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 September 30, 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 October 31, 2006, there were 41,286,512 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 |
59th 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.
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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 the Period Ended September 30, 2006
TABLE OF CONTENTS
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Page |
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Number |
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FORWARD-LOOKING STATEMENTS |
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1 |
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements: |
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Condensed Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005 |
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2 |
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Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2006 and 2005 |
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3 |
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Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 2006 and 2005 |
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4 |
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Consolidated Statement of Stockholders Deficit and Comprehensive Income (Unaudited) for the Nine
Months Ended September 30, 2006 |
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5 |
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Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2006 and 2005 |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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7 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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31 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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44 |
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Item 4. Controls and Procedures |
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44 |
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PART II. OTHER INFORMATION |
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46 |
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Item 1. Legal Proceedings |
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46 |
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Item 1A. Risk Factors |
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49 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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51 |
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Item 3. Defaults Upon Senior Securities |
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51 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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51 |
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Item 5. Other Information |
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51 |
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Item 6. Exhibits |
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51 |
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SIGNATURE PAGE |
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54 |
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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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ability to maintain existing or obtain new sources of equity and debt financing, on
acceptable terms or at all, to satisfy the Companys cash needs and obligations; |
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availability of adequate sources of liquidity and the Companys ability to meet its
obligations beyond the third quarter of 2007; |
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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; |
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availability, terms, and development of capital; |
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success of operating initiatives, advertising and promotional efforts; |
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ability to attract, retain and motivate highly skilled employees; |
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the outcome of the Companys exploration of strategic alternatives, which is now focused
on restructuring and refinancing alternatives; |
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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 the Companys product and service offerings; |
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changes in business strategy or plans; |
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the effect of material weaknesses in internal controls over financial reporting on the
Companys ability to prepare financial statements and file
reports with the Securities and Exchange Commission (the
SEC); |
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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 insurance rescission actions) 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; and |
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other factors described in this Quarterly Report on Form 10-Q, including the risk factors
identified in Item 1A, and prior filings of the Company with the SEC, including the Annual
Report on Form 10-K for the year-ended December 31, 2005. |
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALLY TOTAL FITNESS HOLDING CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
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September 30 |
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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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$ |
30,223 |
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$ |
17,454 |
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Deferred income taxes |
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856 |
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151 |
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Prepaid expenses |
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17,808 |
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20,846 |
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Other current assets |
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12,172 |
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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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61,059 |
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56,187 |
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Property and equipment, less accumulated depreciation and amortization of $783,886 and $749,860 |
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294,124 |
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314,670 |
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Goodwill, net |
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19,734 |
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19,734 |
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Trademarks, net of accumulated amortization of $1,642 and $1,510 |
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6,844 |
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6,912 |
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Intangible assets, net of accumulated amortization of $14,238 and $13,463 |
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2,373 |
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2,879 |
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Deferred financing costs, net of accumulated amortization of $34,046 and $18,190 |
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34,902 |
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29,501 |
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Other assets |
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10,215 |
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10,317 |
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Non-current assets held for sale |
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39,894 |
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$ |
429,251 |
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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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$ |
48,242 |
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$ |
57,832 |
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Income taxes payable |
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|
1,832 |
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|
1,697 |
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Accrued liabilities |
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99,759 |
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96,442 |
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Current maturities of long-term debt |
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8,113 |
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13,018 |
|
Deferred revenues |
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279,835 |
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299,441 |
|
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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437,781 |
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476,194 |
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Long-term debt, less current maturities |
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739,185 |
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756,304 |
|
Deferred rent liability |
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89,076 |
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87,290 |
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Deferred income taxes |
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|
2,399 |
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|
|
1,435 |
|
Other liabilities |
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|
28,379 |
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28,112 |
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Deferred revenues |
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550,749 |
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566,469 |
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Non-current liabilities associated with assets held for sale |
|
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27,976 |
|
Stockholders deficit |
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|
(1,418,318 |
) |
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|
(1,463,686 |
) |
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|
|
|
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$ |
429,251 |
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$ |
480,094 |
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|
|
|
|
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See accompanying notes to condensed consolidated financial statements.
2
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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September 30 |
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2006 |
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2005 |
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(As restated) |
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Net revenues: |
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Membership services |
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$ |
234,347 |
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$ |
232,743 |
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Retail products |
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|
10,165 |
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11,530 |
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Miscellaneous |
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3,859 |
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3,666 |
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|
|
|
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248,371 |
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|
247,939 |
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Operating costs and expenses: |
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Membership services |
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167,282 |
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|
165,943 |
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Retail products |
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10,468 |
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12,649 |
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Marketing and advertising |
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12,956 |
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12,946 |
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General and administrative |
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23,608 |
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19,233 |
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Net gain on sale of land and building |
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(2,211 |
) |
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Asset impairment charge |
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2,993 |
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Depreciation and amortization |
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13,389 |
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|
14,875 |
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|
|
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|
|
|
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|
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|
228,485 |
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|
225,646 |
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Operating income |
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19,886 |
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|
|
22,293 |
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|
|
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Interest expense, net |
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(26,000 |
) |
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|
(21,811 |
) |
Foreign exchange gain |
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|
566 |
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|
1,141 |
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Other, net |
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|
167 |
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|
|
133 |
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|
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|
|
|
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|
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(25,267 |
) |
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(20,537 |
) |
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Income (loss) from continuing operations before income taxes |
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|
(5,381 |
) |
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|
1,756 |
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Income tax provision |
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(351 |
) |
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|
(240 |
) |
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|
|
|
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Income (loss) from continuing operations |
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|
(5,732 |
) |
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|
1,516 |
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Loss from discontinued operations, net of income taxes |
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|
|
|
|
|
(1,730 |
) |
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|
|
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Net loss |
|
$ |
(5,732 |
) |
|
$ |
(214 |
) |
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|
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|
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Basic income (loss) per common share: |
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Income (loss) from continuing operations |
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$ |
(0.14 |
) |
|
$ |
0.04 |
|
Loss from discontinued operations |
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|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
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Net loss |
|
$ |
(0.14 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
Diluted income (loss) per common share: |
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|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.14 |
) |
|
$ |
0.04 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.14 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As restated) |
|
Net revenues: |
|
|
|
|
|
|
|
|
Membership services |
|
$ |
713,551 |
|
|
$ |
712,247 |
|
Retail products |
|
|
33,562 |
|
|
|
37,517 |
|
Miscellaneous |
|
|
11,055 |
|
|
|
11,545 |
|
|
|
|
|
|
|
|
|
|
|
758,168 |
|
|
|
761,309 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Membership services |
|
|
509,770 |
|
|
|
504,617 |
|
Retail products |
|
|
32,146 |
|
|
|
38,881 |
|
Marketing and advertising |
|
|
48,031 |
|
|
|
44,698 |
|
General and administrative |
|
|
66,227 |
|
|
|
58,686 |
|
Net gain on sales of land and buildings |
|
|
(3,984 |
) |
|
|
|
|
Asset impairment charge |
|
|
2,993 |
|
|
|
|
|
Depreciation and amortization |
|
|
40,836 |
|
|
|
44,837 |
|
|
|
|
|
|
|
|
|
|
|
696,019 |
|
|
|
691,719 |
|
|
|
|
|
|
|
|
Operating income |
|
|
62,149 |
|
|
|
69,590 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(75,181 |
) |
|
|
(61,052 |
) |
Foreign exchange gain |
|
|
2,336 |
|
|
|
1,185 |
|
Other, net |
|
|
451 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
(72,394 |
) |
|
|
(59,595 |
) |
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
(10,245 |
) |
|
|
9,995 |
|
Income tax provision |
|
|
(1,053 |
) |
|
|
(719 |
) |
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(11,298 |
) |
|
|
9,276 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes |
|
|
(872 |
) |
|
|
(3,268 |
) |
Gain on disposal |
|
|
38,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations |
|
|
37,503 |
|
|
|
(3,268 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
26,205 |
|
|
$ |
6,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share: |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.29 |
) |
|
$ |
0.27 |
|
Income (loss) from discontinued operations |
|
|
0.95 |
|
|
|
(0.09 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
0.66 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.29 |
) |
|
$ |
0.26 |
|
Income (loss) from discontinued operations |
|
|
0.95 |
|
|
|
(0.09 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
0.66 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement of Stockholders Deficit and Comprehensive Income
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,514 |
) |
|
|
(8,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
4,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock |
|
|
800,000 |
|
|
|
8 |
|
|
|
5,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to noteholders |
|
|
1,956,194 |
|
|
|
19 |
|
|
|
17,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to agent |
|
|
11,936 |
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unearned
compensation balance to
contributed capital |
|
|
|
|
|
|
|
|
|
|
(5,534 |
) |
|
|
|
|
|
|
5,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted stock |
|
|
(9,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under
stock option plans |
|
|
51,081 |
|
|
|
1 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
41,313,262 |
|
|
$ |
420 |
|
|
$ |
691,204 |
|
|
$ |
(2,087,649 |
) |
|
$ |
|
|
|
$ |
(11,635 |
) |
|
$ |
(10,658 |
) |
|
$ |
(1,418,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As restated) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,205 |
|
|
$ |
6,008 |
|
Adjustments to reconcile to cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization included in interest expense |
|
|
56,807 |
|
|
|
53,346 |
|
Changes in operating assets and liabilities |
|
|
(36,749 |
) |
|
|
(41,071 |
) |
Deferred income taxes, net |
|
|
265 |
|
|
|
315 |
|
Gain on disposal of discontinued operations |
|
|
(38,375 |
) |
|
|
|
|
Loss (gain) on sale of assets |
|
|
(4,419 |
) |
|
|
78 |
|
Impairment
of long-lived assets |
|
|
2,993 |
|
|
|
|
|
Foreign currency translation gain |
|
|
(2,925 |
) |
|
|
(1,185 |
) |
Stock-based compensation |
|
|
4,214 |
|
|
|
4,957 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
8,016 |
|
|
|
22,448 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
(27,997 |
) |
|
|
(24,648 |
) |
Proceeds from sale of discontinued operations |
|
|
45,152 |
|
|
|
|
|
Proceeds from sale of discontinued operations in escrow |
|
|
338 |
|
|
|
|
|
Proceeds from sales of properties |
|
|
7,527 |
|
|
|
1,455 |
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
25,020 |
|
|
|
(23,193 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net repayments under credit agreement |
|
|
(12,386 |
) |
|
|
18,688 |
|
Net repayments of other long-term debt |
|
|
(10,454 |
) |
|
|
(13,867 |
) |
Debt issuance and refinancing costs |
|
|
(3,791 |
) |
|
|
(10,944 |
) |
Proceeds from sale of common stock |
|
|
5,600 |
|
|
|
|
|
Proceeds from issuance of common stock under stock option plans |
|
|
277 |
|
|
|
93 |
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(20,754 |
) |
|
|
(6,030 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
12,282 |
|
|
|
(6,775 |
) |
Effect of exchange rate changes on cash balance |
|
|
487 |
|
|
|
361 |
|
Cash, beginning of period |
|
|
17,454 |
|
|
|
19,177 |
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
30,223 |
|
|
$ |
12,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (increase) in other current and other assets |
|
$ |
8,193 |
|
|
$ |
(7,407 |
) |
Decrease in accounts payable |
|
|
(9,672 |
) |
|
|
(3,989 |
) |
Increase in income taxes payable |
|
|
135 |
|
|
|
303 |
|
Increase (decrease) in accrued liabilities |
|
|
(159 |
) |
|
|
(17,696 |
) |
Increase in other liabilities |
|
|
3,377 |
|
|
|
8,947 |
|
Decrease in deferred revenues |
|
|
(38,623 |
) |
|
|
(21,229 |
) |
|
|
|
|
|
|
|
Change in operating assets and liabilities |
|
$ |
(36,749 |
) |
|
$ |
(41,071 |
) |
|
|
|
|
|
|
|
Cash payments for interest and income taxes were as follows |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
57,950 |
|
|
$ |
53,773 |
|
Interest capitalized |
|
|
(483 |
) |
|
|
(198 |
) |
Income taxes paid, net |
|
|
660 |
|
|
|
158 |
|
Investing and financing activities exclude the following non-cash transactions |
|
|
|
|
|
|
|
|
Acquisitions of property and equipment through capital leases/borrowings |
|
$ |
|
|
|
$ |
390 |
|
Reclassification of unearned compensation balance to contributed capital |
|
|
5,534 |
|
|
|
|
|
Payments of consents with common stock |
|
|
17,488 |
|
|
|
4,675 |
|
Stock issued to agent |
|
|
98 |
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
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 379 fitness centers at September 30,
2006 concentrated in 28 states and Canada. Additionally, as of September 30, 2006, 37 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 September 30, 2006,
its consolidated statements of operations for the three and nine months ended September 30, 2006
and 2005, its consolidated statement of stockholders deficit and comprehensive income for the nine
months ended September 30, 2006, and its consolidated statements of cash flows for the nine months
ended September 30, 2006 and 2005. In the three months ended September 30, 2006, the Company reclassified $4,162 in previously
reported deferred revenue to cumulative translation. This reclassification reflects the
correction of an error identified in the Companys accounting for foreign exchange associated with
deferred revenue of its Canadian subsidiaries and which relates principally to periods prior to
2006. In the three and nine months ended September 30, 2006, the Company recorded $286 of foreign
exchange gain that reflects the correction of amounts previously reported in interim periods of
2006 associated with the Companys accounting for the foreign exchange associated with deferred
revenue of its Canadian subsidiaries. In the three months ended June 30, 2006, the Company
reclassified $2,518 in previously reported property and equipment to cumulative translation. This
reclassification reflects the correction of an error identified in the Companys accounting for
foreign exchange associated with property and equipment of its Canadian subsidiaries and which
relates to periods prior to 2006. The Company
has also reclassified the gain ($901) on the sale of an underperforming Canadian club previously
recorded in the first quarter of 2006 as a reduction of membership services expense to net gain on
sales of land and buildings in its Consolidated Statement of Operations for the nine months ended
September 30, 2006. Additionally, in the second quarter of 2006, the Company determined that
approximately $900 of the $4,600 write-down of equipment at various clubs recorded in the fourth
quarter of 2005 related to equipment previously retired. As a result, an adjustment of $900 is reflected in the Companys consolidated statement of operations for the nine months ended September 30,
2006. No adjustment was made to the Companys consolidated statement of operations for 2005 as such
amount was not deemed material.
