
)
|
|
|
(17.0
|
)
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per common share
|
|
|
(0.01
|
)
|
|
|
0.21
|
|
|
|
(0.45
|
)
|
|
|
(0.52
|
)
|
Diluted per common share
|
|
|
(0.01
|
)
|
|
|
0.21
|
|
|
|
(0.45
|
)
|
|
|
(0.52
|
)
|
2005 quarterly results have been restated to reflect each of the
following items:
1. In the fourth quarter of 2005, as a result of evaluating
the Companys revenue recognition for various membership
plans, including certain corporate membership offers, offers
that include zero dues for life, irregular payments,
month-to-month,
BYOM
paid-in-full
and others, the Company determined an additional
$5.3 million in revenue should have been recognized in the
first nine months of 2005.
2. In the fourth quarter of 2005, the Company determined
that the amortization period for deferred finance costs
associated with the Companys revolving credit agreement
and term loan should be consistent with the early termination
date of April 15, 2007 pursuant to the Credit Agreement.
The Company recognized $1.0 million in additional expense
in the first nine months of 2005 not previously included in
those quarters.
3. In the fourth quarter of 2005, the Company determined
that as a result of impairment and other factors, depreciation
expense of approximately $1.4 million in the first nine
months of 2005 should not have been recorded.
4. In the fourth quarter of 2005, the Company determined,
as a result of an actuarial study, that expenses for insured
liabilities for retained risks in the first nine months of 2005
should be approximately $2.8 million greater than the
amount previously recorded by the Company.
In addition, in the fourth quarter of 2005, the Company recorded
$4.6 million for the write-off of equipment at various
clubs. Also, in the fourth quarter of 2005, the Company
determined that payment of a $4.0 million bonus related to
service performed by employees during 2005 was probable. Prior
to the fourth quarter, payment of this bonus was not considered
probable.
F-40
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
Note 21
|
Supplemental
Condensed Consolidating Financial Information
|
Condensed consolidating financial statements present the
accounts of Bally Total Fitness Holding Corporation
(Parent), and its Guarantor and Non-Guarantor
subsidiaries, as defined in the indenture governing the Senior
Notes issued in July 2003. The Notes are unconditionally
guaranteed, on a joint and several basis, by the Guarantor
subsidiaries, including substantially all domestic subsidiaries
of Parent. Non-Guarantor subsidiaries include Canadian
operations and certain entities for real estate finance programs.
As defined in the indenture governing the Senior Notes,
guarantor subsidiaries include:
59th Street Gym LLC; 708 Gym LLC; Ace LLC; Bally Fitness
Franchising, Inc.; Bally Franchise RSC, Inc.; Bally Franchising
Holdings, Inc.; Bally Total Fitness Corporation; Bally Total
Fitness International, Inc.; Bally Total Fitness of Missouri,
Inc.; Bally Total Fitness of Toledo, Inc.; Ballys Fitness
and Racquet Clubs, Inc.; BFIT Rehab of West Palm Beach, Inc.;
Bally Total Fitness of Connecticut Coast, Inc.; Bally Total
Fitness of Connecticut Valley, Inc.; Crunch LA LLC; Crunch World
LLC; Flambe LLC; Greater Philly No. 1 Holding Company;
Greater Philly No. 2 Holding Company; Health &
Tennis Corporation of New York; Holiday Health Clubs of the East
Coast, Inc.; Bally Total Fitness of Upstate New York, Inc.;
Bally Total Fitness of Colorado, Inc.; Bally Total Fitness of
the Southeast, Inc.; Holiday/Southeast Holding Corp.; Bally
Total Fitness of California, Inc.; Bally Total Fitness of the
Mid-Atlantic, Inc.; Bally Total Fitness of Greater New York,
Inc.; Jack La Lanne Holding Corp.; Bally Sports Clubs,
Inc.; Mission Impossible, LLC; New Fitness Holding Co., Inc.;
Nycon Holding Co., Inc.; Bally Total Fitness of Philadelphia,
Inc.; Bally Total Fitness of Rhode Island, Inc.; Bally Total
Fitness of the Midwest, Inc.; Bally Total Fitness of Minnesota,
Inc.; Soho Ho LLC; BTF/CFI, Inc. (f/k/a Crunch Fitness
International, Inc.); Tidelands Holiday Health Clubs, Inc.;
U.S. Health, Inc.; and West Village Gym at the Archives LLC.
F-41
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The following tables present the condensed consolidating balance
sheets at December 31, 2005 and December 31, 2004, and
the condensed consolidating statements of operations and the
condensed consolidating statements of cash flows for the years
ended December 31, 2005, 2004, and 2003. The Eliminations
column reflects the elimination of investments in subsidiaries
and intercompany balances and transactions.
