e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for
the quarterly period ended March 31, 2006 |
or
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o |
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Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
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
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60631 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (773) 380-3000
SEE TABLE OF ADDITIONAL REGISTRANTS
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 þ No: 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
As of May 31, 2006, there were 41,310,827 shares of the registrants common stock outstanding.
TABLE OF ADDITIONAL REGISTRANTS
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Jurisdiction of |
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I.R.S. Employer |
Exact Name of Additional Registrants |
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Incorporation |
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Identification Number |
59 th Street Gym LLC |
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New York |
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36-4474644 |
708 Gym LLC |
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New York |
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36-4474644 |
Ace, LLC |
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New York |
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36-4474644 |
Bally Fitness Franchising, Inc. |
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Illinois |
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36-4029332 |
Bally Franchise RSC, Inc. |
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Illinois |
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36-4028744 |
Bally Franchising Holdings, Inc. |
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Illinois |
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36-4024133 |
Bally Sports Clubs, Inc. |
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New York |
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36-3407784 |
Bally Total Fitness Corporation |
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Delaware |
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36-2762953 |
Bally Total Fitness International, Inc. |
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Michigan |
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36-1692238 |
Bally Total Fitness of California, Inc. |
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California |
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36-2763344 |
Bally Total Fitness of Colorado, Inc. |
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Colorado |
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84-0856432 |
Bally Total Fitness of Connecticut Coast, Inc. |
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Connecticut |
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36-3209546 |
Bally Total Fitness of Connecticut Valley, Inc. |
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Connecticut |
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36-3209543 |
Bally Total Fitness of Greater New York, Inc. |
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New York |
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95-3445399 |
Bally Total Fitness of the Mid-Atlantic, Inc. |
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Delaware |
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52-0820531 |
Bally Total Fitness of the Midwest, Inc. |
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Ohio |
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34-1114683 |
Bally Total Fitness of Minnesota, Inc. |
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Ohio |
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84-1035840 |
Bally Total Fitness of Missouri, Inc. |
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Missouri |
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36-2779045 |
Bally Total Fitness of Upstate New York, Inc. |
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New York |
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36-3209544 |
Bally Total Fitness of Philadelphia, Inc. |
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Pennsylvania |
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36-3209542 |
Bally Total Fitness of Rhode Island, Inc. |
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Rhode Island |
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36-3209549 |
Bally Total Fitness of the Southeast, Inc. |
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South Carolina |
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52-1230906 |
Bally Total Fitness of Toledo, Inc. |
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Ohio |
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38-1803897 |
Ballys Fitness and Racquet Clubs, Inc. |
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Florida |
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36-3496461 |
BFIT Rehab of West Palm Beach, Inc. |
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Florida |
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36-4154170 |
BTF/CFI, Inc. |
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Delaware |
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36-4474644 |
Crunch LA LLC |
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New York |
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36-4474644 |
Crunch World LLC |
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New York |
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36-4474644 |
Flambe LLC |
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New York |
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36-4474644 |
Greater Philly No. 1 Holding Company |
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Pennsylvania |
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36-3209566 |
Greater Philly No. 2 Holding Company |
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Pennsylvania |
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36-3209557 |
Health & Tennis Corporation of New York |
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Delaware |
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36-3628768 |
Holiday Health Clubs of the East Coast, Inc. |
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Delaware |
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52-1271028 |
Holiday/Southeast Holding Corp. |
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Delaware |
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52-1289694 |
Jack La Lanne Holding Corp. |
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New York |
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95-3445400 |
Mission Impossible, LLC |
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California |
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36-4474644 |
New Fitness Holding Co., Inc. |
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New York |
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36-3209555 |
Nycon Holding Co., Inc. |
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New York |
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36-3209533 |
Rhode Island Holding Company |
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Rhode Island |
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36-3261314 |
Soho Ho LLC |
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New York |
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36-4474644 |
Tidelands Holiday Health Clubs, Inc. |
|
Virginia |
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52-1229398 |
U.S. Health, Inc. |
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Delaware |
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52-1137373 |
West Village Gym at the Archives LLC |
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New York |
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36-4474644 |
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.
BALLY TOTAL FITNESS HOLDING CORPORATION
Quarterly Report on Form 10-Q For Period Ended March 31, 2006
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Quarterly Report on Form 10-Q 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 controls 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 Quarterly Report on Form 10-Q and prior filings of the Company with the SEC. |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALLY TOTAL FITNESS HOLDING CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
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March 31 |
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December 31 |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash |
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$ |
15,984 |
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$ |
17,454 |
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Deferred income taxes |
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|
319 |
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|
151 |
|
Prepaid expenses |
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|
18,400 |
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20,846 |
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Other current assets |
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13,949 |
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17,394 |
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Current assets held for sale |
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342 |
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Total current assets |
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48,652 |
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56,187 |
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Property and equipment, less accumulated depreciation and
amortization of $757,360 and $749,860 |
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311,107 |
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|
314,670 |
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Goodwill, net |
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19,734 |
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|
19,734 |
|
Trademarks,
net of accumulated amortization of $1,536 and $1,510 |
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6,883 |
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|
6,912 |
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Intangible
assets, net of accumulated amortization of $13,760 and $13,463 |
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2,729 |
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|
2,879 |
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Deferred
financing costs, net of accumulated amortization of $21,593 and
$18,190 |
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|
50,589 |
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|
29,501 |
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Other assets |
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|
12,408 |
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10,317 |
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Non-current assets held for sale |
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39,894 |
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$ |
452,102 |
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$ |
480,094 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
49,760 |
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$ |
57,832 |
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Income taxes payable |
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|
1,714 |
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|
1,697 |
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Accrued liabilities |
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|
126,873 |
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|
96,442 |
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Current maturities of long-term debt |
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|
9,327 |
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|
13,018 |
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Deferred revenues |
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|
290,585 |
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|
299,441 |
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Current liabilities associated with assets held for sale |
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7,764 |
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Total current liabilities |
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478,259 |
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|
476,194 |
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Long-term debt, less current maturities |
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|
713,293 |
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756,304 |
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Deferred rent liability |
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|
90,023 |
|
|
|
87,290 |
|
Deferred income taxes |
|
|
1,689 |
|
|
|
1,435 |
|
Other liabilities |
|
|
29,854 |
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|
|
28,112 |
|
Deferred revenues |
|
|
568,984 |
|
|
|
566,469 |
|
Non-current liabilities associated with assets held for sale |