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 and nine months ended September 30, 2006 and 2005 are not necessarily
indicative of the results of operations for the full year.
New accounting pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.
This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return, and provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently assessing the impact of the
Interpretation on its financial statements.
In July 2006, the FASB issued Staff Position (FSP) on FAS 13, FSP FAS 13-2, Accounting for
a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a
Leveraged Lease Transaction. FSP FAS 13-2 addresses how a change or projected change in the timing
of cash flows relating to income taxes generated by a leveraged lease transaction affects the
accounting by a lessor for that lease and amends FAS 13, Accounting for Leases. FSP FAS 13-2 is
effective for fiscal years beginning after December 15, 2006 with earlier application permitted.
The Company is evaluating the impact, if any, of FSP FAS 13-2 on its financial statements.
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)
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (FAS 157). This Standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. The Company has not yet
determined the effect, if any, the adoption of FAS 157 will have on the Companys financial
position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission staff issued Staff Accounting
Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 eliminates the diversity of practice
surrounding how public companies quantify financial statement misstatements. It establishes an
approach that requires quantification of financial statement misstatements based on the effects of
the misstatements on each of the companys financial statements and the related financial statement
disclosures. The Company does not expect SAB 108 to have a material impact on its financial
condition or results of operations. SAB 108 must be applied to annual financial statements for
fiscal years ending after November 15, 2006.
Market risk
The Company is exposed to market risk from changes in the interest rates on certain of its
outstanding debt. The outstanding revolving credit and term loan balance under its Amended and
Restated Credit Agreement dated October 14, 2004 (the Credit Agreement) 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%.
Fair value of financial instruments
The Company determined by using quoted market prices that the fair value of the Senior
Subordinated Notes was $251,168 and $288,507 at September 30, 2006 and December 31, 2005,
respectively, and that the carrying value at September 30, 2006 was $297,240. The Company
determined by using quoted market prices that the fair value of the Companys 10 1/2% Senior Notes
due 2011 (the Senior Notes) was $227,363 and $242,050 at September 30, 2006 and December 31,
2005, respectively, and that the carrying value at September 30, 2006 was $235,210. Since
considerable judgment is required in interpreting market information, the fair value of the Senior
Subordinated Notes and the Senior Notes is not necessarily indicative of the amount which could be
realized in a current market exchange.
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 financing 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 statements of operations and consolidated
statement of cash flows for the 2005 periods included herein reflect the restated items.
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.
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)
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 Court
granted defendants motions to dismiss the amended consolidated complaint and dismissed the
complaint in its entirety on July 12, 2006 without prejudice to plaintiffs filing an amended
complaint on or before August 14, 2006. An amended complaint was filed on August 14, 2006. The
Company filed a motion to dismiss the amended complaint on September 28, 2006. 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, John Rogers, Jr., Lee Hillman, John Dwyer, J.
Kenneth Looloian, Stephen Swid, George Aronoff, Martin Franklin and Liza Walsh, who are current or
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. Shortly before oral argument on that motion, the parties
executed a Memorandum of Understanding memorializing a settlement in principle of all claims. The
Court has continued the motion to dismiss pending completion and Court approval of a final
settlement agreement. It is not yet possible to determine the ultimate outcome of these actions.
Stockholder Derivative Lawsuit in Illinois Federal Court
On April 5, 2005, a stockholder derivative lawsuit was filed in the United States District
Court for the Northern District of Illinois, purportedly on behalf of the Company against certain
current and former officers and directors of the Company by another of the Companys stockholders,
Albert Said. This lawsuit asserts claims for breaches of fiduciary duty in failing to supervise
properly its financial and corporate affairs and accounting practices. Plaintiff also requests
restitution and disgorgement of bonuses and trading proceeds under Delaware law and the
Sarbanes-Oxley Act of 2002. By stipulation of the parties, the lawsuit was stayed pending
restatement of the Companys financial statements in November 2005. An amended consolidated
complaint was filed on February 27, 2006. Bally filed a motion to dismiss on May 30, 2006, directed
solely to the issues of whether the court has subject matter jurisdiction and whether plaintiffs
have adequately alleged demand futility as required by applicable Delaware law in order to
establish standing to sue derivatively. That motion is currently pending. It is not yet possible to
determine the ultimate outcome of this action.
Individual Securities Action in Illinois
On March 15, 2006, a lawsuit captioned Levine v. Bally Total Fitness Holding Corporation, et
al., Case No. 06 C 1437 was filed in the United States District Court for the Northern District of
Illinois against the Company, certain of its former and current officers and directors, and its
former outside audit firm, Ernst & Young, LLP. Plaintiffs complaint alleges violations of Sections
10(b), 18 and 20(a) of the Exchange Act, SEC Rule 10b-5, and the Illinois Consumer Fraud and
Deceptive Practices Act, as well as common law fraud in connection with the Companys restatement. The
Court found this action related to the consolidated securities class action discussed
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)
above, and transferred it to the judge before whom the class action cases were pending. After
defendants filed motions to dismiss the complaint and after the Court granted motions to dismiss
the class action cases, plaintiff moved for leave to amend its complaint. On July 19, 2006, the
Court denied plaintiffs motion and ordered completion of briefings on defendants motions to
dismiss on statute of limitations issues. On September 29, 2006, the Court granted defendants
motion to dismiss plaintiffs Section 18 claim as untimely, denied the motion as to Sections 10(b)
and 20(a), dismissed Ernst & Young, LLP as a defendant and granted plaintiff leave to amend his
complaint. An amended complaint was filed on November 3, 2006. 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.
On July 27, 2006, the presiding Magistrate Judge issued proposed Findings and Conclusions
recommending that summary judgment be entered in favor of all defendants on all remaining claims.
The parties thereafter reached agreement under which plaintiffs would dismiss their case without
appealing the Magistrate Judges recommendation. The parties executed a final Settlement Agreement
on October 16, 2006, and expect to soon file a stipulation of dismissal.
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, Case No. 03-CV-10295 MEL, 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 cash and shares of Bally stock. The
2005 amended complaint asserted new claims against the Company for violation of state 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 former 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 were due on October 16, 2006. A tentative settlement
agreement was reached on October 4, 2006, wherein plaintiffs agreed to dismiss all claims and
execute mutual releases, which was memorialized in a final settlement agreement on October 18,
2006.
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.
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)
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 requested 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. The motion to dismiss was granted on September 11, 2006.
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 requested the Court to declare the Companys
excess policy for the year 2002-2003 void, voidable and/or subject to rescission. Defendants filed
motions to dismiss or stay the proceedings on July 10, 2006, which motions are currently pending.
Defendants filed a motion for advancement of defense costs and to compel interim funding on
October 20, 2006.
On August 22, 2006, the Companys primary directors and officers insurance provider for the
policy years 2001-2002 and 2002-2003 filed a complaint captioned Great American Insurance Company
v. Bally Total Fitness Holding Corporation, Case No. 06 C 4554 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 2001-2002 and
2002-2003 policy years was materially false and misleading. Plaintiff requested the Court to
declare the Companys primary policies for those years void ab initio and rescinded, and to award
plaintiff all sums that plaintiff has paid pursuant to an Interim Funding and Non-Waiver Agreement
between the parties, which consists of the $10,000 limit of the 2002-2003 primary policy and
additional amounts paid pursuant to the 2001-2002 primary policy. The Company filed a motion to
dismiss or stay the proceedings on October 12, 2006, which motion is currently pending.
It is not yet possible to determine the ultimate outcome of these actions.
None of the settlements or agreements in principle regarding settlements discussed above will,
individually or in the aggregate, have a material effect on the Companys liquidity or results of
operations.
Other Litigation Related Matters:
The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, from time to time, customer
complaints are investigated by various governmental bodies. In the opinion of management, none of
these other complaints or investigations currently pending should have a material adverse effect on
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
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)
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.
Obligations Under Employment Agreements:
Under employment agreements with four senior executives, the Company has agreed to use its
reasonable best efforts to develop and adopt a supplemental retirement plan for the benefit of
these executives and other executives as the Board may determine. As of October 31, 2006, no plan
has been adopted.
Note 4 Debt
On October 16, 2006, the Company entered into a new senior secured credit facility (the New
Facility) with a group of financial institutions led by JPMorgan Chase Bank, N.A. (JPMorgan).
The New Facility provides for (i) a term loan facility in the amount of $205,900, (ii) a
delayed-draw term loan facility in the amount of $34,100, and (iii) a revolving credit facility in
the amount of $44,000. The proceeds from the New Facility were used to refinance the facilities
outstanding under the Companys existing Credit Agreement (discussed below) and will be used to
fund capital expenditures and provide for additional liquidity. The termination date of the New
Facility is the earlier of (i) 14 days prior to the maturity of the Senior Subordinated Notes (due
October 15, 2007), including extensions or refinancing or (ii) October 1, 2010. The current
termination date for the New Facility is October 1, 2007, and amounts outstanding have been
included in long-term debt on the Companys Condensed Consolidated Balance Sheet at September 30,
2006. In the event that the Senior Subordinated Notes are not extended or refinanced prior to
filing our Annual Report on Form 10-K for the year ending
December 31, 2006 with the SEC, amounts outstanding under the New Facility will become due and owing on
October 1, 2007 and will be included as current maturities of long-term debt on the Companys
Consolidated Balance Sheet at December 31, 2006. Costs incurred related to obtaining the New
Facility totaled approximately $5,800. The Company will expense
approximately $4,000 of these costs
in the fourth quarter of 2006 and the remaining $1,800 will be capitalized and amortized to
interest expense over the term of the New Facility, which currently has a termination date of
October 1, 2007. If the termination date of the New Facility is extended, the deferral period for
any remaining unamortized costs will also be extended to the new termination date. Unamortized
deferred financing costs relating to the Credit Agreement of approximately $3,600 will be expensed
in the fourth quarter of 2006 and the remaining $300 will be amortized over the term of the New
Facility. See Note 15 for more information relating to the New Facility.
As of September 30, 2006, the Company had in place a Credit Agreement with a group of
financial institutions led by JPMorgan that provided for a five-year initial amount $175,000 term
loan maturing October 2009 and a $100,000 revolving credit facility with an expiration date of June
2008, subject to an early termination date of April 15, 2007 in the event the Senior Subordinated
Notes had not been refinanced or repaid. The Credit Agreement was secured by substantially all the
Companys real and personal property, including member obligations under installment contracts. The
Credit Agreement contained restrictive covenants that included 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;
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. At September 30,
2006, pursuant to the Credit Agreement, the Company had $60,000 in borrowings and $15,353 of
letters of credit outstanding under its $100,000 revolving credit facility. At September 30, 2006,
availability under the revolving credit facility was $24,647. The amount outstanding on the term
loan under the Credit Agreement was $135,864 reflecting payments in the amount of $5,575 during the
third quarter from proceeds of asset sales. At September 30, 2006, the average rate on borrowings
under the revolving credit and term loan facility was 9.89%. As of September 30, 2006, the Company
was in compliance with the terms of the Credit Agreement. Amounts outstanding under the Credit
Agreement were repaid on October 16, 2006 using proceeds from the New Facility.
The Company requires operating cash flows to fund its capital spending and working capital
requirements. The Company maintains a substantial amount of debt, the terms of which require
significant interest payments each year. Cash flows and liquidity may be negatively impacted by
various items, including declines in membership revenues, changes in terms or other requirements by
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)
vendors, regulatory fines, penalties, settlements or adverse results in litigation, future
consent payments to lenders or bondholders if required and unexpected capital requirements. The
Companys liquidity (cash and unutilized revolving credit facility) declined by approximately
$14,000 from $68,900 to $54,900 during the first nine months of 2006. Decreased cash collections
of membership revenue, coupled with costs incurred in connection with ongoing investigations and
litigation related to the restatement of the Companys financial statements, an increase in
Directors fees and audit costs, severance costs, cash fees paid related to consent solicitations
of the Companys lenders and noteholders in April 2006, fees paid to the lenders for the Fourth
Amendment (described below), capital expenditures and the interest payments on the Senior Notes and
the Senior Subordinated Notes, more than offset the $10,000 of Crunch Fitness sale proceeds that
were not required to prepay the term loan pursuant to the Credit Agreement and $5,600 of proceeds
from the sale of stock. The interest payment on the Senior Subordinated Notes made in October 2006
and the interest payments due on the Senior Notes in January and
July 2007 and on the Senior
Subordinated Notes in April 2007 will further reduce liquidity.