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
16,238
|
|
|
$
|
1,216
|
|
|
$
|
|
|
|
$
|
17,454
|
|
Other current assets
|
|
|
|
|
|
|
37,318
|
|
|
|
1,415
|
|
|
|
|
|
|
|
38,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
53,556
|
|
|
|
2,631
|
|
|
|
|
|
|
|
56,187
|
|
Property and equipment, net
|
|
|
|
|
|
|
306,942
|
|
|
|
19,782
|
|
|
|
|
|
|
|
326,724
|
|
Goodwill, net
|
|
|
|
|
|
|
41,731
|
|
|
|
|
|
|
|
|
|
|
|
41,731
|
|
Trademarks, net
|
|
|
6,507
|
|
|
|
2,466
|
|
|
|
403
|
|
|
|
|
|
|
|
9,376
|
|
Intangible assets, net
|
|
|
|
|
|
|
4,472
|
|
|
|
546
|
|
|
|
|
|
|
|
5,018
|
|
Investment in and advances to
subsidiaries
|
|
|
(724,893
|
)
|
|
|
221,315
|
|
|
|
|
|
|
|
503,578
|
|
|
|
|
|
Other assets
|
|
|
29,265
|
|
|
|
7,818
|
|
|
|
3,975
|
|
|
|
|
|
|
|
41,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(689,121
|
)
|
|
$
|
638,300
|
|
|
$
|
27,337
|
|
|
$
|
503,578
|
|
|
$
|
480,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
57,724
|
|
|
$
|
108
|
|
|
$
|
|
|
|
$
|
57,832
|
|
Income taxes payable
|
|
|
|
|
|
|
1,641
|
|
|
|
56
|
|
|
|
|
|
|
|
1,697
|
|
Accrued liabilities
|
|
|
22,407
|
|
|
|
68,339
|
|
|
|
6,267
|
|
|
|
|
|
|
|
97,013
|
|
Current maturities of long-term
debt
|
|
|
6,594
|
|
|
|
485
|
|
|
|
5,939
|
|
|
|
|
|
|
|
13,018
|
|
Deferred revenues
|
|
|
|
|
|
|
300,309
|
|
|
|
6,325
|
|
|
|
|
|
|
|
306,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,001
|
|
|
|
428,498
|
|
|
|
18,695
|
|
|
|
|
|
|
|
476,194
|
|
Long-term debt, less current
maturities
|
|
|
745,564
|
|
|
|
5,182
|
|
|
|
5,558
|
|
|
|
|
|
|
|
756,304
|
|
Net affiliate payable
|
|
|
|
|
|
|
519,997
|
|
|
|
56,460
|
|
|
|
(576,457
|
)
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
122,876
|
|
|
|
8,578
|
|
|
|
|
|
|
|
131,454
|
|
Deferred revenues
|
|
|
|
|
|
|
568,081
|
|
|
|
11,747
|
|
|
|
|
|
|
|
579,828
|
|
Stockholders deficit
|
|
|
(1,463,686
|
)
|
|
|
(1,006,334
|
)
|
|
|
(73,701
|
)
|
|
|
1,080,035
|
|
|
|
(1,463,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(689,121
|
)
|
|
$
|
638,300
|
|
|
$
|
27,337
|
|
|
$
|
503,578
|
|
|
$
|
480,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
18,726
|
|
|
$
|
451
|
|
|
$
|
|
|
|
$
|
19,177
|
|
Other current assets
|
|
|
|
|
|
|
29,365
|
|
|
|
1,345
|
|
|
|
|
|
|
|
30,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
48,091
|
|
|
|
1,796
|
|
|
|
|
|
|
|
49,887
|
|
Property and equipment, net
|
|
|
|
|
|
|
345,836
|
|
|
|
18,917
|
|
|
|
|
|
|
|
364,753
|
|
Goodwill, net
|
|
|
|
|
|
|
41,698
|
|
|
|
|
|
|
|
|
|
|
|
41,698
|
|
Trademarks, net
|
|
|
6,507
|
|
|
|
2,875
|
|
|
|
551
|
|
|
|
|
|
|
|
9,933
|
|
Intangible assets, net
|
|
|
|
|
|
|
6,953
|
|
|
|
956
|
|
|
|
|
|
|
|
7,909
|
|
Investment in and advances to
subsidiaries
|
|
|
(744,360
|
)
|
|
|
221,315
|
|
|
|
|
|
|
|
523,045
|
|
|
|
|
|
Other assets
|
|
|
17,408
|
|
|
|
7,699
|
|
|
|
3,172
|
|
|
|
|
|
|
|
28,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(720,445
|
)
|
|
$
|
674,467
|
|
|
$
|
25,392
|
|
|
$
|
523,045
|
|
|
$
|
502,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
49,965
|
|
|
$
|
$1,408
|
|
|
$
|
|
|
|
$
|
51,373
|
|
Income taxes payable
|
|
|
|
|
|
|
1,399
|
|
|
|
|
|
|
|
|
|
|
|
1,399
|
|
Accrued liabilities
|
|
|
21,403
|
|
|
|
85,125
|
|
|
|
6,682
|
|
|
|
|
|
|
|
113,210
|
|
Current maturities of long-term
debt
|
|
|
11,899
|
|
|
|
3,382
|
|
|
|
6,846
|
|
|
|
|
|
|
|
22,127
|
|
Deferred revenues
|
|
|
|
|
|
|
315,847
|
|
|
|
6,074
|
|
|
|
|
|
|
|
321,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,302
|
|
|
|
455,718
|
|
|
|
21,010
|
|
|
|
|
|
|
|
510,030
|
|
Long-term debt, less current
maturities
|
|
|
718,378
|
|
|
|
10,097
|
|
|
|
8,957
|
|
|
|
|
|
|
|
737,432
|
|
Net affiliate payable
|
|
|
|
|
|
|
578,080
|
|
|
|
54,228
|
|
|
|
(632,308
|
)
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
123,248
|
|
|
|
4,496
|
|
|
|
|
|
|
|
127,744
|
|
Deferred revenues
|
|
|
|
|
|
|
588,099
|
|
|
|
11,279
|
|
|
|
|
|
|
|
599,378
|
|
Stockholders deficit
|
|
|
(1,472,125
|
)
|
|
|
(1,080,775
|
)
|
|
|
(74,578
|
)
|
|
|
1,155,353
|
|
|
|
(1,472,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(720,445
|
)
|
|
$
|
674,467
|
|
|
$
|
25,392
|
|
|
$
|
523,045
|
|
|
$
|
502,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated Total
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
|
|
|
$
|
965,601
|
|
|
$
|
38,296
|
|
|
$
|
|
|
|
$
|
1,003,897
|
|
Retail products
|
|
|
|
|
|
|
49,311
|
|
|
|
1,374
|
|
|
|
|
|
|
|
50,685
|
|
Miscellaneous
|
|
|
|
|
|
|
14,647
|
|
|
|
1,804
|
|
|
|
|
|
|
|
16,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,029,559
|
|
|
|
41,474
|
|
|
|
|
|
|
|
1,071,033
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
|
|
|
|
697,788
|
|
|
|
29,149
|
|
|
|
|
|
|
|
726,937
|
|
Retail products
|
|
|
|
|
|
|
50,622
|
|
|
|
1,382
|
|
|
|
|
|
|
|
52,004
|
|
Advertising
|
|
|
|
|
|
|
53,867
|
|
|
|
1,147
|
|
|
|
|
|
|
|
55,014
|
|
General and administrative
|
|
|
4,470
|
|
|
|
81,604