|
|
|
|
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|
27,976 |
|
Stockholders deficit |
|
|
(1,430,000 |
) |
|
|
(1,463,686 |
) |
|
|
|
|
|
|
|
|
|
$ |
452,102 |
|
|
$ |
480,094 |
|
|
|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
1
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
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Three months ended |
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March 31 |
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|
2006 |
|
|
2005 |
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(As restated) |
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Net revenues: |
|
|
|
|
|
|
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Membership services |
|
$ |
239,655 |
|
|
$ |
236,135 |
|
Retail products |
|
|
11,937 |
|
|
|
13,347 |
|
Miscellaneous |
|
|
3,574 |
|
|
|
4,271 |
|
|
|
|
|
|
|
|
|
|
|
255,166 |
|
|
|
253,753 |
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|
|
|
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|
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Operating costs and expenses: |
|
|
|
|
|
|
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|
Membership services |
|
|
171,138 |
|
|
|
167,611 |
|
Retail products |
|
|
11,011 |
|
|
|
12,808 |
|
Advertising |
|
|
18,895 |
|
|
|
17,111 |
|
General and administrative |
|
|
21,635 |
|
|
|
18,220 |
|
Depreciation and amortization |
|
|
14,214 |
|
|
|
14,939 |
|
|
|
|
|
|
|
|
|
|
|
236,893 |
|
|
|
230,689 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Operating income |
|
|
18,273 |
|
|
|
23,064 |
|
|
|
|
|
|
|
|
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Interest expense, net |
|
|
(23,033 |
) |
|
|
(18,077 |
) |
Foreign exchange gain |
|
|
10 |
|
|
|
207 |
|
Other, net |
|
|
118 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
(22,905 |
) |
|
|
(17,795 |
) |
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|
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|
Income (loss) from continuing operations before income taxes |
|
|
(4,632 |
) |
|
|
5,269 |
|
Income tax provision |
|
|
(201 |
) |
|
|
(240 |
) |
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(4,833 |
) |
|
|
5,029 |
|
Discontinued operations: |
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|
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|
|
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|
Loss from discontinued operations, net of income taxes |
|
|
(872 |
) |
|
|
(414 |
) |
Gain on disposal |
|
|
38,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations |
|
|
37,503 |
|
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,670 |
|
|
$ |
4,615 |
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|
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|
|
|
|
|
|
|
|
|
|
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Basic income (loss) per common share: |
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|
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|
|
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|
Income (loss) from continuing operations |
|
$ |
(0.13 |
) |
|
$ |
0.15 |
|
Income (loss) from discontinued operations |
|
|
1.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
0.87 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.13 |
) |
|
$ |
0.15 |
|
Income (loss) from discontinued operations |
|
|
1.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
0.87 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
2
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement
of Stockholders Deficit and Comprehensive Income
(In thousands, except share data)
(Unaudited)
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|
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|
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|
|
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|
|
|
Accumulated |
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
other |
|
|
Total |
|
|
|
Shares |
|
|
Par |
|
|
Contributed |
|
|
Accumulated |
|
|
Unearned |
|
|
stock in |
|
|
comprehensive |
|
|
stockholders |
|
|
|
outstanding |
|
|
value |
|
|
capital |
|
|
deficit |
|
|
compensation |
|
|
treasury |
|
|
loss |
|
|
deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
38,503,551 |
|
|
$ |
392 |
|
|
$ |
669,089 |
|
|
$ |
(2,113,854 |
) |
|
$ |
(5,534 |
) |
|
$ |
(11,635 |
) |
|
$ |
(2,144 |
) |
|
$ |
(1,463,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of unearned compensation balance to contributed capital |
|
|
|
|
|
|
|
|
|
|
(5,534 |
) |
|
|
|
|
|
|
5,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted stock |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
under stock option plans |
|
|
30,413 |
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
|
38,533,959 |
|
|
$ |
392 |
|
|
$ |
664,697 |
|
|
$ |
(2,081,184 |
) |
|
$ |
|
|
|
$ |
(11,635 |
) |
|
$ |
(2,270 |
) |
|
$ |
(1,430,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,670 |
|
|
$ |
4,615 |
|
Adjustments to reconcile to cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization included in interest expense |
|
|
17,657 |
|
|
|
18,065 |
|
Changes in operating assets and liabilities |
|
|
(1,389 |
) |
|
|
1,019 |
|
Deferred income taxes, net |
|
|
92 |
|
|
|
106 |
|
Gain on disposal of discontinued operations |
|
|
(38,375 |
) |
|
|
|
|
Gain on sale of assets |
|
|
(1,058 |
) |
|
|
|
|
Foreign currency translation gain |
|
|
(11 |
) |
|
|
(207 |
) |
Stock-based compensation |
|
|
991 |
|
|
|
131 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
10,577 |
|
|
|
23,729 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
(11,629 |
) |
|
|
(8,430 |
) |
Proceeds from sale of discontinued operations |
|
|
43,240 |
|
|
|
|
|
Proceeds from sale of discontinued operations in escrow |
|
|
2,250 |
|
|
|
|
|
Proceeds
from sale of property |
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
35,787 |
|
|
|
(8,430 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net borrowings (repayments) under credit agreement |
|
|
(40,000 |
) |
|
|
3,563 |
|
Net repayments of other long-term debt |
|
|
(5,675 |
) |
|
|
(5,128 |
) |
Debt issuance and refinancing costs |
|
|
(2,474 |
) |
|
|
|
|
Proceeds from issuance of common stock under stock option plans |
|
|
151 |
|
|
|
162 |
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(47,998 |
) |
|
|
(1,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
(1,634 |
) |
|
|
13,896 |
|
Effect of exchange rate changes on cash balance |
|
|
164 |
|
|
|
268 |
|
Cash, beginning of period |
|
|
17,454 |
|
|
|
19,177 |
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
15,984 |
|
|
$ |
33,341 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows -- (continued)
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in other current and other assets |
|
$ |
(18,291 |
) |
|
$ |
(3,930 |
) |
Decrease in accounts payable |
|
|
(8,094 |
) |
|
|
(1,749 |
) |
Increase in income taxes payable |
|
|
17 |
|
|
|
97 |
|
Increase (decrease) in accrued liabilities |
|
|
27,055 |
|
|
|
(3,264 |
) |
Increase in other liabilities |
|
|
4,129 |
|
|
|
6,875 |
|
Increase (decrease) in deferred revenues |
|
|
(6,205 |
) |
|
|
2,990 |
|
|
|
|
|
|
|
|
Change in operating assets and liabilities |
|
$ |
(1,389 |
) |
|
$ |
1,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest and income taxes were as follows |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
18,495 |
|
|
$ |
16,844 |
|
Interest capitalized |
|
|
(192 |
) |
|
|
(68 |
) |
Income taxes paid, net |
|
|
98 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
Investing and financing activities exclude the following non-cash transactions |
|
|
|
|
|
|
|
|
Acquisitions of property and equipment through capital leases/borrowings |
|
$ |
|
|
|
$ |
140 |
|
Reclassification of unearned compensation balance to contributed capital |
|
$ |
5,534 |
|
|
$ |
|
|
See accompanying notes to condensed consolidated financial statements.
5
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements
(All dollar amounts in
thousands, except share and per share data)
(Unaudited)
Note 1 Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Bally
Total Fitness Holding Corporation (the Company) and the subsidiaries that it controls. The
Company, through its subsidiaries, is a commercial operator of 384 fitness centers at March 31,
2006 concentrated in 29 states and Canada. Additionally, as of March 31, 2006, 29 clubs were
operated pursuant to franchise and joint venture agreements in the United States, Asia, Mexico, and
the Caribbean. The Company operates in one industry segment, and all significant revenues arise
from the commercial operation of fitness centers, primarily in major metropolitan markets in the
United States and Canada. Unless otherwise specified in the text, references to the Company include
the Company and its subsidiaries. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2005 filed with the SEC on June 27, 2006.
All adjustments have been recorded which are, in the opinion of management, necessary for a
fair presentation of the condensed consolidated balance sheet of the Company at March 31, 2006, its
consolidated statements of operations for the three months ended March 31, 2006 and 2005, its
consolidated statement of stockholders deficit and
comprehensive income for the three months ended
March 31, 2006, and its consolidated statements of cash flows for the three months ended March 31,
2006 and 2005.
The accompanying condensed consolidated financial statements have been prepared in conformity
with U.S. generally accepted accounting principles, which require the Companys management to make
estimates and assumptions that affect the amounts reported therein. Actual results could vary from
such estimates. Prior period amounts related to discontinued operations reported on the
Consolidated Statements of Operations and Condensed Consolidated Balance Sheets have been
reclassified in accordance with Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
Seasonal factors
The Companys operations are subject to seasonal factors and, therefore, the results of
operations for the three months ended March 31, 2006 and 2005 are not necessarily indicative of the
results of operations for the full year.
Market risk
The Company is exposed to market risk from changes in the interest rates on certain of its
outstanding debt. The outstanding loan balance under its bank credit facility bears interest at
variable rates based upon prevailing short-term interest rates in the United States and Europe.
The Company has entered into interest rate swap agreements whereby the fixed interest
commitment on $200,000 of outstanding principal on the Companys 9 7/8% Senior Subordinated Notes
due 2007 (the Senior Subordinated Notes) was swapped for a variable rate commitment based on the
LIBOR rate plus 6.01%.
Note 2
Restatement of 2005 Quarterly Information
In the fourth quarter of 2005, the Company identified errors in its previously reported 2005
quarterly results with respect to revenue items relating to certain membership offers, amortization
of deferred finance costs, depreciation expense and certain insurance liability expense. See Note
20 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for
the year ended December 31, 2005. The consolidated statement of operations and consolidated
statement of cash flows for the three months ended March 31, 2005 included herein reflect the
restated items.
6
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note
3 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.
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
(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. 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 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
7
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
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.
8
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
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 time, customer
complaints are investigated by various
9
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
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 operations. 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 Part II, Item 1A Risk Factors.
10
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note 4 Debt
At March 31, 2006, the Company had $25,000 in borrowings and $14,114 of letters of credit
outstanding under its $100,000 revolving credit facility. The amount available under the revolving
credit facility is reduced by any outstanding letters of credit, which
are limited to $30,000. At March 31, 2006, the average rate on borrowings under the revolving
credit and term loan facility was 9.11%. On March 30, 2006, the Company entered into the Third
Amendment and Waiver with the lenders under its Amended and Restated Credit Agreement dated October
14, 2004 (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 Companys 10 1/2% Senior
Notes due 2011 (the Senior Notes) and excluded fees and expenses incurred in connection with the
consent solicitation from the computation of financial covenants. As of March 31, 2006, the
Company was in compliance with the terms of the Credit Agreement.
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.
The Companys unrestricted Canadian subsidiary was not in compliance with its credit agreement
at March 31, 2006. As a result, the outstanding amount of $1,028 has been classified as current.