The Company is subject to certain financial covenants under the New Facility, including
minimum monthly cash EBITDA and minimum monthly liquidity tests. While the Company currently
believes that it will be in compliance with the financial covenants in the New Facility through the
third quarter of 2007, and has taken and will take certain liquidity raising, revenue enhancement
and cost savings actions in that regard, there can be no assurance as to financial covenant
compliance. The New Facility also contains various non-financial covenants similar to those in the
Credit Agreement. In addition, the New Facility contains a covenant that requires the Company to
raise additional liquidity in the amount of $20,000 by December 31, 2006 from permitted
sale/leasebacks, permitted asset sales or issuances of capital stock. If the Company is unable to
satisfy these covenants, absent a waiver by the lenders, the Company will be unable to access the
revolving credit and delayed draw term loan facilities and, therefore, will be unable to operate its business. As a result of
not satisfying a covenant, an event of default could occur under the New Facility and
cross-defaults could occur under the indentures governing the Senior Notes and the Senior
Subordinated Notes. If such events were to occur, the lenders and holders could accelerate the
obligations under these instruments and the Company would be unable to satisfy those obligations.
In the event the Company fails to maintain adequate liquidity, as a result of decreased revenues or
increased expenses or as a result of a default under its New Facility
(whether directly or as a result
of a cross-default to other indebtedness), the Company would be unable to continue operating its business.
In addition, the Company is subject to certain financial reporting covenants under the
indentures governing the Senior Notes and the Senior Subordinated Notes. Although the Company
anticipated filing this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 on a
timely basis, on June 23, 2006, the Company entered into the Fourth Amendment with the lenders
under its Credit Agreement which extended the 10 day period to 28 days after which a cross-default
would occur upon receipt of any financial reporting covenant default notice (Notice) for the
third quarter of 2006 under the indentures governing the Senior Subordinated Notes or the Senior
Notes. The Company paid the lenders under the Credit Agreement fees in the amount of $493 in
connection with the Fourth Amendment. Pursuant to the New Facility, the cross-default period is
also 28 days from any future financial covenant default notices received under the indentures.
However, if the Company is unable to file its financial reports on a timely basis and cannot obtain
additional consents from its bondholders and lenders and such a cross-default or indenture event of
default occurs, it would not be able to draw on its revolving credit facility and the lenders under
the New Facility and the holders of the Senior Notes and Senior Subordinated Notes could accelerate
the obligations under these instruments and the Company would be unable to satisfy those
obligations and continue operating its business.
On April 10, 2006, the Company completed consent solicitations to amend the indentures
governing the Senior Subordinated Notes and the Senior Notes to waive any default through certain
dates 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 quarters ended March 31, 2006
and June 30, 2006. In connection with the consent solicitations, on March 30, 2006, the Company
entered into the Third Amendment and Waiver with the lenders under the Credit Agreement that, among
other things, 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, permitted payment of the consent fees to the holders
of the Senior Notes and the Senior Subordinated Notes and excludes fees and expenses incurred in
connection with the consent solicitation from the computation of financial covenants.
In connection with these consents, the Company issued 1,956,195 shares of unregistered common
stock (valued at $17,446 as of the completion date of the solicitation) and paid $769 in consent
fees to the holders of the Senior Notes and the Senior Subordinated
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)
Notes, paid the lenders under the Credit Agreement $2,474, and recorded $20,689 in deferred
financing charges. 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 Notes and Senior Subordinated Notes and related
expenses; (ii) fees and expenses relating to the Credit Agreement amendment and waiver; and (iii)
additional working capital.
The Companys unrestricted Canadian subsidiary was not in compliance with its credit agreement
at September 30, 2006. As a result, the entire outstanding amount of $495 has been classified as
current.
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 September 30, 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. Advance payments from financed members are included within this table as advance payments
of periodic dues and membership fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
Cash |
|
|
Revenue |
|
|
September 30, |
|
|
|
2005 |
|
|
Additions |
|
|
Recognized |
|
|
2006 |
|
Deferral of receipts from financed members: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments |
|
$ |
517,624 |
|
|
$ |
166,755 |
|
|
$ |
(201,743 |
) |
|
$ |
482,636 |
|
Down payments |
|
|
100,009 |
|
|
|
35,009 |
|
|
|
(40,958 |
) |
|
|
94,060 |
|
Deferral of receipts representing advance payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full membership fees collected upon origination |
|
|
109,819 |
|
|
|
28,734 |
|
|
|
(28,495 |
) |
|
|
110,058 |
|
Advance payments of periodic dues and membership fees |
|
|
120,696 |
|
|
|
88,976 |
|
|
|
(88,709 |
) |
|
|
120,963 |
|
Receipts collected and earned without deferral during period |
|
|
|
|
|
|
260,697 |
|
|
|
(260,697 |
) |
|
|
|
|
Deferral of receipts for personal training services |
|
|
17,762 |
|
|
|
94,031 |
|
|
|
(92,949 |
) |
|
|
18,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
865,910 |
|
|
$ |
674,202 |
|
|
$ |
(713,551 |
) |
|
|
826,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of
foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
830,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
Cash |
|
|
Revenue |
|
|
September 30, |
|
|
|
2004 |
|
|
Additions |
|
|
Recognized |
|
|
2005 |
|
|
|
|
|
|
|
(As restated) |
|
|
(As restated) |
|
|
(As restated) |
Deferral of receipts from financed members: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments |
|
$ |
534,446 |
|
|
$ |
209,344 |
|
|
$ |
(219,424 |
) |
|
$ |
524,366 |
|
Down payments |
|
|
105,614 |
|
|
|
40,470 |
|
|
|
(41,925 |
) |
|
|
104,159 |
|
Deferral of receipts representing advance payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full membership fees collected upon origination |
|
|
115,735 |
|
|
|
21,257 |
|
|
|
(26,906 |
) |
|
|
110,086 |
|
Advance payments of periodic dues and membership fees |
|
|
132,164 |
|
|
|
96,538 |
|
|
|
(105,869 |
) |
|
|
122,833 |
|
Receipts collected and earned without deferral during period |
|
|
|
|
|
|
227,105 |
|
|
|
(227,105 |
) |
|
|
|
|
Deferral of receipts for personal training services |
|
|
17,697 |
|
|
|
92,019 |
|
|
|
(91,018 |
) |
|
|
18,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
905,656 |
|
|
$ |
686,733 |
|
|
$ |
(712,247 |
) |
|
$ |
880,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
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 September 30, |
|
Nine months ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
(As
restated) |
|
|
|
|
|
(As
restated) |
Weighted average number of common shares outstanding |
|
|
40,601,740 |
|
|
|
34,824,522 |
|
|
|
39,503,111 |
|
|
|
33,891,804 |
|
Effect of outstanding stock options and warrants |
|
|
147,606 |
|
|
|
181,030 |
|
|
|
1,043,660 |
|
|
|
853,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding |
|
|
40,749,346 |
|
|
|
35,005,552 |
|
|
|
40,546,771 |
|
|
|
34,744,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
4,269,043 |
|
|
|
5,324,223 |
|
|
|
2,254,340 |
|
|
|
5,324,223 |
|
Range of exercise prices per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
36.00 |
|
|
$ |
36.00 |
|
|
$ |
36.00 |
|
|
$ |
36.00 |
|
Low |
|
$ |
2.91 |
|
|
$ |
2.91 |
|
|
$ |
2.91 |
|
|
$ |
2.91 |
|
Note 7 Income Taxes
At September 30, 2006, the Company had approximately $681,000 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.
Note 8 Share-based Payments
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
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)
award. Total stock-based compensation expense for the three months ended September 30, 2006
was $2,633, which is comprised of $857 related to stock options, $1,558 related to restricted
shares and $218 related to estimated income tax obligations which are liability classified. Total
stock-based compensation expense for the nine months ended September 30, 2006 was $4,569, which is
comprised of $1,908 related to stock options, $2,306 related to restricted shares and $355 related
to estimated income tax obligations which are liability classified.
Pursuant to the termination without cause terms of the restricted stock grants to Mr. Landeck
(former Chief Financial Officer), Mr. Toback (former Chairman,
President and Chief Executive Officer) and Mr. Gaan (former
Senior Vice President), remaining unrecognized
compensation cost of $345 on 55,000 shares, $788 on 135,000 shares
and $222 on 40,000 shares was recognized at the date of
their termination in April, August and September 2006, respectively. In addition,
pursuant to the Separation Agreement discussed in Note 13, the Company accelerated the vesting on
approximately 332,000 options granted to Mr. Toback in 2003 and 2005 and recognized the remaining
unrecognized compensation cost of $370 in August 2006.
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 the effect of adopting SFAS No. 123R on selected items (As Reported) and what those items
would have been under previous guidance under APB 25:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Under APB |
|
|
|
|
|
|
Under APB |
|
|
|
As Reported |
|
|
No. 25 |
|
|
As Reported |
|
|
No. 25 |
|
Loss from continuing operations before income taxes |
|
$ |
(5,381 |
) |
|
$ |
(4,524 |
) |
|
$ |
(10,245 |
) |
|
$ |
(8,337 |
) |
Loss from continuing operations |
|
|
(5,732 |
) |
|
|
(4,875 |
) |
|
|
(11,298 |
) |
|
|
(9,390 |
) |
Net income (loss) |
|
|
(5,732 |
) |
|
|
(4,875 |
) |
|
|
26,205 |
|
|
|
28,113 |
|
Cash flow from operating activities |
|
|
(2,315 |
) |
|
|
(2,315 |
) |
|
|
8,016 |
|
|
|
8,016 |
|
Cash flow from financing activities |
|
|
22,136 |
|
|
|
22,136 |
|
|
|
(20,754 |
) |
|
|
(20,754 |
) |
Basic and diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.14 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.24 |
) |
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
0.95 |
|
|
|
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.14 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.66 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and nine months
ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income (loss), as reported |
|
$ |
(214 |
) |
|
$ |
6,008 |
|
Plus: stock-based compensation expense included in net income |
|
|
620 |
|
|
|
4,957 |
|
Less: stock-based compensation expense determined under fair value based method |
|
|
(1,108 |
) |
|
|
(6,489 |
) |
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
(702 |
) |
|
$ |
4,476 |
|
|
|
|
|
|
|
|
Basic income (loss) per common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.01 |
) |
|
$ |
0.18 |
|
Pro forma |
|
|
(0.02 |
) |
|
|
0.13 |
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
Pro forma |
|
|
(0.02 |
) |
|
|
0.13 |
|
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 day prior to the date of grant. Option grants under the Directors Plan become exercisable in three
equal annual installments
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)
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 on the day prior to the date of grant. Incentive stock options could not be granted at
less than the fair market value of the Common Stock on the date of grant. Option grants become
exercisable generally in three equal annual installments commencing one year from the date of
grant. Option grants in 2005, 2004 and 2003 have 10-year terms. 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 on the day prior to the date of
grant. Inducement stock options must be granted at not less than the fair market value of the
Common Stock on 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 September 30, 2006, 65,500 shares remain available for issuance under
the Inducement Plan.
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.
Stock Options
A summary of stock based compensation activity within the Companys stock-based compensation
plans for the nine months ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
|
|
Number of Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Outstanding at December 31, 2005 |
|
|
4,138,514 |
|
|
$ |
13.26 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
19,500 |
|
|
|
8.02 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(51,081 |
) |
|
|
5.41 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(132,010 |
) |
|
|
7.61 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(311,581 |
) |
|
|
19.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
3,663,342 |
|
|
$ |
13.02 |
|
|
|
5.8 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
2,960,024 |
|
|
$ |
14.77 |
|
|
|
5.1 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
Other information pertaining to option activity during the three and nine months ended
September 30, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Weighted average grant-date fair value of stock options granted |
|
$ |
|
|
|
$ |
|
|
|
$ |
4.42 |
|
|
$ |
1.72 |
|
Total intrinsic value of stock options exercised |
|
$ |
|
|
|
$ |
|
|
|
$ |
276 |
|
|
$ |
|
|
The Company received $277 of cash from stock options exercised during the nine months
ended September 30, 2006. At September 30, 2006, there was approximately $1,237 of total
unrecognized compensation cost related to non-vested stock options. This cost will be recognized
over a weighted average period of 1.9 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected option life in years |
|
|
N/A |
|
|
|
N/A |
|
|
|
6 |
|
|
|
6 |
|
Risk-free interest rate |
|
|
N/A |
|
|
|
N/A |
|
|
|
4.87 |
% |
|
|
4.15 |
% |
Dividend yield |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
N/A |
|
|
|
N/A |
|
|
|
52 |
% |
|
|
52 |
% |
For the first and second quarters of 2006, the expected life of each award granted was
calculated using historical experience. Expected volatility was based on historical volatility
levels of the Companys 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
nine months of 2006.