|
|
|
|
1,439
|
|
|
|
|
|
|
|
87,513
|
|
Impairment of goodwill and other
intangibles
|
|
|
|
|
|
|
858
|
|
|
|
362
|
|
|
|
|
|
|
|
1,220
|
|
Asset impairment charges
|
|
|
|
|
|
|
7,657
|
|
|
|
2,458
|
|
|
|
|
|
|
|
10,115
|
|
Depreciation and amortization
|
|
|
|
|
|
|
60,567
|
|
|
|
2,004
|
|
|
|
|
|
|
|
62,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,470
|
|
|
|
952,963
|
|
|
|
37,941
|
|
|
|
|
|
|
|
995,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,470
|
)
|
|
|
76,596
|
|
|
|
3,533
|
|
|
|
|
|
|
|
75,659
|
|
Equity in net income of
subsidiaries
|
|
|
75,065
|
|
|
|
|
|
|
|
|
|
|
|
(75,065
|
)
|
|
|
|
|
Interest expense
|
|
|
(82,161
|
)
|
|
|
(1,618
|
)
|
|
|
(3,698
|
)
|
|
|
2,148
|
|
|
|
(85,329
|
)
|
Foreign exchange gain
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
869
|
|
Other, net
|
|
|
1,952
|
|
|
|
326
|
|
|
|
(41
|
)
|
|
|
(2,148
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,144
|
)
|
|
|
(1,292
|
)
|
|
|
(2,870
|
)
|
|
|
(75,065
|
)
|
|
|
(84,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(9,614
|
)
|
|
|
75,304
|
|
|
|
663
|
|
|
|
(75,065
|
)
|
|
|
(8,712
|
)
|
Income tax provision
|
|
|
|
|
|
|
(863
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,614
|
)
|
|
$
|
74,441
|
|
|
$
|
624
|
|
|
$
|
(75,065
|
)
|
|
$
|
(9,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated Total
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
|
|
|
$
|
938,518
|
|
|
$
|
37,464
|
|
|
$
|
|
|
|
$
|
975,982
|
|
Retail products
|
|
|
|
|
|
|
51,858
|
|
|
|
1,482
|
|
|
|
|
|
|
|
53,340
|
|
Miscellaneous
|
|
|
|
|
|
|
16,894
|
|
|
|
1,772
|
|
|
|
|
|
|
|
18,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,007,270
|
|
|
|
40,718
|
|
|
|
|
|
|
|
1,047,988
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
|
|
|
|
703,135
|
|
|
|
29,606
|
|
|
|
|
|
|
|
732,741
|
|
Retail products
|
|
|
|
|
|
|
53,163
|
|
|
|
1,333
|
|
|
|
|
|
|
|
54,496
|
|
Advertising
|
|
|
|
|
|
|
60,347
|
|
|
|
1,255
|
|
|
|
|
|
|
|
61,602
|
|
General and administrative
|
|
|
3,828
|
|
|
|
69,829
|
|
|
|
2,320
|
|
|
|
|
|
|
|
75,977
|
|
Impairment of goodwill and other
intangibles
|
|
|
|
|
|
|
293
|
|
|
|
112
|
|
|
|
|
|
|
|
405
|
|
Asset impairment charges
|
|
|
|
|
|
|
14,491
|
|
|
|
281
|
|
|
|
|
|
|
|
14,772
|
|
Depreciation and amortization
|
|
|
|
|
|
|
67,650
|
|
|
|
2,129
|
|
|
|
|
|
|
|
69,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,828
|
|
|
|
968,908
|
|
|
|
37,036
|
|
|
|
|
|
|
|
1,009,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,828
|
)
|
|
|
38,362
|
|
|
|
3,682
|
|
|
|
|
|
|
|
38,216
|
|
Equity in net income (loss) of
subsidiaries
|
|
|
30,786
|
|
|
|
|
|
|
|
|
|
|
|
(30,786
|
)
|
|
|
|
|
Interest expense
|
|
|
(59,582
|
)
|
|
|
(5,545
|
)
|
|
|
(8,728
|
)
|
|
|
6,654
|
|
|
|
(67,201
|
)
|
Foreign exchange gain
|
|
|
|
|
|
|
|
|
|
|
1,578
|
|
|
|
|
|
|
|
1,578
|
|
Other, net
|
|
|
2,368
|
|
|
|
80
|
|
|
|
2,208
|
|
|
|
(6,654
|
)
|
|
|
(1,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,428
|
)
|
|
|
(5,465
|
)
|
|
|
(4,942
|
)
|
|
|
(30,786
|
)
|
|
|
(67,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(30,256
|
)
|
|
|
32,897
|
|
|
|
(1,260
|
)
|
|
|
(30,786
|
)
|
|
|
(29,405
|
)
|
Income tax provision
|
|
|
|
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(30,256
|
)
|
|
$
|
32,046
|
|
|
$
|
(1,260
|
)
|
|
$
|
(30,786
|
)
|
|
$
|
(30,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
|
|
|
$
|
895,151
|
|
|
$
|
34,715
|
|
|
$
|
|
|
|
$
|
929,866
|
|
Retail products
|
|
|
|
|
|
|
53,818
|
|
|
|
1,448
|
|
|
|
|
|
|
|
55,266
|
|
Miscellaneous
|
|
|
|
|
|
|
16,177
|
|
|
|
1,562
|
|
|
|
|
|
|
|
17,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
965,146
|
|
|
|
37,725
|
|
|
|
|
|
|
|
1,002,871
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
|
|
|
|
696,307
|
|
|
|
29,924
|
|
|
|
|
|
|
|
726,231
|
|
Retail products
|
|
|
|
|
|
|
56,219
|
|
|
|
1,274
|
|
|
|
|
|
|
|
57,493
|
|
Advertising
|
|
|
|
|
|
|
51,732
|
|
|
|
1,771
|
|
|
|
|
|
|
|
53,503
|
|
General and administrative
|
|
|
3,599
|
|
|
|
48,586
|
|
|
|
1,461
|
|
|
|
|
|
|
|
53,646
|
|
Impairment of goodwill and other
intangibles
|
|
|
|
|
|
|
54,469
|
|
|
|
36
|
|
|
|
|
|
|
|
54,505
|
|
Asset impairment charges
|
|
|
|
|
|
|
19,340
|
|
|
|
265
|
|
|
|
|
|
|
|
19,605
|
|
Depreciation and amortization
|
|
|
|
|
|
|
74,682
|
|
|
|
2,085
|
|
|
|
|
|
|
|
76,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,599
|
|
|
|
1,001,335
|
|
|
|
36,816
|
|
|
|
|
|
|
|
1,041,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,599
|
)
|
|
|
(36,189
|
)
|
|
|
909
|
|
|
|
|
|
|
|
(38,879
|
)
|
Equity in loss from continuing
operations of subsidiaries
|
|
|
(48,589
|
)
|
|
|
|
|
|
|
|
|
|
|
48,589
|
|
|
|
|
|
Interest expense
|
|
|
(50,511
|
)
|
|
|
(9,634
|
)
|
|
|
(10,594
|
)
|
|
|
8,154
|
|
|
|
(62,585
|
)
|
Foreign exchange gain
|
|
|
|
|
|
|
|
|
|
|
2,371
|
|
|
|
|
|
|
|
2,371
|
|
Other, net
|
|
|
25
|
|
|
|
73
|
|
|
|
5,577
|
|
|
|
(8,154
|
)
|
|
|