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. As the Company was in compliance as of the date of
filing this Form 10-Q for the period ending March 31, 2006, no additional amounts have
been classified as current.
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 in Note 12, Subsequent Events, 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.
Note 5 Deferred Revenue
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 March 31, 2006 and 2005 and for the periods 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006 |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
Cash |
|
|
Revenue |
|
|
March 31, |
|
|
|
2005 |
|
|
Additions |
|
|
Recognized |
|
|
2006 |
|
Deferral of receipts from financed members: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
contract term payments |
|
$ |
517,624 |
|
|
$ |
59,698 |
|
|
$ |
(69,111 |
) |
|
$ |
508,211 |
|
Down payments |
|
|
100,009 |
|
|
|
14,490 |
|
|
|
(14,381 |
) |
|
|
100,118 |
|
Deferral of receipts representing advance payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full membership fees collected upon origination |
|
|
109,819 |
|
|
|
10,086 |
|
|
|
(9,306 |
) |
|
|
110,599 |
|
Advance payments of periodic dues and membership fees |
|
|
120,696 |
|
|
|
27,094 |
|
|
|
(26,726 |
) |
|
|
121,064 |
|
Receipts collected and earned without deferral during period |
|
|
|
|
|
|
89,227 |
|
|
|
(89,227 |
) |
|
|
|
|
Deferral of receipts for personal training services |
|
|
17,762 |
|
|
|
32,719 |
|
|
|
(30,904 |
) |
|
|
19,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
865,910 |
|
|
$ |
233,314 |
|
|
$ |
(239,655 |
) |
|
$ |
859,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2005 |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
Cash |
|
|
Revenue |
|
|
March 31, |
|
|
|
2004 |
|
|
Additions |
|
|
Recognized |
|
|
2005 |
|
Deferral of receipts from financed members: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
contract term payments |
|
$ |
534,446 |
|
|
$ |
72,297 |
|
|
$ |
(74,844 |
) |
|
$ |
531,899 |
|
Down payments |
|
|
105,614 |
|
|
|
15,694 |
|
|
|
(13,307 |
) |
|
|
108,001 |
|
Deferral of receipts representing advance payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full membership fees collected upon origination |
|
|
115,735 |
|
|
|
8,537 |
|
|
|
(9,037 |
) |
|
|
115,235 |
|
Advance payments of periodic dues and membership fees |
|
|
132,164 |
|
|
|
35,788 |
|
|
|
(35,233 |
) |
|
|
132,719 |
|
Receipts collected and earned without deferral during period |
|
|
|
|
|
|
74,632 |
|
|
|
(74,632 |
) |
|
|
|
|
Deferral of receipts for personal training services |
|
|
17,697 |
|
|
|
31,112 |
|
|
|
(29,082 |
) |
|
|
19,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
905,656 |
|
|
$ |
238,060 |
|
|
$ |
(236,135 |
) |
|
$ |
907,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note 6 Income (loss) per Common Share
Income (loss) per share is computed in accordance with SFAS No. 128 Earnings per Share.
Basic income (loss) per share is computed on the basis of the weighted average number of common
shares outstanding. Diluted income per share is computed on the basis of the weighted average
number of common shares outstanding plus the effect of outstanding stock options and warrants using
the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
37,685,264 |
|
|
|
32,943,842 |
|
Effect of outstanding stock options and warrants |
|
|
|
|
|
|
324,553 |
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding |
|
|
37,685,264 |
|
|
|
33,268,395 |
|
|
|
|
|
|
|
|
Options and warrants excluded from the computation
of diluted weighted average number of common shares
because the exercise prices were greater than the average
market prices of the common stock |
|
|
1,722,640 |
|
|
|
4,878,403 |
|
|
|
|
|
|
|
|
|
|
Range of exercise prices per share: |
|
|
|
|
|
|
|
|
High |
|
$ |
36.00 |
|
|
$ |
36.00 |
|
Low |
|
$ |
2.91 |
|
|
$ |
4.11 |
|
Note 7 Income Taxes
At March 31, 2006, the Company had approximately $710,000 of federal net operating loss
carryforwards and approximately $5,896 of Alternative Minimum Tax (AMT) credit carryforwards. The
AMT credits can be carried forward indefinitely, while the tax loss
carryforwards expire beginning
in 2011 and fully expire in 2026. In addition, the Company has
substantial state tax loss carryforwards
that began to expire in 2006 and fully expire in 2026. 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 on 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. In accordance with SFAS No. 109, Accounting for Income Taxes, the
Company will continue to review and evaluate the valuation allowance.
12
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note 8 Stock-based Compensation
In December 2004 the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No.123R). SFAS No. 123R
is a revision of SFAS No. 123, Accounting for Stock-based Compensation, (SFAS No. 123) and
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(APB 25) and its related implementation guidance. SFAS No. 123R primarily focuses on accounting
for transactions in which an entity obtains employee services in
share-based payment transactions and requires entities to recognize compensation expense from all share-based payment
transactions in the financial statements. SFAS No. 123R establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for all share-based payment transactions with
employees.
The Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective method.
Accordingly, prior period amounts have not been restated. Under this method, the Company must
record compensation expense for all awards granted after the adoption date and for the unvested
portion of previously granted awards that remain outstanding at the adoption date, under the fair
value method. The Company has elected to recognize compensation expense on a straight-line basis
over the vesting period of the award. Total stock-based compensation
expense for the first quarter of 2006 was
$1,090 which is comprised of
$561 related to stock
options, $430 related to
restricted shares and $99 related to estimated income tax obligations which are liability
classified.
Prior to the adoption of SFAS No. 123R, the Company accounted for its stock-based awards using
the intrinsic value method in accordance with APB 25, and recognized no compensation costs for its
stock plans other than for its restricted stock awards. Specifically, the adoption of SFAS No.
123R resulted in the recording of compensation expense for employee stock options. The
following table shows what selected reported items would have been for the three months ended
March 31, 2006 under APB 25:
|
|
|
|
|
Loss from
continuing operations before income taxes |
|
$ |
(4,071 |
) |
Loss from
continuing operations |
|
|
(4,272 |
) |
Net income |
|
|
33,231 |
|
Cash flow
from operating activities |
|
|
10,577 |
|
Cash flow from financing activities |
|
|
(47,998 |
) |
Basic and
diluted income (loss) per common share |
|
|
|
|
Loss from
continuing operations |
|
$ |
(0.11 |
) |
Income from
discontinued operations |
|
|
1.00 |
|
|
|
|
|
Net income(1) |
|
$ |
0.88 |
|
|
|
|
|
|
|
|
(1) |
|
Per share amounts do not sum due to rounding differences. |
The following table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 for the three months ended March
31, 2005:
|
|
|
|
|
Net income, as reported |
|
$ |
4,615 |
|
Plus: stock-based compensation expense included in net income |
|
|
131 |
|
Less: stock-based compensation expense determined under fair value
based method |
|
|
(701 |
) |
|
|
|
|
Pro forma net income |
|
$ |
4,045 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per common share |
|
|
|
|
As reported |
|
$ |
0.14 |
|
Pro forma |
|
|
0.12 |
|
Stock-Based Compensation Plans
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 provided for the grant of
non-qualified stock options to non-employee directors of the Company. 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 and have a 10-year term. The
Directors Plan expired as of January 3, 2006. As such, stock options may no longer be granted
under the Directors Plan.
Also in January 1996, the Board of Directors of the Company adopted the 1996 Long-Term
Incentive Plan (the Incentive Plan). The Incentive Plan provided 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. 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 could not be granted at
less than the fair market value of the Common Stock at the date of grant. Option grants become
exercisable
13
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
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. The Incentive Plan expired as of
January 3, 2006. As such, awards may no longer be granted under the Incentive Plan.
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. 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
and have 10-year terms. As
of March 31, 2006, 54,500 shares remain available for issuance under
the Inducement Plan (42,500 at May 31, 2006).
Certain employment arrangements contain provisions that provide for the payment to the
participant of amounts which represent estimated income tax obligations related to the vesting of
awards. The amounts related to the estimated income tax obligations
are liability classified awards.