A summary of restricted stock activity for the nine months ended September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Number of Shares |
|
|
Value |
|
Outstanding at December 31, 2005 |
|
|
837,000 |
|
|
$ |
6.92 |
|
Vested |
|
|
(232,500 |
) |
|
|
7.01 |
|
Forfeited |
|
|
(9,500 |
) |
|
|
6.80 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
595,000 |
|
|
$ |
6.88 |
|
|
|
|
|
|
|
|
As of September 30, 2006, the total amount of unrecognized compensation expense related to
non-vested restricted stock awards and estimated income tax obligations was approximately $3,193
and $90, respectively. Both amounts are expected to be recognized on a straight-line basis over a
weighted-average period of approximately 4 years. The total grant date fair value of shares vested
during the nine months ended September 30, 2006 and 2005 was $1,630 and $6,885, respectively.
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)
Stock Issued for Services
The Company issued approximately 11,936 shares of its common stock to its tabulation agent for
their services in connection with the Companys consent solicitation. The shares were valued as of
the agreement date and the Company has recorded general and administrative expense of $98 for this
transaction.
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 $81,742.
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.
Note 10 Net Gain on Sales of Land and Buildings
The Company recorded a gain of $901 on the sale of land and a building relating to a club in
Canada in March 2006 (see Note 1), a $872 gain on the sale of land and a building relating to a
club in Ohio in June 2006, and a $2,353 gain on the sale of land and a building relating to a club
in Georgia in July 2006. In addition, in September 2006 the Company recorded a $142 loss on the
sale of assets related to a club in Tennessee.
Note 11 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
insurance payments of $770 and $2,797 for the three and nine month periods ended September 30,
2006, respectively, and $1,077 and $4,658 for the three and nine month periods ended September 30,
2005, respectively, for reimbursement of costs incurred in prior periods pursuant to the Companys
Director and Officer insurance policies. See Note 3.
Note 12 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.
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)
The financial results of Crunch Fitness, included in discontinued operations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
|
|
|
$ |
16,790 |
|
|
$ |
4,687 |
|
|
$ |
51,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes |
|
|
|
|
|
|
(1,711 |
) |
|
|
(866 |
) |
|
|
(3,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
|
|
|
|
(19 |
) |
|
|
(6 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
(1,730 |
) |
|
|
(872 |
) |
|
|
(3,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations |
|
|
|
|
|
|
|
|
|
|
38,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
|
|
|
$ |
(1,730 |
) |
|
$ |
37,503 |
|
|
$ |
(3,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 Employment Agreement and Separation Agreement
On August 6, 2006, upon the recommendation of the Compensation Committee, the Board of
Directors (with Mr. Toback recusing himself) approved a modification to the employment agreement
between the Company and Paul A. Toback, the Companys then Chairman, President and Chief Executive
Officer (the Employment Agreement). The modification increased by $900 the amount payable to Mr.
Toback only in the event he were terminated without Cause (as defined in the Employment
Agreement) on or prior to February 7, 2008.
On August 11, 2006, the Company announced the separation of Mr. Toback as Chairman, President
and Chief Executive Officer of the Company, effective August 11, 2006. Pursuant to the terms of a
separation agreement and general release dated August 10, 2006 (the Separation Agreement), among
other things, on August 11, 2006 the Company paid Mr. Toback approximately $3,800 and certain
equity awards previously granted to him immediately vested. The Company is also obligated to
provide Mr. Toback a tax gross-up if any amounts payable under the Separation Agreement or
otherwise are subject to excise tax under Section 4999 of the Internal Revenue Code. In addition,
Mr. Toback is entitled to tax gross-up payments for income and employment taxes relating to the
vesting of his restricted stock. The terms of Mr. Tobacks Separation Agreement were substantially
equivalent to those set forth in the Employment Agreement in the circumstances of termination
without Cause following a Change in Control (as defined in the Employment Agreement). The Company
recorded a charge of approximately $5,400 in the third quarter of 2006 in connection with the
Separation Agreement.
Note
14 Asset Impairment Charge
On
October 25, 2006, the Company entered into a transaction to sell and
lease back the land and buildings of four properties. This event
triggered an impairment review as of September 30, 2006, of the clubs to be sold. In accordance
with SFAS No. 144, the Company recorded an impairment charge of
$2,993 as of September 30, 2006, representing the amount by which the
carrying value of one of the properties exceeded its fair value less
the costs associated with selling the property. The net gain on the
sale of the three remaining properties of approximately $6,200 will
be deferred and amortized in proportion to the related gross rental
charged to expense over the lease term based upon operating lease
classification according to SFAS No. 13. See Note 15 for further
description of the sale-leaseback transaction.
Note 15 Subsequent Events
New Facility
On October 16, 2006, the Company entered into the New Facility with a group of financial
institutions led by JPMorgan, the proceeds of which were used to fully satisfy the Companys
obligations under the Credit Agreement. The New Facility, which amended and restated the Credit
Agreement, provides (i) a term loan facility in the amount of $205,900, (ii) a delayed-draw term
loan facility in the amount of $34,100, and (iii) a revolving credit facility in the amount of
$44,000. The New Facility has a termination date which is the earlier of (i) 14 days prior to the
maturity of the Senior Subordinated Notes (due October 15, 2007), including extensions or
refinancing, and (ii) October 1, 2010. The term loan is payable in quarterly installments of $514.8
beginning on October 31, 2007 with a final installment of $199.7 due on October 1, 2010, or any
earlier termination date related to the maturity of the Senior Subordinated Notes. The delayed draw
term loan is payable in a single installment on the termination date. The rate of interest on the
borrowings and letters of credit outstanding under the New Facility is, at the Companys option,
either the reference rate (higher of the prime rate or federal funds rate plus .50%) plus a margin
of 3.25% or a Eurodollar rate plus a margin of 4.25%. Commitment fees of 0.50% and 1.00% per annum
are payable on the unused portion of the revolving credit facility and the undrawn portion of the
delayed draw term loan, respectively. A fronting fee of 0.25% per annum is paid on outstanding
letters of credit. The proceeds from the term loan and revolving credit were used to refinance the
amounts outstanding under the Companys existing Credit Agreement and to provide additional working
capital. The amount available under the revolving credit is reduced by any letters of credit
outstanding. The delayed draw term loan is available to be drawn for 18 months from October 2006
and will be used to fund capital expenditures. Costs incurred related to obtaining the New Facility
totaled approximately $5,800. The Company will expense approximately
$4,000 of these costs in the
fourth quarter of 2006 and the remaining $1,800 will be capitalized and amortized to interest
expense over the term of the New Facility, which currently has a termination date of October 1,
2007. If the termination date of the New Facility is extended, the deferral period for any
remaining unamortized costs will also be extended to the new termination date. Unamortized
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)
deferred financing costs relating to the Credit Agreement of approximately $3,600 will be
expensed in the fourth quarter of 2006 and the remaining $300 will be amortized over the term of
the New Facility.
The New Facility is secured by substantially all the Companys real and personal property,
including member obligations under installment contracts. The New Facility contains restrictive
covenants that include minimum monthly cash EBITDA and minimum monthly liquidity requirements 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; 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 receipt of a qualified audit opinion does not violate the
terms of the New Facility so long as the Company is otherwise in compliance with the New Facility.
The New Facility provides the Company with the ability to enter into and to retain the
proceeds from permitted (i) sale/leaseback transactions of up to $25,000 and (ii) asset sales of up
to $25,000 and, thereafter, 50% of incremental proceeds from permitted sale/leaseback and asset
sale transactions up to $25,000. The Company may, at its option, elect a $50,000 basket of proceeds
from permitted sale/leasebacks and/or permitted asset sales. Additionally, the New Facility
contains a covenant that requires the Company to raise additional liquidity in the amount of
$20,000 by December 31, 2006 from permitted sale/leasebacks, permitted asset sales or issuances of
capital stock.
At October 31, 2006, the Company had no borrowings and $15,247 of letters of credit
outstanding under its $44,000 revolving credit facility. The amount available under the revolving
credit facility is reduced by any outstanding letters of credit. The amount outstanding on the term
loan under the New Facility was $205,900 and there were no outstandings on the delayed draw term
loan.
Sale/Leaseback Transaction
On
October 25, 2006, the Company entered into a transaction to sell
and lease back the land and buildings of four properties. The Company received approximately $11,500 at closing (less $2,550
remaining in escrow pending the Company obtaining certain permits for one of the properties
($1,800) and effecting certain repairs to the properties ($750)). The leases have a term of
twenty years with four five-year renewal options and will be recorded
as operating leases. In accordance with SFAS No. 144, the Company
recorded an impairment charge of $2,993 as of September 30, 2006,
representing the amount by which the carrying value of one of the properties
exceeded its fair value less the costs associated with selling the
property. The
Company expects to realize a gain on the sale of the three remaining
properties of approximately $6,200, which gain will
be amortized to income in proportion to the related gross rental charged to expense over the lease
term of twenty years.
Note 16 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 entities.
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;
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)
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.
The following tables present the condensed consolidating balance sheets at September 30, 2006
and December 31, 2005, the condensed consolidating statements of operations for the three and nine
months ended September 30, 2006 and 2005, and the condensed consolidating statements of cash flows
for the nine months ended September 30, 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 and nine months ended September 30, 2005 have been restated. See Note
2.