(2,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,075
|
)
|
|
|
(9,561
|
)
|
|
|
(2,646
|
)
|
|
|
48,589
|
|
|
|
(62,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(102,674
|
)
|
|
|
(45,750
|
)
|
|
|
(1,737
|
)
|
|
|
48,589
|
|
|
|
(101,572
|
)
|
Income tax provision
|
|
|
|
|
|
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(102,674
|
)
|
|
|
(46,852
|
)
|
|
|
(1,737
|
)
|
|
|
48,589
|
|
|
|
(102,674
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(981
|
)*
|
|
|
|
|
|
|
(981
|
)
|
|
|
981
|
|
|
|
(981
|
)
|
Loss on disposal
|
|
|
(1,699
|
)*
|
|
|
|
|
|
|
(1,699
|
)
|
|
|
1,699
|
|
|
|
(1,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(2,680
|
)
|
|
|
|
|
|
|
(2,680
|
)
|
|
|
2,680
|
|
|
|
(2,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(105,354
|
)
|
|
|
(46,852
|
)
|
|
|
(4,417
|
)
|
|
|
51,269
|
|
|
|
(105,354
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
(626
|
)*
|
|
|
(626
|
)
|
|
|
|
|
|
|
626
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(105,980
|
)
|
|
$
|
(47,478
|
)
|
|
$
|
(4,417
|
)
|
|
$
|
51,895
|
|
|
$
|
(105,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Equity in amounts from subsidiaries related to discontinued
operations and cumulative effect of changes in accounting
principles. |
F-46
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,614
|
)
|
|
$
|
74,441
|
|
|
$
|
624
|
|
|
$
|
(75,065
|
)
|
|
$
|
(9,614
|
)
|
Adjustments to reconcile to cash
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
3,250
|
|
|
|
66,004
|
|
|
|
2,004
|
|
|
|
|
|
|
|
71,258
|
|
Changes in operating assets and
liabilities
|
|
|
6,894
|
|
|
|
(60,608
|
)
|
|
|
1,620
|
|
|
|
|
|
|
|
(52,094
|
)
|
Changes in net affiliate balances
|
|
|
|
|
|
|
(54,591
|
)
|
|
|
(1,260
|
)
|
|
|
55,851
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
8,515
|
|
|
|
2,820
|
|
|
|
|
|
|
|
11,335
|
|
Other, net
|
|
|
5,073
|
|
|
|
5,312
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
9,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
5,603
|
|
|
|
39,073
|
|
|
|
5,239
|
|
|
|
(19,214
|
)
|
|
|
30,701
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
|
|
|
|
(37,385
|
)
|
|
|
(469
|
)
|
|
|
|
|
|
|
(37,854
|
)
|
Other, net
|
|
|
|
|
|
|
2,043
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
1,649
|
|
Investment in and advances to
subsidiaries
|
|
|
(19,214
|
)
|
|
|
|
|
|
|
|
|
|
|
19,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
(19,214
|
)
|
|
|
(35,342
|
)
|
|
|
(863
|
)
|
|
|
19,214
|
|
|
|
(36,205
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving
credit agreement
|
|
|
33,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,250
|
|
Net repayments of other long-term
debt
|
|
|
(11,369
|
)
|
|
|
(6,219
|
)
|
|
|
(3,993
|
)
|
|
|
|
|
|
|
(21,581
|
)
|
Debt issuance and refinancing costs
|
|
|
(11,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,307
|
)
|
Proceeds from sale of stock
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
Stock purchase and options plans
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
13,611
|
|
|
|
(6,219
|
)
|
|
|
(3,993
|
)
|
|
|
|
|
|
|
3,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
|
|
|
|
(2,488
|
)
|
|
|
383
|
|
|
|
|
|
|
|
(2,105
|
)
|
Effect of exchange rate changes on
cash balances
|
|
|
|
|
|
|
|
|
|
|
382
|
|
|
|
|
|
|
|
382
|
|
Cash, beginning of year
|
|
|
|
|
|
|
18,726
|
|
|
|
451
|
|
|
|
|
|
|
|
19,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
16,238
|
|
|
$
|
1,216
|
|
|
$
|
|
|
|
$
|
17,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(30,256
|
)
|
|
$
|
32,046
|
|
|
$
|
(1,260
|
)
|
|
$
|
(30,786
|
)
|
|
$
|
(30,256
|
)
|
Adjustments to reconcile to cash
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
1,149
|
|
|
|
68,939
|
|
|
|
3,110
|
|
|
|
|
|
|
|
73,198
|
|
Changes in operating assets and
liabilities
|
|
|
3,077
|
|
|
|
(37,211
|
)
|
|
|
9,661
|
|
|
|
|
|
|
|
(24,473
|
)
|
Changes in net affiliate balances
|
|
|
|
|
|
|
(13,850
|
)
|
|
|
93,654
|
|
|
|
(79,804
|
)
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
14,784
|
|
|
|
393
|
|
|
|
|
|
|
|
15,177
|
|
Other, net
|
|
|
1,122
|
|
|
|
1,345
|
|
|
|
11
|
|
|
|
|
|
|
|
2,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operating activities
|
|
|
(24,908
|
)
|
|
|
66,053
|
|
|
|
105,569
|
|
|
|
(110,590
|
)
|
|
|
36,124
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
|
|
|
|
(48,910
|
)
|
|
|
(830
|
)
|
|
|
|
|
|
|
(49,740
|
)
|
Acquisitions of businesses, net of
cash acquired and other
|
|
|
|
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
(501
|
)
|
Investment in and advances to
subsidiaries
|
|
|
(110,590
|
)
|
|
|
|
|
|
|
|
|
|
|
110,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(110,590
|
)
|
|
|
(49,411
|
)
|
|
|
(830
|
)
|
|
|
110,590
|
|
|
|
(50,241
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving
credit agreement
|
|
|
154,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,000
|
|
Net repayments of other long-term