14
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Stock Options
A summary of stock based compensation activity within the
Companys stock-based compensation plans for the three months ended March 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Number of Shares |
|
|
Exercise Price |
|
|
Term (Years) |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
4,138,514 |
|
|
$ |
13.26 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
7,500 |
|
|
|
8.40 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(30,413 |
) |
|
|
4.96 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(33,250 |
) |
|
|
6.13 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(33,792 |
) |
|
|
19.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
4,048,559 |
|
|
$ |
13.32 |
|
|
|
6.4 |
|
|
$ |
8,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
2,747,641 |
|
|
$ |
17.00 |
|
|
|
5.3 |
|
|
$ |
3,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information pertaining to option activity during the three months ended March 31, 2006
and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Weighted average grant-date fair value of
stock options granted |
|
$ |
4.60 |
|
|
$ |
1.74 |
|
Total intrinsic value of stock options exercised |
|
$ |
134 |
|
|
$ |
|
|
The Company received $151 of cash from stock options exercised during the first quarter
of 2006. At March 31, 2006, there was approximately $2,500 of total unrecognized
compensation cost related to nonvested stock options. This cost will be recognized over a
weighted average period of 3 years.
The fair value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
March 31, |
|
|
2006 |
|
2005 |
Expected option life in years |
|
|
6 |
|
|
|
6 |
|
Risk-free interest rate |
|
|
4.7 |
% |
|
|
4.2 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
52 |
% |
|
|
52 |
% |
For the first quarter of 2006, the expected life of each award granted was calculated
using historical experience. Expected volatility was based on historical volatility levels
of Bally Total Fitness Holding Corporation common stock. The risk-free interest rate is
based on the implied yield currently available on U.S. Treasury strip rates with a remaining
term equal to the expected term. Expected dividend yield is based on historical dividend
payments.
Restricted Stock
The Company also 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. The Company did not grant restricted
stock awards during the first quarter of 2006.
15
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
A summary of restricted stock activity for the three months ended March 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Number of Shares |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
837,000 |
|
|
$ |
6.92 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(2,500 |
) |
|
|
7.01 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
834,500 |
|
|
$ |
6.92 |
|
|
|
|
|
|
|
|
As of March 31, 2006, the total amount of unrecognized compensation expense related to
nonvested restricted stock awards and estimated income tax
obligations was approximately $5,292, and
$1,159, respectively. Both amounts are expected to be
recognized on a straight-line basis over a weighted-average period of approximately 4 years.
The total fair value of shares vested during the first
quarters of 2006 and 2005 was $20 and $0, respectively.
Note 9 Guarantees
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 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 has recorded 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.
16
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note
10 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 $1,623
during the quarter ended March 31, 2006 for reimbursement of
costs incurred in prior periods pursuant to the
Companys Director and Officer insurance policies.
Note 11 Discontinued Operations
On January 20, 2006, pursuant to a sale agreement, the Company completed the sale of
twenty-five health clubs operated primarily 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. The transaction resulted from an offering and competitive bidding
process run by the Companys independent investment banking
firm. The Company received $45,000
in gross proceeds and
recorded a net gain of $38,375. As a result of this transaction, the Company has
presented the operating results of Crunch as a discontinued operation for all periods presented.
All previously reported amounts from the statement of operations and balance sheet have been
reclassified in accordance with the reporting requirements of SFAS No. 144.
The financial results of Crunch Fitness, included in discontinued operations, are as follows:
|
|
|
|
|
|
|
|
|
Summarized |
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
4,687 |
|
|
$ |
17,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes |
|
|
(866 |
) |
|
|
(395 |
) |
Income tax provision |
|
|
(6 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(872 |
) |
|
|
(414 |
) |
Gain on disposal of discontinued operations |
|
|
38,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
37,503 |
|
|
$ |
(414 |
) |
|
|
|
|
|
|
|
Note 12 Subsequent Events
Credit Agreement Amendment and Noteholder 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.
17
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
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 consent 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. These deferred finance
charges were reduced to $18,220 subsequent to March 31, 2006 to
reflect the ultimate value of payments elected in shares after the
end of the period. 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.
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.
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 13 Condensed Consolidating Financial Statements
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 Senior Notes are unconditionally
guaranteed, on a joint and several basis, by the Guarantor
subsidiaries, including substantially all
domestic subsidiaries of the Parent. Non-Guarantor subsidiaries include Canadian operations and
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; BFT/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.
18
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
The following tables present the condensed consolidating balance sheets at March 31, 2006 and
December 31, 2005, the condensed consolidating statements of operations for the three months ended
March 31, 2006 and 2005, and the condensed consolidating statements of cash flows for the three
months ended March 31, 2006 and 2005. The Eliminations column reflects the elimination of
investments in subsidiaries and intercompany balances and transactions. Certain amounts in the
condensed consolidated statement of operations and condensed consolidated statement of cash flows
for the three months ended March 31, 2005 have been restated.
See Note 2.
CONDENSED CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non- Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
13,787 |
|
|
$ |
2,197 |
|
|
$ |
|
|
|
$ |
15,984 |
|
Other current assets |
|
|
|
|
|
|
31,153 |
|
|
|
1,515 |
|
|
|
|
|
|
|
32,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
44,940 |
|
|
|
3,712 |
|
|
|
|
|
|
|
48,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
292,705 |
|
|
|
18,402 |
|
|
|
|
|
|
|
311,107 |
|
Goodwill, net |
|
|
|
|
|
|
19,734 |
|
|
|
|
|
|
|
|
|
|
|
19,734 |
|
Trademarks, net |
|
|
6,507 |
|
|
|
|
|
|
|
376 |
|
|
|
|
|
|
|
6,883 |
|
Intangible assets, net |
|
|
|
|
|
|
2,230 |
|
|
|
499 |
|
|
|
|
|
|
|
2,729 |
|
Investment in and advances to subsidiaries |
|
|
(734,243 |
) |
|
|
221,315 |
|
|
|
|
|
|
|
512,928 |
|
|
|
|
|
Other assets |
|
|
50,390 |
|
|
|
8,880 |
|
|
|
3,727 |
|
|
|
|
|
|
|
62,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(677,346 |
) |
|
$ |
589,804 |
|
|
$ |
26,716 |
|
|
$ |
512,928 |
|
|
$ |
452,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
49,509 |
|
|
$ |
251 |
|
|
$ |
|
|
|
$ |
49,760 |
|
Income taxes payable |
|
|
|
|
|
|
1,658 |
|
|
|
56 |
|
|
|
|
|
|
|
1,714 |
|
Accrued liabilities |
|
|
44,196 |
|
|
|
74,195 |
|
|
|
8,482 |
|
|
|
|
|
|
|
126,873 |
|
Current maturities of long-term debt |
|
|
4,579 |
|
|
|
1,513 |
|
|
|
3,235 |
|
|
|
|
|
|
|
9,327 |
|
Deferred revenues |
|
|
|
|
|
|
284,655 |
|
|
|
5,930 |
|
|
|
|
|
|
|
290,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
48,775 |
|
|
|
411,530 |
|
|
|
17,954 |
|
|
|
|
|
|
|
478,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
703,879 |
|
|
|
3,722 |
|
|
|
5,692 |
|
|
|
|
|
|
|
713,293 |
|
Net affiliate payable |
|
|
|
|
|
|
456,846 |
|
|
|
54,673 |
|
|
|
(511,519 |
) |
|
|
|
|
Other liabilities |
|
|
|
|
|
|
111,675 |
|
|
|