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 BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
26,890 |
|
|
$ |
3,333 |
|
|
$ |
|
|
|
$ |
30,223 |
|
Other current assets |
|
|
|
|
|
|
29,619 |
|
|
|
1,217 |
|
|
|
|
|
|
|
30,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
56,509 |
|
|
|
4,550 |
|
|
|
|
|
|
|
61,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
279,113 |
|
|
|
15,011 |
|
|
|
|
|
|
|
294,124 |
|
Goodwill, net |
|
|
|
|
|
|
19,734 |
|
|
|
|
|
|
|
|
|
|
|
19,734 |
|
Trademarks, net |
|
|
6,507 |
|
|
|
|
|
|
|
337 |
|
|
|
|
|
|
|
6,844 |
|
Intangible assets, net |
|
|
|
|
|
|
1,950 |
|
|
|
423 |
|
|
|
|
|
|
|
2,373 |
|
Investment in and advances to subsidiaries |
|
|
(700,977 |
) |
|
|
221,315 |
|
|
|
|
|
|
|
479,662 |
|
|
|
|
|
Other assets |
|
|
34,777 |
|
|
|
6,810 |
|
|
|
3,530 |
|
|
|
|
|
|
|
45,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(659,693 |
) |
|
$ |
585,431 |
|
|
$ |
23,851 |
|
|
$ |
479,662 |
|
|
$ |
429,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
47,757 |
|
|
$ |
485 |
|
|
$ |
|
|
|
$ |
48,242 |
|
Income taxes payable |
|
|
|
|
|
|
1,776 |
|
|
|
56 |
|
|
|
|
|
|
|
1,832 |
|
Accrued liabilities |
|
|
22,680 |
|
|
|
66,196 |
|
|
|
10,883 |
|
|
|
|
|
|
|
99,759 |
|
Current maturities of long-term debt |
|
|
3,326 |
|
|
|
1,989 |
|
|
|
2,798 |
|
|
|
|
|
|
|
8,113 |
|
Deferred revenues |
|
|
|
|
|
|
270,277 |
|
|
|
9,558 |
|
|
|
|
|
|
|
279,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
26,006 |
|
|
|
387,995 |
|
|
|
23,780 |
|
|
|
|
|
|
|
437,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
732,619 |
|
|
|
2,253 |
|
|
|
4,313 |
|
|
|
|
|
|
|
739,185 |
|
Net affiliate payable |
|
|
|
|
|
|
440,037 |
|
|
|
61,975 |
|
|
|
(502,012 |
) |
|
|
|
|
Other liabilities |
|
|
|
|
|
|
114,069 |
|
|
|
5,785 |
|
|
|
|
|
|
|
119,854 |
|
Deferred revenues |
|
|
|
|
|
|
540,057 |
|
|
|
10,692 |
|
|
|
|
|
|
|
550,749 |
|
Stockholders deficit |
|
|
(1,418,318 |
) |
|
|
(898,980 |
) |
|
|
(82,694 |
) |
|
|
981,674 |
|
|
|
(1,418,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(659,693 |
) |
|
$ |
585,431 |
|
|
$ |
23,851 |
|
|
$ |
479,662 |
|
|
$ |
429,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 |
|
|
|
|
|
|
517,799 |
|
|
|
58,658 |
|
|
|
(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 |
) |
|
|
(1,004,136 |
) |
|
|
(75,899 |
) |
|
|
1,080,035 |
|
|
|
(1,463,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(689,121 |
) |
|
$ |
638,300 |
|
|
$ |
27,337 |
|
|
$ |
503,578 |
|
|
$ |
480,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
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 September 30, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
225,093 |
|
|
$ |
9,254 |
|
|
$ |
|
|
|
$ |
234,347 |
|
Retail products |
|
|
|
|
|
|
9,908 |
|
|
|
257 |
|
|
|
|
|
|
|
10,165 |
|
Miscellaneous |
|
|
|
|
|
|
3,509 |
|
|
|
350 |
|
|
|
|
|
|
|
3,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,510 |
|
|
|
9,861 |
|
|
|
|
|
|
|
248,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
160,218 |
|
|
|
7,064 |
|
|
|
|
|
|
|
167,282 |
|
Retail products |
|
|
|
|
|
|
10,183 |
|
|
|
285 |
|
|
|
|
|
|
|
10,468 |
|
Marketing and advertising |
|
|
|
|
|
|
12,690 |
|
|
|
266 |
|
|
|
|
|
|
|
12,956 |
|
General and administrative |
|
|
6,079 |
|
|
|
16,987 |
|
|
|
542 |
|
|
|
|
|
|
|
23,608 |
|
Net gain on sale of land and building |
|
|
|
|
|
|
(2,211 |
) |
|
|
|
|
|
|
|
|
|
|
(2,211 |
) |
Asset
impairment charge |
|
|
|
|
|
|
2,993 |
|
|
|
|
|
|
|
|
|
|
|
2,993 |
|
Depreciation and amortization |
|
|
|
|
|
|
12,839 |
|
|
|
550 |
|
|
|
|
|
|
|
13,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,079 |
|
|
|
213,699 |
|
|
|
8,707 |
|
|
|
|
|
|
|
228,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(6,079 |
) |
|
|
24,811 |
|
|
|
1,154 |
|
|
|
|
|
|
|
19,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income from subsidiaries |
|
|
25,263 |
|
|
|
|
|
|
|
|
|
|
|
(25,263 |
) |
|
|
|
|
Interest expense |
|
|
(25,455 |
) |
|
|
(367 |
) |
|
|
(817 |
) |
|
|
639 |
|
|
|
(26,000 |
) |
Foreign exchange gain (loss) |
|
|
|
|
|
|
185 |
|
|
|
381 |
|
|
|
|
|
|
|
566 |
|
Other, net |
|
|
539 |
|
|
|
76 |
|
|
|
191 |
|
|
|
(639 |
) |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347 |
|
|
|
(106 |
) |
|
|
(245 |
) |
|
|
(25,263 |
) |
|
|
(25,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(5,732 |
) |
|
|
24,705 |
|
|
|
909 |
|
|
|
(25,263 |
) |
|
|
(5,381 |
) |
Income tax provision |
|
|
|
|
|
|
(351 |
) |
|
|
|
|
|
|
|
|
|
|
(351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(5,732 |
) |
|
$ |
24,354 |
|
|
$ |
909 |
|
|
$ |
(25,263 |
) |
|
$ |
(5,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
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 September 30, 2005 |
|
|
|
(As restated) |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
223,330 |
|
|
$ |
9,413 |
|
|
$ |
|
|
|
$ |
232,743 |
|
Retail products |
|
|
|
|
|
|
11,183 |
|
|
|
347 |
|
|
|
|
|
|
|
11,530 |
|
Miscellaneous |
|
|
|
|
|
|
3,260 |
|
|
|
406 |
|
|
|
|
|
|
|
3,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,773 |
|
|
|
10,166 |
|
|
|
|
|
|
|
247,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
158,506 |
|
|
|
7,437 |
|
|
|
|
|
|
|
165,943 |
|
Retail products |
|
|
|
|
|
|
12,297 |
|
|
|
352 |
|
|
|
|
|
|
|
12,649 |
|
Marketing and advertising |
|
|
|
|
|
|
12,654 |
|
|
|
292 |
|
|
|
|
|
|
|
12,946 |
|
General and administrative |
|
|
1,215 |
|
|
|
17,686 |
|
|
|
332 |
|
|
|
|
|
|
|
19,233 |
|
Depreciation and amortization |
|
|
|
|
|
|
14,158 |
|
|
|
717 |
|
|
|
|
|
|
|
14,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215 |
|
|
|
215,301 |
|
|
|
9,130 |
|
|
|
|
|
|
|
225,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1,215 |
) |
|
|
22,472 |
|
|
|
1,036 |
|
|
|
|
|
|
|
22,293 |
|
Equity in income (loss) from continuing
operations of subsidiaries |
|
|
23,241 |
|
|
|
|
|
|
|
|
|
|
|
(23,241 |
) |
|
|
|
|
Interest expense |
|
|
(21,020 |
) |
|
|
(403 |
) |
|
|
(947 |
) |
|
|
559 |
|
|
|
(21,811 |
) |
Foreign exchange gain (loss) |
|
|
|
|
|
|
1,604 |
|
|
|
(463 |
) |
|
|
|
|
|
|
1,141 |
|
Other, net |
|
|
510 |
|
|
|
115 |
|
|
|
67 |
|
|
|
(559 |
) |
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,731 |
|
|
|
1,316 |
|
|
|
(1,343 |
) |
|
|
(23,241 |
) |
|
|
(20,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
1,516 |
|
|
|
23,788 |
|
|
|
(307 |
) |
|
|
(23,241 |
) |
|
|
1,756 |
|
Income tax provision |
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
1,516 |
|
|
|
23,548 |
|
|
|
(307 |
) |
|
|
(23,241 |
) |
|
|
1,516 |
|
Loss from discontinued operations |
|
|
(1,730 |
) |
|
|
(1,730 |
) |
|
|
|
|
|
|
1,730 |
|
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(214 |
) |
|
$ |
21,818 |
|
|
$ |
(307 |
) |
|
$ |
(21,511 |
) |
|
$ |
(214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
685,414 |
|
|
$ |
28,137 |
|
|
$ |
|
|
|
$ |
713,551 |
|
Retail products |
|
|
|
|
|
|
32,688 |
|
|
|
874 |
|
|
|
|
|
|
|
33,562 |
|
Miscellaneous |
|
|
|
|
|
|
9,966 |
|
|
|
1,089 |
|
|
|
|
|
|
|
11,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728,068 |
|
|
|
30,100 |
|
|
|
|
|
|
|
758,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
488,583 |
|
|
|
21,187 |
|
|
|
|
|
|
|
509,770 |
|
Retail products |
|
|
|
|
|
|
31,245 |
|
|
|
901 |
|
|
|
|
|
|
|
32,146 |
|
Marketing and advertising |
|
|
|
|
|
|
47,235 |
|
|
|
796 |
|
|
|
|
|
|
|
48,031 |
|
General and administrative |
|
|
9,068 |
|
|
|
55,495 |
|
|
|
1,664 |
|
|
|
|
|
|
|
66,227 |
|
Net gain on sales of land and buildings |
|
|
|
|
|
|
(3,083 |
) |
|
|
(901 |
) |
|
|
|
|
|
|
(3,984 |
) |
Asset
impairment charge |
|
|
|
|
|
|
2,993 |
|
|
|
|
|
|
|
|
|
|
|
2,993 |
|
Depreciation and amortization |
|
|
|
|
|
|
38,736 |
|
|
|
2,100 |
|
|
|
|
|
|
|
40,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,068 |
|
|
|
661,204 |
|
|
|
25,747 |
|
|
|
|
|
|
|
696,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(9,068 |
) |
|
|
66,864 |
|
|
|
4,353 |
|
|
|
|
|
|
|
62,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income from continuing operations of subsidiaries |
|
|
69,372 |
|
|
|
|
|
|
|
|
|
|
|
(69,372 |
) |
|
|
|
|
Interest expense |
|
|
(73,355 |
) |
|
|
(1,060 |
) |
|
|
(2,718 |
) |
|
|
1,952 |
|
|
|
(75,181 |
) |
Foreign exchange gain (loss) |
|
|
|
|
|
|
2,014 |
|
|
|
322 |
|
|
|
|
|
|
|
2,336 |
|
Other, net |
|
|
1,753 |
|
|
|
299 |
|
|
|
351 |
|
|
|
(1,952 |
) |
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,230 |
) |
|
|
1,253 |
|
|
|
(2,045 |
) |
|
|
(69,372 |
) |
|
|
(72,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes |
|
|
(11,298 |
) |
|
|
68,117 |
|
|
|
2,308 |
|
|
|
(69,372 |
) |
|
|
(10,245 |
) |
Income tax provision |
|
|
|
|
|
|
(1,053 |
) |
|
|
|
|
|
|
|
|
|
|
(1,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(11,298 |
) |
|
|
67,064 |
|
|
|
2,308 |
|
|
|
(69,372 |
) |
|
|
(11,298 |
) |
Gain from discontinued operations |
|
|
37,503 |
|
|
|
37,503 |
|
|
|
|
|
|
|
(37,503 |
) |
|
|
37,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,205 |
|
|
$ |
104,567 |
|
|
$ |
2,308 |
|
|
$ |
(106,875 |
) |
|
$ |
26,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
683,169 |
|
|
$ |
29,078 |
|
|
$ |
|
|
|
$ |
712,247 |
|
Retail products |
|
|
|
|
|
|
36,449 |
|
|
|
1,068 |
|
|
|
|
|
|
|
37,517 |
|
Miscellaneous |
|
|
|
|
|
|
10,194 |
|
|
|
1,351 |
|
|
|
|
|
|
|
11,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729,812 |
|
|
|
31,497 |
|
|
|
|
|
|
|
761,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
482,591 |
|
|
|
22,026 |
|
|
|
|
|
|
|
504,617 |
|
Retail products |
|
|
|
|
|
|
37,847 |
|
|
|
1,034 |
|
|
|
|
|
|
|
38,881 |
|
Marketing and advertising |
|
|
|
|
|
|
43,764 |
|
|
|
934 |
|
|
|
|
|
|
|
44,698 |
|
General and administrative |
|
|
3,256 |
|
|
|
54,490 |
|
|
|
940 |
|
|
|
|
|
|
|
58,686 |
|
Depreciation and amortization |
|
|
|
|
|
|
42,641 |
|
|
|
2,196 |
|
|
|
|
|
|
|
44,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,256 |
|
|
|
661,333 |
|
|
|
27,130 |
|
|
|
|
|
|
|
691,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(3,256 |
) |
|
|
68,479 |
|
|
|
4,367 |
|
|
|
|
|
|
|
69,590 |
|
Equity in income from continuing operations of subsidiaries |
|
|
69,925 |
|
|
|
|
|
|
|
|
|
|
|
(69,925 |
) |
|
|
|
|
Interest expense |
|
|
(58,791 |
) |
|
|
(1,086 |
) |
|
|
(2,719 |
) |
|
|
1,544 |
|
|
|
(61,052 |
) |
Foreign exchange gain (loss) |
|
|
|
|
|
|
1,772 |
|
|
|
(587 |
) |
|
|
|
|
|
|
1,185 |
|
Other, net |
|
|
1,398 |
|
|
|
229 |
|
|
|
189 |
|
|
|
(1,544 |
) |
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,532 |
|
|
|
915 |
|
|
|
(3,117 |
) |
|
|
(69,925 |
) |
|
|
(59,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
9,276 |
|
|
|
69,394 |
|
|
|
1,250 |
|
|
|
(69,925 |
) |
|
|
9,995 |
|
Income tax provision |
|
|
|
|
|
|
(719 |
) |
|
|
|
|
|
|
|
|
|
|
(719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
9,276 |
|
|
|
68,675 |
|
|
|
1,250 |
|
|
|
(69,925 |
) |
|
|
9,276 |
|
Loss from discontinued operations |
|
|
(3,268 |
) |
|
|
(3,268 |
) |
|
|
|
|
|
|
3,268 |
|
|
|
(3,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,008 |
|
|
$ |
65,407 |
|
|
$ |
1,250 |
|
|
$ |
(66,657 |
) |
|
$ |
6,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,205 |
|
|
$ |
104,567 |
|
|
$ |
2,308 |
|
|
$ |
(106,875 |
) |
|
$ |
26,205 |
|
Adjustments to reconcile to cash provided |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including
amortization included in interest expense |
|
|
15,735 |
|
|
|
38,907 |
|
|
|
2,165 |
|
|
|
|
|
|
|
56,807 |
|
Changes in operating assets and liabilities |
|
|
403 |
|
|
|
(37,041 |
) |
|
|
(700 |
) |
|
|
|
|
|
|
(37,338 |
) |
Changes in net affiliate balances |
|
|
|
|
|
|
(79,513 |
) |
|
|
3,860 |
|
|
|
75,653 |
|
|
|
|
|
Other, net |
|
|
4,214 |
|
|
|
(38,635 |
) |
|
|
(3,237 |
) |
|
|
|
|
|
|
(37,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
|
46,557 |
|
|
|
(11,715 |
) |
|
|
4,396 |
|
|
|
(31,222 |
) |
|
|
8,016 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
|
|
|
|
(27,770 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
(27,997 |
) |
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
45,152 |
|
|
|
|
|
|
|
|
|
|
|
45,152 |
|
Proceeds from sale of discontinued operations in escrow |
|
|
|
|
|
|
338 |
|
|
|
|
|
|
|
|
|
|
|
338 |
|
Proceeds from sale of property |
|
|
|
|
|
|
6,199 |
|
|
|
1,328 |
|
|
|
|
|
|
|
7,527 |
|
Investment in and advances to subsidiaries |
|
|
(31,222 |
) |
|
|
|
|
|
|
|
|
|
|
31,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
(31,222 |
) |
|
|
23,919 |
|
|
|
1,101 |
|
|
|
31,222 |
|
|
|
25,020 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under credit agreement |
|
|
(12,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,386 |
) |
Net repayments of other long-term debt |
|
|
(5,035 |
) |
|
|
(1,552 |
) |
|
|
(3,867 |
) |
|
|
|
|
|
|
(10,454 |
) |
Debt issuance and refinancing costs |
|
|
(3,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,791 |
) |
Proceeds from sale of common stock |
|
|
5,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,600 |
|
Stock purchase and options plans |
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(15,335 |
) |
|
|
(1,552 |
) |
|
|
(3,867 |
) |
|
|
|
|
|
|
(20,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
|
|
|
|
10,652 |
|
|
|
1,630 |
|
|
|
|
|
|
|
12,282 |
|
Effect of exchange rate changes on cash balances |
|
|
|
|
|
|
|
|
|
|
487 |
|
|
|
|
|
|
|
487 |
|
Cash, beginning of period |
|
|
|
|
|
|
16,238 |
|
|
|
1,216 |
|
|
|
|
|
|
|
17,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
|
|
|
$ |
26,890 |
|
|
$ |
3,333 |
|
|
$ |
|
|
|
$ |
30,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
(As restated) |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,008 |
|
|
$ |
65,407 |
|
|
$ |
1,250 |
|
|
$ |
(66,657 |
) |
|
$ |
6,008 |
|
Adjustments to reconcile to cash provided |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including
amortization included in interest expense |
|
|
4,262 |
|
|
|
46,888 |
|
|
|
2,196 |
|
|
|
|
|
|
|
53,346 |
|
Changes in operating assets and liabilities |
|
|
(2,808 |
) |
|
|
(40,068 |
) |
|
|
1,805 |
|
|
|
|
|
|
|
(41,071 |
) |
Changes in net affiliate balances |
|
|
|
|
|
|
(56,041 |
) |
|
|
304 |
|
|
|
55,737 |
|
|
|
|
|
Other net |
|
|
4,957 |
|
|
|
393 |
|
|
|
(1,185 |
) |
|
|
|
|
|
|
4,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
12,419 |
|
|
|
16,579 |
|
|
|
4,370 |
|