debt
|
|
|
(14,246
|
)
|
|
|
(11,310
|
)
|
|
|
(104,965
|
)
|
|
|
|
|
|
|
(130,521
|
)
|
Debt issuance and refinancing costs
|
|
|
(4,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,862
|
)
|
Stock purchase and options plans
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
135,498
|
|
|
|
(11,310
|
)
|
|
|
(104,965
|
)
|
|
|
|
|
|
|
19,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
|
|
|
|
5,332
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
5,106
|
|
Effect of exchange rate changes on
cash balances
|
|
|
|
|
|
|
|
|
|
|
431
|
|
|
|
|
|
|
|
431
|
|
Cash, beginning of year
|
|
|
|
|
|
|
13,394
|
|
|
|
246
|
|
|
|
|
|
|
|
13,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
18,726
|
|
|
$
|
451
|
|
|
$
|
|
|
|
$
|
19,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
$
|
(105,354
|
)
|
|
$
|
(46,852
|
)
|
|
$
|
(4,417
|
)
|
|
$
|
51,269
|
|
|
$
|
(105,354
|
)
|
Adjustments to reconcile to cash
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
2,088
|
|
|
|
74,998
|
|
|
|
3,284
|
|
|
|
|
|
|
|
80,370
|
|
Changes in operating assets and
liabilities
|
|
|
7,128
|
|
|
|
19,508
|
|
|
|
9,551
|
|
|
|
|
|
|
|
36,187
|
|
Changes in net affiliate balances
|
|
|
|
|
|
|
(35,643
|
)
|
|
|
48,513
|
|
|
|
(12,870
|
)
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
73,809
|
|
|
|
301
|
|
|
|
|
|
|
|
74,110
|
|
Other, net
|
|
|
2,839
|
|
|
|
2,067
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
4,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operating activities
|
|
|
(93,299
|
)
|
|
|
87,887
|
|
|
|
56,890
|
|
|
|
38,399
|
|
|
|
89,877
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
|
|
|
|
(47,495
|
)
|
|
|
(447
|
)
|
|
|
|
|
|
|
(47,942
|
)
|
Acquisitions of businesses, net of
cash acquired and other
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
(269
|
)
|
Investment in and advances to
subsidiaries
|
|
|
38,399
|
|
|
|
|
|
|
|
|
|
|
|
(38,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
38,399
|
|
|
|
(47,495
|
)
|
|
|
(716
|
)
|
|
|
(38,399
|
)
|
|
|
(48,211
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving
credit agreement
|
|
|
(28,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,500
|
)
|
Net borrowings (repayments) of
other long-term debt
|
|
|
91,139
|
|
|
|
(38,917
|
)
|
|
|
(52,182
|
)
|
|
|
|
|
|
|
40
|
|
Debt issuance and refinancing costs
|
|
|
(8,471
|
)
|
|
|
|
|
|
|
(1,943
|
)
|
|
|
|
|
|
|
(10,414
|
)
|
Stock purchase and options plans
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
54,900
|
|
|
|
(38,917
|
)
|
|
|
(54,125
|
)
|
|
|
|
|
|
|
(38,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
|
|
|
|
1,475
|
|
|
|
2,049
|
|
|
|
|
|
|
|
3,524
|
|
Effect of exchange rate changes on
cash balances
|
|
|
|
|
|
|
|
|
|
|
(2,011
|
)
|
|
|
|
|
|
|
(2,011
|
)
|
Cash, beginning of year
|
|
|
|
|
|
|
11,919
|
|
|
|
208
|
|
|
|
|
|
|
|
12,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
13,394
|
|
|
$
|
246
|
|
|
$
|
|
|
|
$
|
13,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
EXHIBIT INDEX
Bally Total Fitness Holding Corporation
Form 10-K
For the Year Ended December 31, 2005
|
|
|
|
|
No.
|
|
Description
|
|
|
2
|
.1
|
|
Purchase Agreement dated
September 16, 2005, among Bally Total Fitness Holding
Corporation, Bally Total Fitness Corporation, Crunch Fitness
International, Inc., Health & Tennis Corporation of New
York, Inc., Jack La Lanne Fitness Centers, Inc., Soho Ho,
LLC, Crunch L.A. LLC, 708 Gym, LLC, West Village Gym at the
Archives LLC, 59th Street Gym, LLC, Flambe LLC, Ace, LLC,
Crunch World, LLC, Crunch CFI, LLC, and AGT Crunch Acquisition
LLC (incorporated by reference to Exhibit 2.2 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated September 19, 2005).
|
|
2
|
.2
|
|
First Amendment to Purchase
Agreement dated December 19, 2005, among Bally Total
Fitness Holding Corporation, Bally Total Fitness Corporation,
Crunch Fitness International, Inc., Health & Tennis
Corporation of New York, Inc., Jack La Lanne Fitness
Centers, Inc., Soho Ho, LLC, Crunch L.A. LLC, 708 Gym, LLC, West
Village Gym at the Archives LLC, 59th Street Gym, LLC,
Flambe LLC, Ace, LLC, Crunch World, LLC, Crunch CFI, LLC, and
AGT Crunch Acquisition LLC (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated December 22, 2005).
|
|
2
|
.3
|
|
Amendment No. 2 to the
Purchase Agreement, dated January 20, 2006, among Bally
Total Fitness Holding Corporation, Bally Total Fitness
Corporation, Crunch Fitness International, Inc.,
Health & Tennis Corporation of New York, Bally Total
Fitness of Greater New York, Inc. (f/k/a Jack La Lanne
Fitness Centers, Inc.), Soho Ho LLC, Crunch L.A. LLC, 708 Gym
LLC, West Village Gym at the Archives LLC, 59th Street Gym
LLC, Flambe LLC, Ace LLC, Crunch World LLC, Crunch CFI Chicago,
LLC, Crunch CFI, LLC, AGT Crunch Chicago LLC and AGT Crunch
Acquisition LLC (incorporated by reference to Exhibit 2.1
to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated January 20, 2006).