9,891 |
|
|
|
|
|
|
|
121,566 |
|
Deferred revenues |
|
|
|
|
|
|
557,801 |
|
|
|
11,183 |
|
|
|
|
|
|
|
568,984 |
|
Stockholders deficit |
|
|
(1,430,000 |
) |
|
|
(951,770 |
) |
|
|
(72,677 |
) |
|
|
1,024,447 |
|
|
|
(1,430,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(677,346 |
) |
|
$ |
589,804 |
|
|
$ |
26,716 |
|
|
$ |
512,928 |
|
|
$ |
452,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
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 |
|
|
|
|
|
|
36,976 |
|
|
|
1,415 |
|
|
|
|
|
|
|
38,391 |
|
Current assets held for sale |
|
|
|
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
53,556 |
|
|
|
2,631 |
|
|
|
|
|
|
|
56,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
294,888 |
|
|
|
19,782 |
|
|
|
|
|
|
|
314,670 |
|
Goodwill, net |
|
|
|
|
|
|
19,734 |
|
|
|
|
|
|
|
|
|
|
|
19,734 |
|
Trademarks, net |
|
|
6,507 |
|
|
|
|
|
|
|
405 |
|
|
|
|
|
|
|
6,912 |
|
Intangible assets, net |
|
|
|
|
|
|
2,333 |
|
|
|
546 |
|
|
|
|
|
|
|
2,879 |
|
Investment in and advances to subsidiaries |
|
|
(724,893 |
) |
|
|
221,315 |
|
|
|
|
|
|
|
503,578 |
|
|
|
|
|
Other assets |
|
|
29,265 |
|
|
|
6,580 |
|
|
|
3,973 |
|
|
|
|
|
|
|
39,818 |
|
Non-current assets held for sale |
|
|
|
|
|
|
39,894 |
|
|
|
|
|
|
|
|
|
|
|
39,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(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 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
22,407 |
|
|
|
67,768 |
|
|
|
6,267 |
|
|
|
|
|
|
|
96,442 |
|
Current maturities of long-term debt |
|
|
6,594 |
|
|
|
485 |
|
|
|
5,939 |
|
|
|
|
|
|
|
13,018 |
|
Deferred revenues |
|
|
|
|
|
|
293,116 |
|
|
|
6,325 |
|
|
|
|
|
|
|
299,441 |
|
Current liabilities associated with assets
held for sale |
|
|
|
|
|
|
7,764 |
|
|
|
|
|
|
|
|
|
|
|
7,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
108,259 |
|
|
|
8,578 |
|
|
|
|
|
|
|
116,837 |
|
Deferred revenues |
|
|
|
|
|
|
554,722 |
|
|
|
11,747 |
|
|
|
|
|
|
|
566,469 |
|
Non-current liabilities associated with assets
held for sale |
|
|
|
|
|
|
27,976 |
|
|
|
|
|
|
|
|
|
|
|
27,976 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
230,315 |
|
|
$ |
9,340 |
|
|
$ |
|
|
|
$ |
239,655 |
|
Retail products |
|
|
|
|
|
|
11,618 |
|
|
|
319 |
|
|
|
|
|
|
|
11,937 |
|
Miscellaneous |
|
|
|
|
|
|
3,199 |
|
|
|
375 |
|
|
|
|
|
|
|
3,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,132 |
|
|
|
10,034 |
|
|
|
|
|
|
|
255,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
164,952 |
|
|
|
6,186 |
|
|
|
|
|
|
|
171,138 |
|
Retail products |
|
|
|
|
|
|
10,710 |
|
|
|
301 |
|
|
|
|
|
|
|
11,011 |
|
Advertising |
|
|
|
|
|
|
18,538 |
|
|
|
357 |
|
|
|
|
|
|
|
18,895 |
|
General and administrative |
|
|
1,283 |
|
|
|
19,788 |
|
|
|
564 |
|
|
|
|
|
|
|
21,635 |
|
Depreciation and amortization |
|
|
|
|
|
|
13,626 |
|
|
|
588 |
|
|
|
|
|
|
|
14,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,283 |
|
|
|
227,614 |
|
|
|
7,996 |
|
|
|
|
|
|
|
236,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1,283 |
) |
|
|
17,518 |
|
|
|
2,038 |
|
|
|
|
|
|
|
18,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income from continuing operations
of
subsidiaries |
|
|
18,211 |
|
|
|
|
|
|
|
|
|
|
|
(18,211 |
) |
|
|
|
|
Interest expense |
|
|
(22,345 |
) |
|
|
(345 |
) |
|
|
(976 |
) |
|
|
633 |
|
|
|
(23,033 |
) |
Foreign exchange gain |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
Other, net |
|
|
584 |
|
|
|
89 |
|
|
|
78 |
|
|
|
(633 |
) |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,550 |
) |
|
|
(256 |
) |
|
|
(888 |
) |
|
|
(18,211 |
) |
|
|
(22,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before
income taxes |
|
|
(4,833 |
) |
|
|
17,262 |
|
|
|
1,150 |
|
|
|
(18,211 |
) |
|
|
(4,632 |
) |
Income tax provision |
|
|
|
|
|
|
(201 |
) |
|
|
|
|
|
|
|
|
|
|
(201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(4,833 |
) |
|
|
17,061 |
|
|
|
1,150 |
|
|
|
(18,211 |
) |
|
|
(4,833 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations |
|
|
38,375 |
* |
|
|
38,375 |
|
|
|
|
|
|
|
(38,375 |
) |
|
|
38,375 |
|
Loss from discontinued operations |
|
|
(872) |
* |
|
|
(872 |
) |
|
|
|
|
|
|
872 |
|
|
|
(872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
37,503 |
|
|
|
37,503 |
|
|
|
|
|
|
|
(37,503 |
) |
|
|
37,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,670 |
|
|
$ |
54,564 |
|
|
$ |
1,150 |
|
|
$ |
(55,714 |
) |
|
$ |
32,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Equity in amounts from subsidiaries related to discontinued operations. |
21
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
226,396 |
|
|
$ |
9,739 |
|
|
$ |
|
|
|
$ |
236,135 |
|
Retail products |
|
|
|
|
|
|
12,985 |
|
|
|
362 |
|
|
|
|
|
|
|
13,347 |
|
Miscellaneous |
|
|
|
|
|
|
3,853 |
|
|
|
418 |
|
|
|
|
|
|
|
4,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,234 |
|
|
|
10,519 |
|
|
|
|
|
|
|
253,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
160,359 |
|
|
|
7,252 |
|
|
|
|
|
|
|
167,611 |
|
Retail products |
|
|
|
|
|
|
12,462 |
|
|
|
346 |
|
|
|
|
|
|
|
12,808 |
|
Advertising |
|
|
|
|
|
|
16,750 |
|
|
|
361 |
|
|
|
|
|
|
|
17,111 |
|
General and administrative |
|
|
878 |
|
|
|
17,053 |
|
|
|
289 |
|
|
|
|
|
|
|
18,220 |
|
Depreciation and amortization |
|
|
|
|
|
|
14,138 |
|
|
|
801 |
|
|
|
|
|
|
|
14,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878 |
|
|
|
220,762 |
|
|
|
9,049 |
|
|
|
|
|
|
|
230,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(878 |
) |
|
|
22,472 |
|
|
|
1,470 |
|
|
|
|
|
|
|
23,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income from continuing
operations
of subsidiaries |
|
|
22,586 |
|
|
|
|
|
|
|
|
|
|
|
(22,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(17,101 |
) |
|
|
(582 |
) |
|
|
(864 |
) |
|
|
470 |
|
|
|
(18,077 |
) |
Foreign exchange gain |
|
|
|
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
207 |
|
Other, net |
|
|
422 |
|
|
|
65 |
|
|
|
58 |
|
|
|
(470 |
) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,907 |
|
|
|
(517 |
) |
|
|
(599 |
) |
|
|
(22,586 |
) |
|
|
(17,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
5,029 |
|
|
|
21,955 |
|
|
|
871 |
|
|
|
(22,586 |
) |
|
|
5,269 |
|
Income tax provision |
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
5,029 |
|
|
|
21,715 |
|
|
|
871 |
|
|
|
(22,586 |
) |
|
|
5,029 |
|
Loss from discontinued operations |
|
|
(414) |
* |
|
|
(414 |
) |
|
|
|
|
|
|
414 |
|
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,615 |
|
|
$ |
21,301 |
|
|
$ |
871 |
|
|
$ |
(22,172 |
) |
|
$ |
4,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Equity in amounts from subsidiaries related to discontinued operations. |
22
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,670 |
|
|
$ |
54,564 |
|
|
$ |
1,150 |
|
|
$ |
(55,714 |
) |
|
$ |
32,670 |
|
Adjustments to reconcile to cash provided
Depreciation and amortization, including
amortization included in interest expense |
|
|
3,250 |
|
|
|
13,819 |
|
|
|
588 |
|
|
|
|
|
|
|
17,657 |
|
Changes in operating assets and liabilities |
|
|
(112 |
) |
|
|
(3,877 |
) |
|
|
2,600 |
|
|
|
|
|
|
|
(1,389 |
) |
Changes in net affiliate balances |
|
|
|
|
|
|
(63,693 |
) |
|
|
(1,245 |
) |
|
|
64,938 |
|
|
|
|
|
Other, net |
|
|
991 |
|
|
|
(39,341 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(38,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
|
36,799 |
|
|
|
(38,528 |
) |
|
|
3,082 |
|
|
|
9,224 |
|
|
|
10,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of property and
equipment |
|
|
|
|
|
|
(11,543 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
(11,629 |
) |
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
43,240 |
|
|
|
|
|
|
|
|
|
|
|
43,240 |
|
Proceeds from sale of discontinued operations
in escrow |
|
|
|
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
|
|
2,250 |
|
Proceeds from sale of property |
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
1,926 |
|
Investment in and advances to subsidiaries |
|
|
9,224 |
|
|
|
|
|
|
|
|
|
|
|
(9,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
9,224 |
|
|
|
35,873 |
|
|
|
(86 |
) |
|
|
(9,224 |
) |
|
|
35,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under credit agreement |
|
|
(40,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,000 |
) |
Net borrowings (repayments) of other
long-term debt |
|
|
(3,700 |
) |
|
|
204 |
|
|
|
(2,179 |
) |
|
|
|
|
|
|
(5,675 |
) |
Debt issuance and refinancing costs |
|
|
(2,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,474 |
) |
Stock purchase and options plans |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
(46,023 |
) |
|
|
204 |
|
|
|
(2,179 |
) |
|
|
|
|
|
|
(47,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
|
|
|
|
(2,451 |
) |
|
|
817 |
|