|
|
(10,920 |
) |
|
|
22,448 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
|
|
|
|
(23,892 |
) |
|
|
(756 |
) |
|
|
|
|
|
|
(24,648 |
) |
Proceeds from sale of land |
|
|
|
|
|
|
1,455 |
|
|
|
|
|
|
|
|
|
|
|
1,455 |
|
Investment in and advances to subsidiaries |
|
|
(10,920 |
) |
|
|
|
|
|
|
|
|
|
|
10,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(10,920 |
) |
|
|
(22,437 |
) |
|
|
(756 |
) |
|
|
10,920 |
|
|
|
(23,193 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving credit agreement |
|
|
18,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,688 |
|
Net repayments of other long-term debt |
|
|
(9,336 |
) |
|
|
(1,487 |
) |
|
|
(3,044 |
) |
|
|
|
|
|
|
(13,867 |
) |
Debt issuance and refinancing costs |
|
|
(10,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,944 |
) |
Proceeds from stock purchase and options plans |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(1,499 |
) |
|
|
(1,487 |
) |
|
|
(3,044 |
) |
|
|
|
|
|
|
(6,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
|
|
|
|
(7,345 |
) |
|
|
570 |
|
|
|
|
|
|
|
(6,775 |
) |
Effect of exchange rate changes on cash balances |
|
|
|
|
|
|
|
|
|
|
361 |
|
|
|
|
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period |
|
|
|
|
|
|
18,726 |
|
|
|
451 |
|
|
|
|
|
|
|
19,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
|
|
|
$ |
11,381 |
|
|
$ |
1,382 |
|
|
$ |
|
|
|
$ |
12,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
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 with the Companys Consolidated Financial Statements and related notes and 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, full service commercial operator of fitness centers in
North America in terms of members, revenues and square footage of its facilities. As of September
30, 2006, we operated 379 fitness centers collectively serving approximately 3.6 million members.
These 379 fitness centers occupied a total of 12.0 million square feet.
Our fitness centers are concentrated in major metropolitan areas in 28 states, the District of
Columbia and Canada, with 318 fitness centers located in the top 25 metropolitan areas in the
United States and Canada. As of September 30, 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 56% of new joining members participate in a membership plan
allowing multiple club access, varying between market and nationwide access. 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.
Bally memberships in most markets require 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 memberships to 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 (cash paid at time of enrollment for membership fees) 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 program, we anticipate that renewal
payments will likely carry a smaller discount from the obligatory
period monthly payment level in most BYOM markets.
Our members may also choose to purchase a prepaid membership for periods up to three years.
Members choosing our month-to-month memberships make month-to-month non-obligatory
payments after paying an enrollment fee. Ongoing membership dues for members in renewal periods
may be paid monthly or annually or may be prepaid for multiple future periods. |
|
|
|
Our membership services revenue is generally collected as cash on a basis that does not conform
to its basis of revenue recognition, resulting in the deferral of significant amounts received
early in the membership period that will be recognized in later periods. This recognition
methodology is a consequence of our long history of offering membership programs with higher
levels of monthly or total payments during the obligatory period of membership, generally for
periods of up to three years, followed by discounted payments in the subsequent renewal phase of
membership. Our revenue recognition objective is to recognize an even amount of membership
revenue from our members throughout their entire term of membership, regardless of the payment
pattern. As a result, we make estimates of membership term length on a composite group basis of
all members joining in a period and set up separate amortization pools based on estimated total
group membership term length averages. Estimated term lengths used to |
31
|
|
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 54% 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% of total revenue for the nine months
ended September 30, 2006 and 2005. 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 4% and 5% of total revenue for the nine months ended September 30, 2006 and
2005, respectively. |
|
3) |
|
The balance of our revenue (approximately 2% and 1% for the nine months ended September 30,
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. |
|
2) |
|
Retail products expenses consist primarily of the cost of products sold as well as the
payroll and related costs of dedicated retail associates. |
32
3) |
|
Marketing and 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) |
|
Asset impairment charges include the write-down of the net
book value of our assets pursuant to SFAS No. 144. Pursuant to
SFAS No. 144, the carrying value of our assets, primarily
property and equipment, is evaluated when circumstances indicate the
carrying value may have been impaired. Asset impairment charges
represent the excess of the carrying value of the assets over their
fair value. |
|
6) |
|
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 non-cancelable 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
non-comparable) depending on how long the fitness centers have been open at the measurement date.
We include a fitness center in comparable fitness center revenues beginning on the first day of the
13th full calendar month of the fitness centers operation, prior to which time we refer to the
fitness center as an a non-comparable fitness center and, therefore, an element of non-comparable
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 from operations 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 $4.0 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.
According to the IHRSAs Industry Data Survey of the Health and Fitness Club Industry, club
membership grew at a 4.7% compounded annual growth rate from 2000 to 2005. We may be able to
benefit from the growth in the industry, although increased competition, including competition from
very small fitness centers (less than 3,000 square feet), will require us to reinvest in our
facilities to remain competitive, which we may not be able to do if we do not have adequate
liquidity. 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.
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 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 Annual Report on Form
10-K for the year ended December 31, 2005 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
33
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 Annual Report on Form 10-K for the year ended December 31, 2005.
Results of Operations
The following table sets forth key operating data for the periods indicated (dollars in
thousands except per member data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
Ended |
|
|
% of |
|
|
Ended |
|
|
% of |
|
|
Change from |
|
|
|
September 30, |
|
|
Net |
|
|
September 30, |
|
|
Net |
|
|
Previous Period |
|
|
|
2006 |
|
|
Revenue |
|
|
2005 |
|
|
Revenue |
|
|
Dollars |
|
|
Percent |
|
|
|
|
(As restated) |
|
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership |
|
$ |
204,509 |
|
|
|
82 |
% |
|
$ |
202,630 |
|
|
|
82 |
% |
|
$ |
1,879 |
|
|
|
1 |
% |
Personal training |
|
|
29,838 |
|
|
|
12 |
% |
|
|
30,113 |
|
|
|
12 |
% |
|
|
(275 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue |
|
|
234,347 |
|
|
|
94 |
% |
|
|
232,743 |
|
|
|
94 |
% |
|
|
1,604 |
|
|
|
1 |
% |
Retail products |
|
|
10,165 |
|
|
|
4 |
% |
|
|
11,530 |
|
|
|
5 |
% |
|
|
(1,365 |
) |
|
|
(12 |
%) |
Miscellaneous |
|
|
3,859 |
|
|
|
2 |
% |
|
|
3,666 |
|
|
|
1 |
% |
|
|
193 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
248,371 |
|
|
|
100 |
% |
|
|
247,939 |
|
|
|
100 |
% |
|
|
432 |
|
|
|
0 |
% |
OPERATING COSTS AND EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
167,282 |
|
|
|
67 |
% |
|
|
165,943 |
|
|
|
67 |
% |
|
|
1,339 |
|
|
|
1 |
% |
Retail products |
|
|
10,468 |
|
|
|
4 |
% |
|
|
12,649 |
|
|
|
5 |
% |
|
|
(2,181 |
) |
|
|
(17 |
%) |
Marketing and advertising |
|
|
12,956 |
|
|
|
5 |
% |
|
|
12,946 |
|
|
|
5 |
% |
|
|
10 |
|
|
|
0 |
% |
Information technology |
|
|
4,916 |
|
|
|
2 |
% |
|
|
5,245 |
|
|
|
2 |
% |
|
|
(329 |
) |
|
|
(6 |
%) |
Other general and administrative |
|
|
18,692 |
|
|
|
8 |
% |
|
|
13,988 |
|
|
|
6 |
% |
|
|
4,704 |
|
|
|
34 |
% |
Net gain on sale of land and building |
|
|
(2,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,211 |
) |
|
|
|
|
Asset impairment charge |
|
|
2,993 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
2,993 |
|
|
|
|
|
Depreciation and amortization |
|
|
13,389 |
|
|
|
5 |
% |
|
|
14,875 |
|
|
|
6 |
% |
|
|
(1,486 |
) |
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,485 |
|
|
|
92 |
% |
|
|
225,646 |
|
|
|
91 |
% |
|
|
2,839 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
19,886 |
|
|
|
8 |
% |
|
$ |
22,293 |
|
|
|
9 |
% |
|
$ |
(2,407 |
) |
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
Ended |
|
|
% of |
|
|
Ended |
|
|
% of |
|
|
Change from |
|
|
|
September 30, |
|
|
Net |
|
|
September 30, |
|
|
Net |
|
|
Previous Period |
|
|
|
2006 |
|
|
Revenue |
|
|
2005 |
|
|
Revenue |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership |
|
$ |
620,602 |
|
|
|
82 |
% |
|
$ |
621,229 |
|
|
|
82 |
% |
|
$ |
(627 |
) |
|
|
0 |
% |
Personal training |
|
|
92,949 |
|
|
|
12 |
% |
|
|
91,018 |
|
|
|
12 |
% |
|
|
1,931 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue |
|
|
713,551 |
|
|
|
94 |
% |
|
|
712,247 |
|
|
|
94 |
% |
|
|
1,304 |
|
|
|
0 |
% |
Retail products |
|
|
33,562 |
|
|
|
4 |
% |
|
|
37,517 |
|
|
|
5 |
% |
|
|
(3,955 |
) |
|
|
(11 |
%) |
Miscellaneous |
|
|
11,055 |
|
|
|
2 |
% |
|
|
11,545 |
|
|
|
1 |
% |
|
|
(490 |
) |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
758,168 |
|
|
|
100 |
% |
|
|
761,309 |
|
|
|
100 |
% |
|
|
(3,141 |
) |
|
|
0 |
% |
OPERATING COSTS AND EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
509,770 |
|
|
|
67 |
% |
|
|
504,617 |
|
|
|
66 |
% |
|
|
5,153 |
|
|
|
1 |
% |
Retail products |
|
|
32,146 |
|
|
|
4 |
% |
|
|
38,881 |
|
|
|
5 |
% |
|
|
(6,735 |
) |
|
|
(17 |
%) |
Marketing and advertising |
|
|
48,031 |
|
|
|
6 |
% |
|
|
44,698 |
|
|
|
6 |
% |
|
|
3,333 |
|
|
|
7 |
% |
Information technology |
|
|
15,314 |
|
|
|
2 |
% |
|
|
16,027 |
|
|
|
2 |
% |
|
|
(713 |
) |
|
|
(4 |
%) |
Other general and administrative |
|
|
50,913 |
|
|
|
7 |
% |
|
|
42,659 |
|
|
|
6 |
% |
|
|
8,254 |
|
|
|
19 |
% |
Net gain on sales of land and buildings |
|
|
(3,984 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
(3,984 |
) |
|
|
|
|
Asset impairment charge |
|
|
2,993 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
2,993 |
|
|
|
|
|
Depreciation and amortization |
|
|
40,836 |
|
|
|
6 |
% |
|
|
44,837 |
|
|
|
6 |
% |
|
|
(4,001 |
) |
|
|
(9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696,019 |
|
|
|
92 |
% |
|
|
691,719 |
|
|
|
91 |
% |
|
|
4,300 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
62,149 |
|
|
|
8 |
% |
|
$ |
69,590 |
|
|
|
9 |
% |
|
$ |
(7,441 |
) |
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Key Operating Data
Membership rollforward and statistics (000s, except dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
change |
|
|
% change |
|
|
|
(As restated) |
|
|
Members at beginning of period |
|
|
3,600 |
|
|
|
3,671 |
|
|
|
(71 |
) |
|
|
(2 |
)% |
Number of new members joining during the period |
|
|
239 |
|
|
|
228 |
|
|
|
11 |
|
|
|
5 |
% |
Number of net member drops during the period |
|
|
(284 |
) |
|
|
(288 |
) |
|
|
4 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Members at end of period |
|
|
3,555 |
|
|
|
3,611 |
|
|
|
(56 |
) |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of members during the period (1) |
|
|
3,577 |
|
|
|
3,641 |
|
|
|
(64 |
) |
|
|
(2 |
)% |
Average monthly membership revenue recognized per member (2) |
|
$ |
19.06 |
|
|
$ |
18.55 |
|
|
$ |
0.51 |
|
|
|
3 |
% |
Average monthly cash received per member (3) |
|
$ |
17.43 |
|
|
$ |
17.55 |
|
|
$ |
(0.12 |
) |
|
|
(1 |
)% |
Fitness centers open at end of period |
|
|
379 |
|
|
|
387 |
|
|
|
(8 |
) |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
change |
|
|
% change |
|
|
|
(As restated) |
|
|
Members at beginning of period |
|
|
3,531 |
|
|
|
3,593 |
|
|
|
(62 |
) |
|
|
(2 |
)% |
Number of new members joining during the period |
|
|
820 |
|
|
|
808 |
|
|
|
12 |
|
|
|
1 |
% |
Number of net member drops during the period |
|
|
(796 |
) |
|
|
(790 |
) |
|
|
(6 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Members at end of period |
|
|
3,555 |
|
|
|
3,611 |
|
|
|
(56 |
) |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of members during the period (1) |
|
|
3,580 |
|
|
|
3,650 |
|
|
|
(70 |
) |
|
|
(2 |
)% |
Average monthly membership revenue recognized per member (2) |
|
$ |
19.26 |
|
|
$ |
18.91 |
|
|
$ |
0.35 |
|
|
|
2 |
% |
Average monthly cash received per member (3) |
|
$ |
18.01 |
|
|
$ |
18.10 |
|
|
$ |
(0.09 |
) |
|
|
0 |
% |
Fitness centers open at end of period |
|
|
379 |
|
|
|
387 |
|
|
|
(8 |
) |
|
|
(2 |
)% |
|
|
|
(1) |
|
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 in the period by two for the
three month period and by six for the nine month period. |
|
(2) |
|
Average monthly membership revenue recognized per member represents membership revenue
recognized for the period divided by the number of months in the period, divided by the
average number of members for the period. |
|
(3) |
|
Average monthly cash received per member represents cash collections of membership revenue
for the period divided by the number of months in the period, divided by the average number of
members for the period. |
Summary of revenue recognition method
The Companys strategy is to grow the number of members and increase the average monthly
payment per member by continued new member acquisition with an emphasis on higher margin national
access memberships and improved retention. The Company also intends to grow its product and
services revenue, as well as personal training.