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Companys registration statement on
Form S-1
filed January 3, 1996, registration
no. 33-99844).
|
|
3
|
.2
|
|
Amended and Restated By-Laws of
the Company (incorporated by reference to Exhibit 3.2 to
the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated May 27, 2005).
|
|
3
|
.3
|
|
Certificate of Designations for
Series B Junior Participating Preferred Stock of Bally
Total Fitness Holding Corporation (incorporated by reference to
Exhibit 3.3 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated October 18, 2005).
|
|
4
|
.1
|
|
Indenture dated as of
October 7, 1997, between the Company and First
Trust National Association, as trustee for the
Registrants
97/8% Senior
Subordinated Notes due 2007, including the form of Old Note and
form of New Note (incorporated by reference to Exhibit 4.1
to the Companys registration statement on
Form S-4
filed October 31, 1997, registration
no. 333-39195).
|
|
4
|
.2
|
|
Warrant Agreement dated as of
December 29, 1995, between Bally Entertainment Corporation
and the Company (incorporated by reference to Exhibit 4.3
to the Companys registration statement on
Form S-1
filed January 3, 1996, registration
no. 33-99844).
|
|
4
|
.3
|
|
First Amendment dated as of
January 21, 2003, to Warrant Agreement dated as of
December 29, 1995 between the Company and Bally
Entertainment Corporation (incorporated by reference to
Exhibit 4.3 to the Companys registration statement on
Form S-3
filed April 30, 2003, registration
no. 333-104877).
|
|
4
|
.4
|
|
Registration Rights Agreement
dated as of December 29, 1995, between Bally Entertainment
Corporation and the Company (incorporated by reference to
Exhibit 4.2 to the Companys registration statement on
Form S-1
filed January 3, 1996, registration
no. 33-99844).
|
|
4
|
.5
|
|
Registration Rights Agreement
dated as of January 21, 2003, between the Company and Lee
S. Hillman (incorporated by reference to Exhibit 4.4 to the
Companys registration statement on
Form S-3
filed April 30, 2003, registration
no. 333-104877).
|
|
4
|
.6
|
|
Indenture dated as of
December 16, 1998, between the Company and U.S. Bank
Trust National Association, as trustee for the
Registrants
97/8% Senior
Subordinated Notes due 2007, including the form of Series C
Notes and form of Series D Notes (incorporated by reference
to Exhibit 4.9 to the Companys Annual Report on
Form 10-K,
file
no. 0-27478,
for the fiscal year ended December 31, 1998).
|
E-1
|
|
|
|
|
No.
|
|
Description
|
|
|
4
|
.7
|
|
Supplemental Indenture dated as of
December 7, 2004, among Bally Total Fitness Holding
Corporation and U.S. Bank National Association, as trustee
for the Registrants
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 4.1 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated December 7, 2004).
|
|
4
|
.8
|
|
Supplemental Indenture dated as of
September 2, 2005, among Bally Total Fitness Holding
Corporation and U.S. Bank National Association, as trustee
for the Registrants
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated September 7, 2005).
|
|
4
|
.9
|
|
Supplemental Indenture dated as of
April 7, 2006, among Bally Total Fitness Holding
Corporation and U.S. Bank National Association, as trustee
for the Registrants
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated April 12, 2006).
|
|
4
|
.10
|
|
Indenture dated as of July 2,
2003, between the Company and U.S. Bank National
Association, as trustee for the Registrants
101/2% Senior
Notes due 2011, including the form of the Note (incorporated by
reference to Exhibit 4.1 to the Companys
Form 10-Q,
file
no. 0-27478,
dated August 14, 2003).
|
|
4
|
.11
|
|
First Supplemental Indenture dated
as of July 22, 2003, between the Company and U.S. Bank
National Association, as trustee for the Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.2 to
the Companys
Form 10-Q,
file
no. 0-27478,
dated August 14, 2003).
|
|
4
|
.12
|
|
Supplemental Indenture dated as of
December 7, 2004, among Bally Total Fitness Holding
Corporation and U.S. Bank National Association, as trustee
for the Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.1 to
the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated December 7, 2004).
|
|
4
|
.13
|
|
Supplemental Indenture dated as of
September 2, 2005, among Bally Total Fitness Holding
Corporation and U.S. Bank National Association, as trustee
for the Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.1 to
the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated September 7, 2005).
|
|
4
|
.14
|
|
Supplemental Indenture dated as of
April 7, 2006, among Bally Total Fitness Holding
Corporation and U.S. Bank National Association, as trustee
for the Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.1 to
the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated April 12, 2006).
|
|
4
|
.15
|
|
Rights Agreement dated as of
October 18, 2005, between Bally Total Fitness Holding
Corporation and LaSalle Bank National Association, which
includes the form of Certificate of Designations of the
Series B Junior Participating Preferred Stock of Bally
Total Fitness Holding Corporation as Exhibit A, the form of
Rights Certificate as Exhibit B and the Summary of Rights
to Purchase Preferred Shares as Exhibit C (incorporated by
reference as Exhibit 4.1 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated October 18, 2005).
|
|
4
|
.16
|
|
Amended and Restated Registration
Rights Agreement dated as of April 13, 2006, by and between
Bally Total Fitness Holding Corporation and certain holders who
are signatories thereto (incorporated by reference as
Exhibit 10.4 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated April 18, 2006).