|
|
|
|
|
|
(1,634 |
) |
Effect of exchange rate changes on cash
balances |
|
|
|
|
|
|
|
|
|
|
164 |
|
|
|
|
|
|
|
164 |
|
Cash, beginning of year |
|
|
|
|
|
|
16,238 |
|
|
|
1,216 |
|
|
|
|
|
|
|
17,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year |
|
$ |
|
|
|
$ |
13,787 |
|
|
$ |
2,197 |
|
|
$ |
|
|
|
$ |
15,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,615 |
|
|
$ |
21,301 |
|
|
$ |
871 |
|
|
$ |
(22,172 |
) |
|
$ |
4,615 |
|
Adjustments to reconcile to cash provided
Depreciation and amortization, including
amortization included in interest expense |
|
|
788 |
|
|
|
16,476 |
|
|
|
801 |
|
|
|
|
|
|
|
18,065 |
|
Changes in operating assets and liabilities |
|
|
1,406 |
|
|
|
532 |
|
|
|
(919 |
) |
|
|
|
|
|
|
1,019 |
|
Changes in net affiliate balances |
|
|
|
|
|
|
(17,014 |
) |
|
|
923 |
|
|
|
16,091 |
|
|
|
|
|
Other, net |
|
|
131 |
|
|
|
106 |
|
|
|
(207 |
) |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
6,940 |
|
|
|
21,401 |
|
|
|
1,469 |
|
|
|
(6,081 |
) |
|
|
23,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
|
|
|
|
(8,198 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
(8,430 |
) |
Investment in and advances to subsidiaries |
|
|
(6,081 |
) |
|
|
|
|
|
|
|
|
|
|
6,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
(6,081 |
) |
|
|
(8,198 |
) |
|
|
(232 |
) |
|
|
6,081 |
|
|
|
(8,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving credit agreement |
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,563 |
|
Net borrowings (repayments) of other long-term debt |
|
|
(4,584 |
) |
|
|
482 |
|
|
|
(1,026 |
) |
|
|
|
|
|
|
(5,128 |
) |
Stock purchase and options plans |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
(859 |
) |
|
|
482 |
|
|
|
(1,026 |
) |
|
|
|
|
|
|
(1,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
|
|
|
|
13,685 |
|
|
|
211 |
|
|
|
|
|
|
|
13,896 |
|
Effect of exchange rate changes on cash balances |
|
|
|
|
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
268 |
|
Cash, beginning of year |
|
|
|
|
|
|
18,726 |
|
|
|
451 |
|
|
|
|
|
|
|
19,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year |
|
$ |
|
|
|
$ |
32,411 |
|
|
$ |
930 |
|
|
$ |
|
|
|
$ |
33,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with the Condensed
Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q and in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, and
with the information under the heading Managements Discussion and Analysis of Financial Condition
and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2005.
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 March 31, 2006, we
operated 384 fitness centers collectively serving approximately 3.6 million members. These 384
fitness centers occupied a total of 12.1 million square feet.
Our fitness centers are concentrated in major metropolitan areas in 29 states, the District of
Columbia and Canada, with more than 321 fitness centers located in the top 25 metropolitan areas in
the United States and Canada. As of March 31, 2006, 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:
1) |
|
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. |
|
|
|
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 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 |
25
|
|
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 membership
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. |
|
|
|
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% and 93% of
total revenue for the three months ended March 31, 2006 and 2005,
respectively. 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. |
|
2) |
|
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 for each of the three
months ended March 31, 2006 and 2005. |
|
3) |
|
The balance of our revenue (approximately 1% and 2% for the three
months ended March 31, 2006 and 2005, respectively), 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. |
Our operating costs and expenses are comprised of the following:
1) |
|
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. |
26
2) |
|
Retail products expenses consist primarily of the cost of products
sold as well as the payroll and related costs of dedicated retail
associates. |
|
3) |
|
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. |
|
4) |
|
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 various accounting
investigations. |
|
5) |
|
Depreciation and amortization expenses 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 noncancelable lease terms. In addition,
equipment and furnishings are depreciated over 5 to 10 years. |
We evaluate the results of our fitness centers on a two-tiered segment basis (comparable and
noncomparable) 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 an 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 member 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 on the planned service offerings and 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.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP 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
27
a consistent
manner from period to period. Our significant accounting policies are summarized in Note 1 in the
Notes to Consolidated Financial Statements that are included in the Companys 2005 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The preparation of financial
statements in conformity with GAAP 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 liabilities not readily obtainable from other sources. Actual results could differ
from those estimates.
The accounting policies and estimates that can have a significant impact on the operating
results, financial position and footnote disclosures of the Company are described in Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations in the
Companys 2005 Annual Report on Form 10-K.
Results of Operations
The following table sets forth key operating data for the periods indicated (dollars in
thousands except per member data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Three Months |
|
|
% of |
|
|
Change from |
|
|
|
Ended |
|
|
% of |
|
|
Ended |
|
|
Net |
|
|
Previous Period |
|
|
|
March 31, 2006 |
|
|
Net Revenue |
|
|
March 31, 2005 |
|
|
Revenue |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
(As restated)
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership |
|
$ |
208,751 |
|
|
|
82 |
% |
|
$ |
207,053 |
|
|
|
82 |
% |
|
$ |
1,698 |
|
|
|
1 |
% |
Personal training |
|
|
30,904 |
|
|
|
12 |
% |
|
|
29,082 |
|
|
|
11 |
% |
|
|
1,822 |
|
|
|
6 |
% |
|
|
|
|
|
Membership services revenue |
|
|
239,655 |
|
|
|
94 |
% |
|
|
236,135 |
|
|
|
93 |
% |
|
|
3,520 |
|
|
|
1 |
% |
Retail products |
|
|
11,937 |
|
|
|
5 |
% |
|
|
13,347 |
|
|
|
5 |
% |
|
|
(1,410 |
) |
|
|
-11 |
% |
Miscellaneous |
|
|
3,574 |
|
|
|
1 |
% |
|
|
4,271 |
|
|
|
2 |
% |
|
|
(697 |
) |
|
|
-16 |
% |
|
|
|
|
|
Net revenues |
|
|
255,166 |
|
|
|
100 |
% |
|
|
253,753 |
|
|
|
100 |
% |
|
|
1,413 |
|
|
|
1 |
% |
OPERATING COSTS AND EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
171,138 |
|
|
|
67 |
% |
|
|
167,611 |
|
|
|
66 |
% |
|
|
3,527 |
|
|
|
2 |
% |
Retail products |
|
|
11,011 |
|
|
|
4 |
% |
|
|
12,808 |
|
|
|
5 |
% |
|
|
(1,797 |
) |
|
|
-14 |
% |
Advertising |
|
|
18,895 |
|
|
|
7 |
% |
|
|
17,111 |
|
|
|
7 |
% |
|
|
1,784 |
|
|
|
11 |
% |
Information technology |
|
|
5,095 |
|
|
|
2 |
% |
|
|
5,310 |
|
|
|
2 |
% |
|
|
(215 |
) |
|
|
-4 |
% |
Other general and administrative |
|
|
16,540 |
|
|
|
7 |
% |
|
|
12,910 |
|
|
|
5 |
% |
|
|
3,630 |
|
|
|
28 |
% |
Depreciation and amortization |
|
|
14,214 |
|
|
|
6 |
% |
|
|
14,939 |
|
|
|
6 |
% |
|
|
(725 |
) |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
236,893 |
|
|
|
93 |
% |
|
|
230,689 |
|
|
|
91 |
% |
|
|
6,204 |
|
|
|
3 |
% |
|
|
|
|
|
Operating income |
|
$ |
18,273 |
|
|
|
7 |
% |
|
$ |
23,064 |
|
|
|
9 |
% |
|
$ |
(4,791 |
) |
|
|
-21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Key
Operating Data
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Average
monthly membership revenue recognized per member (1) |
|
$ |
19.34 |
|
|
$ |
18.99 |
|
Average number of members during the period
(000s) (1) |
|
|
3,598 |
|
|
|
3,635 |
|
Number of
members joining during the period (000s) |
|
|
357 |
|
|
|
365 |
|
Number of members at end of period (000s) |
|
|
3,563 |
|
|
|
3,677 |
|
Fitness
centers open at end of period |
|
|
384 |
|
|
|
391 |
|
(1) Average
monthly membership revenue recognized per member represents membership revenue recognized for
the period divided by three, divided by the average number of members for the period. The average
number of members for the period is derived by dividing the sum of the total members outstanding at
the beginning and end of each quarter by two.