The Companys sources of membership revenue include health club memberships and personal
training services. As a general principle, revenue is recognized when the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and services have
been rendered, (iii) the price to the buyer is fixed or determinable and (iv) collectability is
reasonably assured. The Company relies upon a signed contract between the Company and the customer
as the persuasive evidence of a sales arrangement. Delivery of health club services extends
throughout the term of membership. Delivery of personal training services occurs when individual
personal training sessions have been rendered.
The Company receives membership fees and monthly dues from its members. Membership fees, which
customers often finance, become customer obligations upon contract execution and after a cooling
off period of three to fifteen calendar days depending on jurisdiction, while monthly dues become
customer obligations on a month-to-month basis as services are provided. Membership fees and
monthly dues are recognized at the later of when collected or earned.
Membership fees and monthly dues collected but not earned are included in deferred revenue.
The majority of members commit to a membership term of between 12 and 36 months. The majority of
these contracts are 36 month contracts. The majority of our existing
35
contracts 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. Currently, the weighted average membership life for members
that commit to a membership term of between 12 and 36 months is
estimated to be
35 months. Members with these terms
that finance their initial membership fee have a weighted average
membership life of 33 months,
while those members that pay their membership fee in full at point of sale have a weighted average
membership life of 53 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
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.
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 42 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 September 30, 2006 and 2005
Our operations are subject to seasonal factors and, therefore, the results of operations for
the three months ended September 30, 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 September 30, 2006 was $248.4 million compared to
$247.9 million in 2005, an increase of $0.5 million. The increase in total revenue resulted from
the following:
|
|
Membership revenue recognized increased to $204.5 million from $202.6
million in 2005, an increase of $1.9 million (1%) from the prior year
period. In the current year, a 3% increase in average monthly
membership revenue per member to $19.06 from $18.55 was partially
offset by a 2% decrease in average number of members to 3.577 million
members. |
|
|
|
Cash collections of membership revenue during the three months ended
September 30, 2006 were $187.0 million, a decrease of $4.7 million
(2%) from 2005. This decrease is the result of a 2% decrease in
average number of members to 3.577 million |
36
|
|
members and a decrease in the average monthly cash received
per member to $17.43 for the 2006
period versus $17.55 in the prior year period. Cash collections of membership revenue include
payments from members who prepay the remaining portion of amounts outstanding under value plan
memberships (accelerations), voluntarily or in response to an offer to prepay at a discount
similar to that offered at point of sale. We received $6.8 million and $4.0 million of proceeds
from accelerations during the three months ended September 30, 2006 and 2005, respectively. We
also allow certain members to reactivate their expired membership at a discount in order to
incent these members to restart their workout routine (reactivations). We received $5.2 million
and $4.1 million of proceeds from reactivations during the three months ended September 30, 2006
and 2005, respectively. The average monthly cash received per member includes $1.11 and $0.74 of
accelerations and reactivations for the three months ended September 30, 2006 and 2005,
respectively. Increases in renewal dues have had a positive impact on average monthly cash
received per member. The mix of new member signups has changed under the BYOM program to include
a higher number of one-club memberships, along with an increase in family add-on member signups
at discounted monthly rates relative to primary member monthly rates, and a higher percentage of
nonobligatory month-to-month members, including members added under family add-on programs. In
the three months ended September 30, 2006, new member signups were approximately 68% value plan,
13% paid-in-full and 19% month-to-month. In the year earlier period, new member signups were
approximately 72% value plan, 13% paid-in-full and 15% month-to-month. As a result, membership
cash collections have been negatively affected due to the higher attrition tendency of
month-to-month members, and the lower average monthly rates of the increasing mix of one-club
memberships and discounted family member signups. Because of the Companys historical attrition
patterns whereby a high percentage of new members drop their membership during the first twelve
months subsequent to joining, a significant portion of cash collections have historically been
provided by new members early in their membership term. Accordingly, a decrease in new member
pricing (both obligatory and nonobligatory) coupled with the change in the mix of new membership
signups had a disproportionate impact on cash collections of membership revenue in 2006 as
compared to 2005 and will continue to have a negative impact for the remainder of 2006 and
beyond. |
|
|
|
Personal training revenue decreased to $29.8 million
from $30.1 million in 2005, a decrease of $0.3 million
(1%). |
|
|
|
Retail products revenue decreased to $10.2 million from $11.5 million in 2005, a decrease of $1.3 million (12%), 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 and a 2% decrease in average number of members to 3.577 million members reducing
workout traffic in the clubs. |
|
|
|
Miscellaneous revenue of $3.9 million increased $0.2 million from the prior year. |
|
|
|
Operating costs and expenses for the three months ended
September 30, 2006 were $228.5 million,
an increase of $2.8 million from the prior year period. Operating costs and expenses included the
following: |
|
|
|
Membership services expenses for the three months ended September 30,
2006 increased $1.3 million (1%) from 2005, reflecting increases in
litigation, property tax and insurance costs. |
|
|
|
Retail products expenses, which included labor costs, for the three
months ended September 30, 2006 decreased $2.2 million (17%) from
2005, primarily as a result of a decrease in cost of goods sold from
lower sales and reduced labor costs as a result of the Companys front
desk retail model integration. |
|
|
|
Marketing and advertising expenses of $13.0 million for the three
months ended September 30, 2006 were unchanged from the 2005 period.
|
|
|
|
Information technology expenses for the three months ended September
30, 2006 decreased $0.3 million (6%) from 2005 primarily as a result
of reduced use of outside consultants and lower telecommunication
costs partially offset by increased internal salaries. |
|
|
|
Other general and administrative expenses for the three months ended
September 30, 2006 increased $4.7 million (34%) from 2005.
Compensation costs of $5.4 million related to the separation agreement
with our former Chairman, President and CEO were partially offset by
lower professional and legal fees compared to the 2005 period. |
|
|
|
The Company recorded a gain of approximately $2.4 million on the sale
of the land and a building relating to a club in Georgia, partially
offset by a $0.2 million loss on the sale of assets of a club in
Knoxville, TN.
|
|
|
|
The Company recorded an impairment charge of
$3.0 million, representing the amount by which the carrying value
of a property sold subject to a sale/leaseback exceeded
its fair value less the costs associated with selling the property. |
37
|
|
Depreciation and amortization expense for the three months ended
September 30, 2006 decreased $1.5 million from 2005, reflecting fewer
depreciable assets resulting from fixed asset write-offs and
impairment charges in 2005, along with a reduction in capital
expenditures in prior periods. |
Operating
income for the three months ended September 30, 2006 decreased
$2.4 million (11%) to
$19.9 million as compared to the prior year. The increase is primarily due to the increase in
membership revenue, the gain on the club sale, increased retail products contribution and lower
depreciation expenses, partially offset by the increase in membership services expenses.
Comparison of the Nine Months Ended September 30, 2006 and 2005
Our operations are subject to seasonal factors and, therefore, the results of operations for
the nine months ended September 30, 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 nine months ended September 30, 2006 was $758.2 million compared to
$761.3 million in 2005, a decrease of $3.1 million. The decrease in total revenue resulted from the
following:
|
|
Membership revenue recognized decreased to
$620.6 million from $621.2 million in 2005, a decrease of $0.6 million from the
prior year period. In the current year, a 2% decrease in average number of members to 3.580 million members was partially
offset by a 2% increase in the average monthly membership revenue per member to $19.26 from $18.91. |
|
|
|
Cash collections of membership revenue during the nine months
ended September 30, 2006 were $580.2 million, a decrease of
$14.5 million (2%) from 2005. This decrease is the result of a 2% decrease in average number of members to 3.580 million
members. The average monthly cash received per member was $18.01 in 2006 versus $18.10 in the prior year period. We
received $16.5 million and $12.3 million of proceeds from accelerations during the nine months ended September 30, 2006 and
2005, respectively. We also received $17.4 million and $16.0 million of proceeds from reactivations during the nine months
ended September 30, 2006 and 2005, respectively. The average monthly cash received per member includes $1.05 and $0.86 of
proceeds from accelerations and reactivations for the nine months ended September 30, 2006 and 2005, respectively.