|
|
4
|
.17
|
|
Registration Rights Agreement
dated as of April 11, 2006, among Bally Total Fitness
Holding Corporation and the purchasers listed on the signature
page thereto (incorporated by reference as Exhibit 4.3 to
the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated April 12, 2006).
|
|
+10
|
.1
|
|
The Companys 1996
Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.23 to the Companys
registration statement on
Form S-1
filed January 3, 1996, registration
no. 33-99844).
|
|
+10
|
.2
|
|
Inducement Plan and Award
Agreement thereunder (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file
no. 0-27478,
dated March 8, 2005).
|
|
+10
|
.3
|
|
The Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.21
to the Companys registration statement on
Form S-1
filed January 3, 1996, registration
no. 33-99844).
|
E-2
|
|
|
|
|
No.
|
|
Description
|
|
|
+10
|
.4
|
|
First Amendment dated as of
November 21, 1997, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.15
to the Companys Annual Report on
Form 10-K,
file
no. 0-27478,
for the fiscal year ended December 31, 1997).
|
|
+10
|
.5
|
|
Second Amendment dated as of
February 24, 1998, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.16
to the Companys Annual Report on
Form 10-K,
file
no. 0-27478,
for the fiscal year ended December 31, 1997).
|
|
+10
|
.6
|
|
Third Amendment dated as of
June 10, 1999, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.6
to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004).
|
|
+10
|
.7
|
|
Fourth Amendment dated as of
December 5, 2000, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.7
to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004).
|
|
+10
|
.8
|
|
Fifth Amendment dated as of
June 6, 2002, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.8
to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004).
|
|
+10
|
.9
|
|
Form of Restricted Stock Award
Agreement under the Companys Employment Inducement Award
Equity Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K,
file no.
001-13997,
dated December 5, 2005).
|
|
+10
|
.10
|
|
Form of Restricted Stock Award
Agreement under the 1996 Long-Term Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated December 5, 2005).
|
|
10
|
.11
|
|
Separation Agreement for Lee S.
Hillman dated as of December 10, 2002 (incorporated by
reference to Exhibit 99.1 to the Companys Current
Report on
Form 8-K,
file
no. 0-27478,
dated December 11, 2002).
|
|
10
|
.12
|
|
General Release and Settlement
Agreement, made and entered into as of April 28, 2004, by
and between John W. Dwyer and the Company (incorporated by
reference to Exhibit 99.2 to the Companys Current
Report on
Form 8-K,
file
no. 0-27478,
dated April 29, 2004).
|
|
+10
|
.13
|
|
Employment Agreement effective as
of January 1, 2003, between the Company and William G.
Fanelli (incorporated by reference to Exhibit 10.31 to the
Companys Annual Report on
Form 10-K,
file
no. 0-27478,
for the fiscal year ended December 31, 2002).
|
|
+10
|
.14
|
|
Employment Agreement effective as
of January 1, 2004, between the Company and Paul A. Toback
(incorporated by reference to Exhibit 99 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated August 24, 2004).
|
|
+10
|
.15
|
|
Employment Agreement effective as
of January 1, 2005, between the Company and Marc D.
Bassewitz (incorporated by reference to Exhibit 99.1 to the
Companys Current Report on
Form 8-K,
file no.
001-13997,
dated as of November 24, 2004).
|
|
+10
|
.16
|
|
Employment Agreement effective as
of March 8, 2005, between the Company and Harold Morgan
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated as of March 8, 2005).
|
|
+10
|
.17
|
|
Employment Agreement effective as
of March 22, 2005, between the Company and Carl J. Landeck
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated as of March 22, 2005).
|
|
+10
|
.18
|
|
Employment Agreement effective as
of May 2, 2005, between the Company and James A. McDonald
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated as of April 25, 2005).
|
|
+10
|
.19
|
|
Form of Amendment to Employment
Agreements with Paul A. Toback, Carl J. Landeck, Marc D.
Bassewitz, Harold Morgan and James A. McDonald, effective as of
November 30, 2004 (incorporated by reference to
Exhibit 10.18 of the Companys annual report on
Form 10-K
for the fiscal year ended December 31, 2004).
|
|
+10
|
.20
|
|
Employment Agreement effective as
of January 1, 2006, between the Company and John H. Wildman
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated February 10, 2006).
|
E-3
|
|
|
|
|
No.
|
|
Description
|
|
|
+10
|
.21
|
|
Interim Executive Services
Agreement dated as of April 12, 2006, between Tatum, LLC
and the Company (incorporated by reference to Exhibit 10.1
to the Companys Current Report on
Form 8-K,
file no.
001-13997,
dated April 18, 2006).
|
|
10
|
.22
|
|
Credit Agreement dated as of
November 18, 1997, as amended and restated as of
October 14, 2004, among Bally Total Fitness Holding
Corporation, the several banks and other financial institutions
as parties thereto, JPMorgan Chase Bank, as agent, Deutsche Bank
Securities Inc., as syndication agent, and LaSalle Bank National
Association, as documentation agent (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated October 14, 2004).
|
|
10
|
.23
|
|
Amended and Restated Guarantee and
Collateral Agreement dated as of October 14, 2004, made by
the Company and certain of its subsidiaries in favor of The
Chase Manhattan Bank, as Collateral Agent (incorporated by
reference to Exhibit 10.25 to the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2004).
|
|
10
|
.24
|
|
First Amendment and Waiver dated
as of March 31, 2005, under the Credit Agreement, dated as
of November 18, 1997, as amended and restated as of
October 14, 2004, among Bally Total Fitness Holding
Corporation, the lenders parties thereto, JPMorgan Chase Bank,
N.A., as agent for the lenders, Deutsche Bank Securities, Inc.,
as syndication agent, and LaSalle Bank National Association, as
documentation agent (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file no.