Summary
of revenue recognition method
The Companys strategy is to grow the number of members by continued new member acquisition
and improve 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.
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 and 2006. As of March 31, 2006, 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.
Cash collected for membership revenue 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 revenue 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.
Revenue recognized during a period reflects 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 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.
29
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 Three Months Ended March 31, 2006 and 2005
Our operations are subject to seasonal factors and, therefore, the results of operations for
the three months ended March 31, 2006 and 2005 are not necessarily indicative of the results of
operations for the full year. All previously reported amounts from the statement of operations and
balance sheet have been reclassified in accordance with the reporting requirements of SFAS No. 144.
Total revenue for the three months ended March 31, 2006 was
$255.2 million compared to $253.8
million in 2005, an increase of $1.4 million (1%). The increase in total revenue resulted from the
following:
|
|
|
Membership revenue recognized increased to
$208.8 million from $207.1 million in 2005, an increase of $1.7 million (1%) from the prior year
period. In the current year, a 1% decrease in average number of
members to 3.598 million members and a decrease in the number of
health clubs was offset by an increase in the average monthly membership
revenue per member to $19.34 from $18.99. |
|
|
|
|
Cash collections of membership revenue during the three months ended
March 31, 2006 was $200.6 million, a decrease of $6.4 million (3%)
from 2005. This decrease is the result of a decrease in advance
payments of dues and membership fees and a decrease in cash received
from initial term monthly payments as more members select value plan
and month-to-month memberships. |
|
|
|
|
Personal training revenue increased to $30.9 million from $29.1
million in 2005, an increase of $1.8 million (6%), primarily
reflecting the Companys emphasis on growth in personal training
services and expansion of new programs such as small group training. |
|
|
|
|
Retail products revenue decreased to $11.9 million from $13.3 million
in 2005, a decrease of $1.4 million (11%), due primarily to the
conversion of 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 $3.6 million from $4.3 million in
2005, primarily due to lower revenue from income producing strategic
partnerships and franchising fees. |
Operating costs and expenses for the three months ended
March 31, 2006 were $236.9 million
compared to $230.7 million during 2005, an increase of $6.2 million (3%). This increase resulted
from the following:
|
|
|
Membership services expenses for the three months ended March 31, 2006
increased $3.5 million (2%) from 2005, reflecting increases in
occupancy and insurance costs offset by a reduction in personnel costs
as a result of the Companys cost reduction initiatives. In
addition, in March 2006, the Company sold an under performing health
club in Canada for a gain of approximately $0.9 million. |
|
|
|
|
Retail products expenses, which included labor costs, for the three
months ended March 31, 2006 decreased $1.8 million (14%) from 2005,
primarily as a result of the conversion of some stores to an
integrated model and a decrease in retail sales in the Companys
fitness centers. |
|
|
|
|
Advertising expenses for the three months ended March 31, 2006
increased $1.8 million (11%) from 2005, primarily from a planned
increase in media spending and the impact of deferred production
costs from the fourth quarter of 2005. |
30
|
|
|
Information technology expenses for the three months ended March 31,
2006 decreased $0.2 million (4%) from 2005 primarily as a result
of reduced use of outside consultants partially offset by increased
internal salaries. |
|
|
|
|
Other general and administrative expenses for the three months ended
March 31, 2006 increased $3.6 million (28%) from 2005, primarily as a
result of costs incurred in connection with the proxy solicitation,
restructuring and ongoing investigations and litigation related to the
restatement of the Companys financial statements and an increase in
insurance, Directors fees and audit costs. |
|
|
|
|
Depreciation and amortization expense for the three months ended March
31, 2006 decreased $0.7 million from 2005, reflecting a reduction in
capital expenditures in prior periods. |
Operating
income for the three months ended March 31, 2006 decreased $4.8 million to $18.3
million as compared to the prior year. The decrease is primarily due to increases in membership services and other
general and administrative expenses as described above, partially offset by an increase in
membership revenue.
We generally expect changes in variable operating expenses to track the changes in net revenue
(also excluding the sale of Crunch Fitness). Accordingly, expenses
expected to be lower than previous
levels include payroll and related costs, reflecting lower staffing levels on average than we have
experienced. 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 the 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 the future.
Financial Condition
Our
consolidated assets of $452.1 million as of March 31, 2006 reflects a decrease of $28.0
million from December 31, 2005. This decrease was primarily due to:
|
|
|
a decrease in assets held for sale of $40.2 million resulting from the sale of
Crunch Fitness (however, $30 million of the proceeds of the sale of such assets was
used to make a repayment under the term loan of the Credit Agreement); |
|
|
|
|
a $3.6 million decrease in property and equipment.
Capital expenditures of $11.6 million include a scheduled replacement of exercise equipment.
The Company will continue a controlled capital spending program reflective of its limited capital
resources; |
|
|
|
|
an increase in deferred financing costs of $21.1 million
primarily resulting from the consent solicitation; and |
|
|
|
|
a decrease in prepaid expenses of $2.4 million primarily from a decrease in prepaid advertising. |
Liquidity
and Capital Resources
The following table summarizes the Companys liquidity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from |
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
previous year |
|
Cash and equivalents |
|
$ |
16.0 |
|
|
$ |
17.5 |
|
|
$ |
(1.5 |
) |
Undrawn revolving credit facility |
|
|
60.9 |
|
|
|
51.4 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
$ |
76.9 |
|
|
$ |
68.9 |
|
|
$ |
8.0 |
|
|
|
|
|
|
|
|
|
|
|
The Companys liquidity improved by $8.0 million during the period as a result of $10
million of the Crunch Fitness sale proceeds that were not required to be used to repay term debt
pursuant to the Credit Agreement.
31
The Company requires operating 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, our 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 could negatively impact cash flows and liquidity.
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 revolving credit
facility will be sufficient to meet our needs in 2007 when our Senior Subordinated Notes come due.
Therefore, we may need to raise additional funds through public or private equity or debt
financings. There is no assurance that 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. 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.
Interest
Expense
Interest expense for the three months ended March 31, 2006 increased $5.0 million to $23.0
million as compared to the prior year, primarily due to increases in general interest rate levels and increased amortization of
deferred financing costs as a result of consent fees paid to obtain waivers from bondholders and
lenders of financial reporting requirements. Amortization of deferred financing costs was
approximately $3.4 million in the three months ended
March 31, 2006, a $2.1 million increase over
2005.
Of
our total debt outstanding of $722.6 million at March 31, 2006, approximately 51% 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 as a result of the rising interest
rate environment and will continue to increase if interest rates continue to rise.
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 the three months ended March 31,
2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change from |
|
|
|
2006 |
|
|
2005 |
|
|
Previous Period |
|
|
|
|
|
|
(As
restated) |
|
|
|
|
Cash provided by operating activities |
|
$ |
10,577 |
|
|
$ |
23,729 |
|
|
$ |
(13,152 |
) |
Cash provided (used in) investing activities |
|
|
35,787 |
|
|
|
(8,430 |
) |
|
|
44,217 |
|
Cash used in financing activities |
|
|
(47,998 |
) |
|
|
(1,403 |
) |
|
|
(46,595 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
$ |
(1,634 |
) |
|
$ |
13,896 |
|
|
$ |
(15,530 |
) |
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities of $10.6 million in the first quarter of 2006
represented a decrease of $13.2 million from $23.7 million in the 2005 period. Cash
received from memberships decreased $6.4 million in the current year period compared
to the prior year period. Increases in operating costs, principally occupancy and
insurance, and higher audit and professional fees, including costs associated with the
proxy solicitation in January 2006, also negatively impacted net cash provided by operating activities in the current year period. In addition, the Company continues to
incur costs associated with ongoing litigation and investigations (net of insurance
proceeds).
Investing
Activities and Capital Expenditures
Net
cash provided by investing activities totaled $35.8 million in the first quarter 2006
compared to $8.4 million used in 2005, as a result of gross proceeds of $45 million from the sale
of Crunch Fitness offset by capital expenditures of
$11.6 million which included a scheduled replacement of exercise
equipment. We opened a club in Carrollton (Dallas), Texas in April
2006. Three clubs currently in
development are planned for opening later in 2006 (two replace existing clubs), four are planned to
open in 2007 (three replace existing clubs) and two during 2008 (both replace existing clubs). The
Company expects to continue controlled capital spending and is currently planning $35 to $40
million of capital spending in 2006. These
expenditures maintain our clubs at levels needed to attract and retain members.
32
Financing
Activities
Net cash used in financing activities totaled $48.0 million in the first quarter of 2006
compared to $1.4 million in 2005. Net repayments under the Credit Agreement in 2006 were $43.6
million higher than in 2005 reflecting the application of the proceeds from the sale of Crunch
Fitness, of which $30 million was used to repay the term loan. Debt issuance and refinancing costs
increased by $2.5 million compared to prior year attributable to the fees paid for the Third
Amendment and Waiver to the Credit Agreement.
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 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 Credit Agreement is
secured by substantially all 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 March 31, 2006, will be prepared in accordance with U.S.
generally accepted accounting principles. On March 30, 2006, the Company entered into the Third
Amendment and Waiver to the Credit Agreement discussed below under Consent Solicitations. At March
31, 2006, there was $25.0 million borrowed and $14.1 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.
Consent Solicitations
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 hereunder 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 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.
33
In connection with these consents, we issued 1,956,195 shares of unregistered common stock and
paid $0.8 million in 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 to 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.
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 Secured Debt
The Companys unrestricted Canadian subsidiary was not in compliance with the terms of its
credit agreement at March 31, 2006. As a result, the outstanding amount of $1.0 million has all
been classified as current. On May 31, 2006, there was $0.8 million outstanding.
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. As the Company was in compliance as of
the date of filing this Form 10-Q for the period ending
March 31, 2006, no additional
amounts have been classified as current.
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 9 of Notes to Condensed Consolidated Financial Statements, Guarantees.
Recently Issued Accounting Standards
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.
34
Item 3. Interest Rate Risk and Market Risk
The Company is exposed to market risk from changes in the interest rates on certain of its
outstanding debt. The outstanding loan balance under its bank credit facility bears interest at
variable rates based upon prevailing short-term interest rates in the United States and Europe.
Based on the average outstanding balance of these variable rate obligations for the three months
ended March 31, 2006, a 100 basis point change in rates would have changed interest expense by
approximately $0.5 million for the three month period.
The Company has entered into interest rate swap agreements whereby the fixed interest
commitment on $200 million of outstanding principal on the Companys Senior Subordinated Notes was
swapped for a variable rate commitment based on the LIBOR
rate plus 6.01% (11.15% at March 31, 2006). A 100 basis point change in the interest rate on
the portion of the debt subject to the swap would have changed interest expense by approximately
$0.5 million for the three month period.
Foreign Exchange Risk
The Company has operations in Canada, which are denominated in local currency. Accordingly,
the Company is exposed to the risk of future currency exchange rate fluctuations, which are
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
loss component of stockholders
equity reported by the Company, 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
This Evaluation of Disclosure Controls and Procedures should be read in conjunction with Item
9A Controls and Procedures included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2005 filed with the SEC on June 27, 2006.
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include controls and procedures designed to ensure that such
information is accumulated and communicated to our management, including our principal executive
officer (PEO) and principal financial officer (PFO), as appropriate, to allow timely decisions
regarding required financial disclosure.
Our management, under the supervision and with the participation of our PEO and PFO, has
completed an evaluation of the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter
ended March 31, 2006. Based on our evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, which included consideration of certain material weaknesses
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005 and our inability
to file this Quarterly Report on Form 10-Q within the statutory time period, our management,
including our PEO and PFO, concluded that as of March 31, 2006, the Companys disclosure controls
and procedures were not effective. In light of the material weaknesses, in 2005 and 2006 we
implemented additional analyses and procedures to ensure that the financial statements we issue are
prepared in accordance with GAAP and are fairly presented in all material respects. The Company has
performed the additional analyses and procedures with respect to this Quarterly Report on Form
10-Q. Accordingly, we believe that the unaudited condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the
Companys financial position, results of operations and cash flows for the periods presented.
Changes in Internal Controls over Financial Reporting (ICFR)
No changes in the period ended March 31, 2006; see Item 9A-Controls and Procedures in the
Companys Annual Report on Form 10-K for the year ended December 31, 2005 for a discussion of
controls and procedures for the Company.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Litigation
See Item 3. Legal Proceedings in the Annual Report on Form 10-K for the year ended December
31, 2005.
Item 1A. Risk Factors
This Quarterly Report on Form 10-Q should be read in conjunction with those certain risk
factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Common Stock
The Company does not regularly repurchase shares nor does the Company have a share repurchase
program.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Stockholders held on January 26, 2006
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. Paul A. Toback, Barry M. Deutsch, James F.
McAnally, M.D., Adam J. Metz, John W. Rogers, Jr. and Steven S. Rogers continued as directors of
the Company after the meeting. However, 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.
In addition, IVS Associates, Inc. certified that the 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 LLC
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.
The votes were tabulated as follows, with holders of 29,772,320 shares of Common Stock
represented in person or by proxy out of 38,285,905 shares outstanding on the record date:
|
|
|
|
|
|
|
|
|
Nominees |
|
Votes Cast For |
|
Votes Withheld |
|
Eric Langshur |
|
|
4,572,342 |
|
|
|
1,384,862 |
|
Charles J. Burdick |
|
|
29,254,705 |
|
|
|
517,615 |
|
Barry R. Elson |
|
|
29,257,838 |
|
|
|
514,482 |
|
Don R. Kornstein |
|
|
24,715,066 |
|
|
|
287,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal |
|
For |
|
Against |
|
Abstain |
|
2006 Omnibus Equity Compensation Plan |
|
|
4,790,557 |
|
|
|
23,923,679 |
|
|
|
1,058,083 |
|
KMPG LLP as Independent Auditor |
|
|
27,818,822 |
|
|
|
52,466 |
|
|
|
1,876,132 |
|
Stockholder proposal regarding the
repeal of, or amendments to, the
Companys by-laws if any, adopted
without stockholder approval after
May 25, 2005 and prior to the annual
meeting |
|
|
24,170,116 |
|
|
|
256,061 |
|
|
|
5,321,243 |
|
Stockholder proposal to give
stockholders the authority to remove
the Chief Executive Officer and
President of the Company* |
|
|
19,612,635 |
|
|
|
8,344,746 |
|
|
|
1,814,938 |
|
Stockholder proposal to increase
stockholder authority in determining
tenure of Ballys officers* |
|
|
19,612,820 |
|
|
|
8.344,746 |
|
|
|
1,814,753 |
|
Stockholder proposal to protect
stockholder authority to remove
Bally officers* |
|
|
19,613,347 |
|
|
|
8,344,746 |
|
|
|
1,814,226 |
|
Stockholder proposal to remove Paul
A. Toback as Chief Executive Officer
and President of the Company* |
|
|
19,605,733 |
|
|
|
8,347,503 |
|
|
|
1,819,083 |
|
|
|
|
|
|
*Proposal required approval of 75% of outstanding common shares of the Company. |
36
Consent Solicitation
On
March 27, 2006, the Company commenced a solicitation of consents from holders of its 10
1/2% Senior Notes due 2011 (the Senior Notes) and holders of its 9 7/8% Senior Subordinated Notes
due 2007 (the Senior Subordinated Notes) to seek a waiver of defaults arising from the Companys
failure to timely file its financial statements for the fiscal year ended December 31, 2005 with
the SEC and to extend the time for filing its financial statements for the quarters ended March 31
and June 30, 2006. On April 7, 2006, the Company received the necessary consents from the holders
of the Senior Notes and the Senior Subordinated Notes. 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 Notes |
|
|
299,764,000 |
|
|
|
283,970,000 |
|
|
|
N/A |
|
|
|
15,794,000 |
|
Senior Subordinated Notes |
|
|
235,000,000 |
|
|
|
233,029,000 |
|
|
|
N/A |
|
|
|
1,971,000 |
|
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:
|
|
|
4.1
|
|
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 9-7/8% 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). |
|
|
|
4.2
|
|
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 10-1/2% 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). |
|
|
|
4.3
|
|
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). |
|
|
|
4.4
|
|
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
|
|
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). |
|
|
|
+10.2
|
|
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). |
37
|
|
|
|
|
|
10.3
|
|
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). |
|
|
|
10.4
|
|
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). |
|
|
|
10.5
|
|
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). |
|
|
|
10.6
|
|
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). |
|
|
|
10.7
|
|
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). |
|
|
|
10.8
|
|
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). |
|
|
|
10.9
|
|
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,
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 10.39
to the Companys Annual Report on Form 10-K, file no. 001-13997, for
the fiscal year ended December 31, 2005). |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
31.2
|
|
Certification of the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
32.1
|
|
Certification of the Chief 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. |
38
SIGNATURE PAGE
Pursuant to the requirements 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 Registrant
|
|
|
By: |
/s/ David S. Reynolds
|
|
|
|
David S. Reynolds |
|
|
|
Vice President and Controller
(principal financial officer) |
|
|
Dated: June 27, 2006
39