001-13997,
dated as of April 4, 2005).
|
|
10
|
.25
|
|
Consent dated as of August 9,
2005, under the Credit Agreement, dated as of November 18,
1997, as amended and restated as of October 14, 2004, as
amended by the First Amendment and Waiver dated March 31,
2005, among Bally Total Fitness Holding Corporation, a Delaware
corporation, the lenders parties thereto, JPMorgan Chase Bank,
N.A., as agent for the lenders, Deutsche Bank Securities, Inc.,
as syndication agent, and LaSalle Bank National Association, as
documentation agent (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated as of August 12, 2005).
|
|
10
|
.26
|
|
Second Amendment and Waiver dated
as of August 24, 2005, under the Credit Agreement, dated as
of November 18, 1997, as amended and restated as of
October 14, 2004, among Bally Total Fitness Holding
Corporation, the lenders parties thereto, JPMorgan Chase Bank,
N.A., as agent for the lenders, Deutsche Bank Securities, Inc.,
as syndication agent, and LaSalle Bank National Association, as
documentation agent (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file no.
001-13997,
dated as of August 25, 2005).
|
|
10
|
.27
|
|
Consent dated as of
October 17, 2005, under the Credit Agreement, dated as of
November 18, 1997, as amended and restated as of
October 14, 2004, as amended as of March 31, 2005,
August 9, 2005 and August 30, 2005 among Bally Total
Fitness Holding Corporation, a Delaware corporation, the lenders
parties thereto, JPMorgan Chase Bank, N.A., as agent for the
lenders, Deutsche Bank Securities, Inc., as syndication agent,
and LaSalle Bank National Association, as documentation agent
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated October 21, 2005).
|
|
10
|
.28
|
|
Third Amendment and Waiver dated
as of March 24, 2006, under the Credit Agreement, dated as
of November 18, 1997, as amended and restated as of
October 14, 2004 (as in effect on March 23, 2006),
among Bally Total Fitness Holding Corporation, a Delaware
corporation, the lenders parties thereto, JPMorgan Chase Bank,
N.A., as agent for the lenders, Deutsche Bank Securities, Inc.,
as syndication agent, and LaSalle Bank National Association, as
documentation agent (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated March 31, 2006).
|
|
10
|
.29
|
|
Consent Agreement dated as of
August 24, 2005, by and between Bally Total Fitness Holding
Corporation and Special Value Bond Fund II, LLC, Special
Value Absolute Return Fund, LLC, Special Value Opportunities
Fund, LLC and Special Value Expansion Fund, LLC. (incorporated
by reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated November 14, 2005).
|
|
10
|
.30
|
|
Consent Agreement dated as of
August 24, 2005 by and between Bally Total Fitness Holding
Corporation and Cascade Investment, LLC (incorporated by
reference to Exhibit 10.2 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated November 14, 2005).
|
E-4
|
|
|
|
|
No.
|
|
Description
|
|
|
10
|
.31
|
|
Consent Agreement dated as of
August 24, 2005 by and between Bally Total Fitness Holding
Corporation and Arrow Investment Partners (incorporated by
reference to Exhibit 10.3 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated November 14, 2005).
|
|
10
|
.32
|
|
Consent Agreement dated as of
August 24, 2005 by and between Bally Total Fitness Holding
Corporation and Bill & Melinda Gates Foundation
(incorporated by reference to Exhibit 10.4 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated November 14, 2005).
|
|
10
|
.33
|
|
Consent Agreement dated as of
August 24, 2005 by and between Bally Total Fitness Holding
Corporation and Everest Capital Limited as agent for HFR ED
Advantage Master Trust, Everest Capital Event Fund, LP, GMAM
Investment Funds Trust II and Everest Capital Senior Debt
Fund, LP (incorporated by reference to Exhibit 10.5 to the
Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated November 14, 2005).
|
|
10
|
.34
|
|
Consent Agreement by and between
Bally Total Fitness Holding Corporation and Special Value Bond
Fund II, LLC, Special Value Absolute Return Fund, LLC,
Special Value Opportunities Fund, LLC and Special Value
Expansion Fund, LLC (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated April 18, 2006).
|
|
10
|
.35
|
|
Consent Agreement by and between
Bally Total Fitness Holding Corporation and Everest Capital
Limited as agent for HFR ED Advantage Master Trust, Everest
Capital Event Fund, LP, GMAM Investment Funds Trust II and
Everest Capital Senior Debt Fund, L.P. (incorporated by
reference to Exhibit 10.2 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated April 18, 2006).
|
|
10
|
.36
|
|
Consent Agreement by and between
Bally Total Fitness Holding Corporation and Pardus European
Special Opportunities Master Fund L.P. (incorporated by
reference to Exhibit 10.3 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated April 18, 2006).
|
|
10
|
.37
|
|
Stock Purchase Agreement dated as
of April 11, 2006, among Bally Total Fitness Holding
Corporation and Wattles Capital Management, LLC (incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
file
no. 001-13997,
dated April 12, 2006).
|
|
10
|
.38
|
|
Stock Purchase Agreement dated as
of April 11, 2006, among Bally Total Fitness Holding
Corporation and investment funds affiliated with Ramius Capital
Group, L.L.C. (incorporated by reference to Exhibit 10.2 to
the Companys Current Report on
Form 8-K,
file
no. 001-13997,
dated April 12, 2006).
|
|
*10
|
.39
|
|
Fourth Amendment dated as of
June 23, 2006, under the Credit Agreement, dated as of
November 18, 1997, as amended and restated as of
October 14, 2004, among Bally Total Fitness Holding
Corporation, the lenders parties thereto, JPMorgan Chase Bank,
N.A., as agent for the lenders, Deutsche Bank Securities, Inc.
as syndication agent, and LaSalle Bank National Association, as
documentation agent.
|
|
14
|
|
|
Code of Business Conduct,
Practices and Ethics (incorporated by reference to
Exhibit 14 to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2003, file
no. 001-13997,
filed April 29, 2004).
|
|
16
|
|
|
Letter re change in certifying
accountants (incorporated by reference to Exhibit 16 to the
Companys Annual Report on
Form 10-K,
file
no. 0-27478,
for the fiscal year ended December 31, 2003).
|
|
*21
|
|
|
List of subsidiaries of the
Company.
|
|
*23
|
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
*31
|
.1
|
|
Certification of the principal
executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
*31
|
.2
|
|
Certification of the principal
financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
*32
|
.1
|
|
Certification of the principal
executive officer and principal financial officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
Management contract or compensatory plan or arrangement. |
E-5