Increases in renewal dues have had a positive impact on average monthly cash received per member. However, the mix of new
member signups has changed under the BYOM program to include a higher number of one-club memberships, along with an
increase in family add-on member signups at discounted monthly rates relative to primary member monthly rates, and a higher
percentage of nonobligatory month-to-month members, including members added under family add-on programs. In the nine
months ended September 30, 2006, new member signups were approximately 71% value plan, 12% paid-in-full and 17%
month-to-month. In the year earlier period, new member signups were approximately 75% value plan, 12% paid-in-full and 13%
month-to-month. As a result, membership cash collections have been negatively affected due to the higher attrition tendency
of month-to-month members, and the lower average monthly rates of the increasing mix of one-club memberships and discounted
family member signups. Because of the Companys historical attrition patterns whereby a high percentage of new members drop
their membership during the first twelve months subsequent to joining, a significant portion of cash collections have
historically been provided by new members early in their membership term. Accordingly, a decrease in new member pricing
(both obligatory and nonobligatory) coupled with the change in the mix of new membership signups had a disproportionate
impact on cash collections of membership revenue in 2006 as compared to 2005 and will continue to have a negative impact
for the remainder of 2006 and beyond. |
|
|
|
Personal training revenue increased to $92.9 million
from $91.0 million in 2005, an increase of $1.9 million (2%),
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 $33.6 million from $37.5 million in 2005, a decrease of $3.9 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 and a 2% decrease in average number of members to 3.580 million members reducing
workout traffic in the clubs. |
|
|
|
Miscellaneous revenue decreased to $11.1 million from $11.5 million in 2005. |
38
Operating
costs and expenses for the nine months ended September 30, 2006
were $696.0 million
compared to $691.7 million during 2005, an increase of $4.3 million. This increase resulted from
the following:
|
|
Membership services expenses for the nine months ended September 30,
2006 increased $5.2 million (1%) from 2005, reflecting increases in
occupancy (primarily utilities) and insurance costs offset by a
reduction in personnel costs as a result of the Companys cost
reduction initiatives. |
|
|
|
Retail products expenses, which included labor costs, for the nine
months ended September 30, 2006 decreased $6.7 million (17%) from
2005, primarily as a result of a decrease in cost of goods sold from
lower sales and reduced labor costs as a result of the Companys front
desk retail model integration. |
|
|
|
Marketing and advertising expenses for the nine months ended September
30, 2006 increased $3.3 million (7%) from 2005, primarily from planned
increases in media spending and television commercial production
costs. |
|
|
|
Information technology expenses for the nine months ended September
30, 2006 decreased $0.7 million (4%) from 2005 primarily as a result
of reduced use of outside consultants and lower telecommunication
costs partially offset by increased internal salaries. |
|
|
|
Other general and administrative expenses for the nine months ended
September 30, 2006 increased $8.3 million (19%) from 2005, primarily
as a result of separation costs associated with our former Chairman
and Chief Executive Officer and former Chief Financial Officer, and
costs incurred as a result of our proxy solicitation, restructuring
and ongoing investigations and litigation related to the restatement
of the Companys financial statements and an increase in Directors
fees and audit costs. |
|
|
|
Gain on sales of land and buildings includes a gain on the March 2006
sale of the land and a building relating to a club in Canada ($0.9
million), a gain on the June 2006 sale of a club in Ohio ($0.9
million) and a gain on the July 2006 sale of a club in Georgia ($2.4
million) partially offset by a loss on the sale of a club in Tennessee
($0.2 million). |
|
|
|
The Company recorded an impairment charge of
$3.0 million, representing the amount by which the carrying
value of a property sold subject to a sale/leaseback exceeded its fair value less the costs associated with selling the
property. |
|
|
|
Depreciation and amortization expense for the nine months ended
September 30, 2006 decreased $4.0 million from 2005, reflecting fewer
depreciable assets resulting from fixed asset write-offs and
impairment charges in 2005, along with a reduction in capital
expenditures in prior periods. |
Operating
income for the nine months ended September 30, 2006 decreased
$7.4 million to $62.1
million as compared to the prior year. The decrease is primarily due to the increase in expenses
for membership services, marketing and advertising and general and administrative, partially offset
by an increase in retail contribution, the gains on the club sales and lower depreciation expense.
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.
Financial Condition
Our
consolidated assets of $429.3 million as of September 30,
2006 reflect a decrease of $50.8
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, $31.8 million of
the proceeds of the sale of such assets was used to make a mandatory repayment under the term loan of the Credit
Agreement); |
|
|
|
a $20.5 million net decrease in property and equipment
(capital expenditures less disposals, impairment and depreciation). Capital
expenditures of $28.0 million included a scheduled replacement of exercise equipment. The Company will continue a
controlled capital spending program reflective of its limited capital resources; |
|
|
|
a $5.2 million decrease in other current assets primarily from a reduction in inventory and a return of cash held by our
credit card processor; and |
|
|
|
a decrease in prepaid expenses of $3.0 million primarily from a decrease in prepaid advertising; offset by |
|
|
|
an increase in cash of $12.8 million; and |
39
|
|
an increase in deferred financing costs of $5.4 million primarily resulting from the fees paid to bondholders and lenders
to obtain waivers of financial reporting requirements. |
Liquidity and Capital Resources
The following table summarizes the Companys liquidity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
Change |
|
Cash and equivalents |
|
$ |
30.2 |
|
|
$ |
17.5 |
|
|
$ |
12.7 |
|
Unutilized revolving credit facility |
|
|
24.7 |
|
|
|
51.4 |
|
|
|
(26.7 |
) |
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
$ |
54.9 |
|
|
$ |
68.9 |
|
|
$ |
(14.0 |
) |
|
|
|
|
|
|
|
|
|
|
The Companys liquidity declined by $14.0 million during the first nine months of 2006.
Decreased cash collections of membership revenue, coupled with costs incurred in connection with
ongoing investigations and litigation related to the restatement of the Companys financial
statements, an increase in Directors fees and audit costs, severance costs, cash fees paid related
to the lender and noteholder consent solicitations, capital expenditures and the July interest
payment, more than offset the $10 million of Crunch Fitness sale proceeds that were not required to
prepay the term loan pursuant to the Credit Agreement and $5.6 million of proceeds from the sale of
stock.
In October 2006, the Companys liquidity was reduced by the interest payment on the Senior
Subordinated Notes which was in part offset by the $8.9 million of
proceeds from the sale/leaseback transaction. At
October 31, 2006, the Companys liquidity was approximately $51.6
million, including $28.7 million available under the $44 million
revolving credit facility pursuant to the New Facility. The $34.1 million delayed draw term loan to be used
to fund capital expenditures was undrawn.
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 $44
million revolving credit facility and $34.1 million delayed draw term loan pursuant to our New Facility, will be sufficient to meet our
expected needs for working capital and other cash requirements through the third quarter of 2007.
However, as discussed below, we do not believe we will have sufficient
liquidity in the event that we are unable to refinance or extend the
maturity of our Senior
Subordinated Notes and as a result our New Facility terminates on October 1,
2007.
Our cash flows and liquidity may, however, be negatively impacted by various items, including
declines in membership revenues, 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 noteholders if required and unexpected capital
requirements. We have substantial interest payments due on our Senior Notes in
January and July 2007 and on our Senior Subordinated Notes in April 2007 and we may be
required to provide additional letters of credit or cash deposits to support certain insurance
programs, which will reduce available liquidity under our revolving credit facility. Accordingly,
we cannot assure you we will have sufficient liquidity to meet all known and unforeseen
requirements.
The New Facility contains a covenant that requires the Company to
raise additional liquidity in the amount of $20 million by
December 31, 2006 from permitted sale/leasebacks, permitted
asset sales or issuances of capital stock. We closed a sale/leaseback
transaction with respect to four properties on October 25, 2006,
which generated approximately $8.9 million of proceeds to date
that applied to this requirement. While we intend to close on other
transactions with sufficient net proceeds to meet the covenant
requirement, we cannot assure you that future liquidity transactions
will be consummated.
On October 1, 2007, our New Facility will terminate in the event that the Senior Subordinated
Notes have not been extended or refinanced. If this occurs, we will not have access to our
revolving credit and delayed draw term loan facilities and amounts outstanding under the New
Facility will become due. Absent an agreement by the lenders to extend the maturity of the New
Facility, we will not have sufficient liquidity to operate our business and will be unable to
satisfy the New Facility obligations when due. If such events were to occur, the holders of the
Senior Notes and the Senior Subordinated Notes could accelerate the obligations under those
instruments, and we would be unable to satisfy those obligations.
In the event we fail to maintain adequate liquidity, as a result of decreased revenues or
increased expenses or as a result of a default under our New Facility (whether directly or as a
result of a cross-default to other indebtedness), we would be unable to meet our obligations and continue operating our business. See
Debt below for a discussion of the New Facility.
Interest Expense
Interest expense for the nine months ended September 30, 2006 increased $14.1 million to $75.2
million as compared to the prior year, primarily due to increased amortization of deferred
financing costs as a result of consent fees paid to obtain waivers from noteholders and lenders of
financial reporting requirements. Amortization of deferred financing costs was approximately $15.8
million in the nine months ended September 30, 2006, a $10.9 million increase over 2005. The
balance of the increase is due to increases in general interest rate levels, partially offset by
lower outstanding debt. For the quarter ending September 30, 2006, interest expense increased by
$4.2 million to $26.0 million as compared to the prior year, of which $4.1 million is due to the
increase in amortization of deferred financing costs.
40
Of our total debt outstanding of $747.3 million at September 30, 2006, approximately 53% bears
interest at floating rates. This includes the effect of interest rate swap agreements, which
effectively convert $200 million of Senior Subordinated Notes into variable rate obligations. Our
interest expense increased 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 has been favorably impacted by the $37.4 million
reduction in our term loan from the application of the proceeds from the sale of Crunch Fitness and
other assets. In March and April 2006, we paid fees to lenders and bondholders that increased
amortization of deferred financing costs and interest expense.
Cash Flows
The following table summarizes the Companys cash flows for the nine months ended September
30, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Change from |
|
|
|
2006 |
|
|
2005 |
|
|
Previous Period |
|
|
|
(As restated) |
|
Cash provided by operating activities |
|
$ |
8.0 |
|
|
$ |
22.4 |
|
|
$ |
(14.4 |
) |
Cash provided by (used in) investing activities |
|
|
25.0 |
|
|
|
(23.2 |
) |
|
|
48.2 |
|
Cash used in financing activities |
|
|
(20.7 |
) |
|
|
(6.0 |
) |
|
|
(14.7 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
$ |
12.3 |
|
|
$ |
(6.8 |
) |
|
$ |
19.1 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities of $8.0 million in the first nine months of 2006
represented a decrease of $14.4 million from $22.4 million in the 2005 period. Cash received from
memberships decreased $14.5 million in the current year period compared to the prior year period.
Increases in operating costs, principally occupancy and insurance, severance costs, 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). Cash interest paid increased $4.2 million in the nine
months ended September 30, 2006 compared to the prior year period.
Investing Activities and Capital Expenditures
Net cash provided by investing activities totaled $25.0 million in the first nine months of
2006 compared to $23.2 million used in 2005, as a result of gross proceeds of $45 million from the
sale of Crunch Fitness offset by capital expenditures of $28.0 million which included a scheduled
replacement of exercise equipment. We opened a club in Texas in April 2006 and a club in California
in September 2006. One club currently in development is planned to open later in 2006 to replace an
existing club, five 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 million of capital spending in 2006. These expenditures maintain our clubs
at levels necessary to attract and retain members.
Financing Activities
Net cash used in financing activities totaled $20.7 million in the first nine months of 2006
compared to $6.0 million in 2005. Net repayments under the Credit Agreement in 2006 were $31.1
million higher than in 2005 reflecting the application of the proceeds from the sale of Crunch
Fitness and other assets, of which $37.4 million was used to repay the term loan. Debt issuance and
refinancing costs decreased by $7.2 million compared to prior year. Proceeds of $5.6 million from
the sales of Common Stock were received in the first nine months of 2006 and 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.
Dividend and Other Commitments
We have remaining authorization from prior Board of Director resolutions to repurchase up to
820,400 shares of our common stock on the open market from time to time. The terms of our New
Facility and other debt instruments 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.
41
Debt
Credit Agreement
On October 16, 2006, we entered the New Facility with a group of financial institutions led by
JPMorgan. The New Facility provides for (i) a term loan facility in the amount of $205.9 million,
(ii) a delayed-draw term loan facility in the amount of $34.1 million, and (iii) a revolving credit
facility in the amount of $44.0 million. The proceeds from the New Facility were used to refinance
the facilities outstanding under the existing Credit Agreement (discussed below) and will be used
to fund capital expenditures and provide for additional liquidity. The termination date of the New
Facility is the earlier of (i) 14 days prior to the maturity of the Senior Subordinated Notes (due
October 15, 2007), including extensions or refinancing or (ii) October 1, 2010. The current
termination date for the New Facility is October 1, 2007, and amounts outstanding have been
included in Long-term debt on the Companys Condensed Consolidated Balance Sheet at September 30,
2006. In the event that the Senior Subordinated Notes are not extended or refinanced prior to
filing our Annual Report on Form 10-K for the year ending December 31, 2006 with the SEC, amounts outstanding under the New Facility will become due and owing on
October 1, 2007 and will be included as current maturities of long-term debt on the Companys
Consolidated Balance Sheet at December 31, 2006. See Note 15 of Notes to Condensed Consolidated
Financial Statements for more information relating to the New Facility.
As of September 30, 2006, we had in place a Credit Agreement with a group of financial
institutions led by JPMorgan that provided for a five-year initial amount $175 million term loan
maturing in October 2009 in addition to a $100 million revolving credit facility expiring in
September 2008. The Credit Agreement was secured by substantially all the Companys real and
personal property, including member obligations under installment contracts. The Credit Agreement
contained restrictive covenants that included 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;
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. At September 30, 2006, there was
$60 million borrowed and $15.4 million in letters of credit issued under the revolving credit
facility, and $135.9 million outstanding on the term loan. Amounts outstanding under the Credit Agreement
were repaid on October 16, 2006 using proceeds from the New Facility.
We are subject to certain financial covenants in the New Facility, including minimum cash
EBITDA and liquidity requirements tested monthly. While we currently believe that we will be in
compliance with the financial covenants in the New Facility through the third quarter of 2007, and
have taken and will take certain liquidity raising, revenue enhancement and cost savings actions in
that regard, there can be no assurance as to financial covenant compliance. The New Facility also
contains various non-financial covenants similar to those in the Credit Agreement. In addition, the
New Facility contains a covenant that requires the Company to raise
$20 million of additional liquidity by December 31, 2006 from permitted sale/leasebacks, permitted asset sales or
issuances of capital stock. If we are unable to satisfy these covenants, absent a waiver by the
lenders, we will be unable to access the revolving credit facility and the delayed draw term loan
and, therefore, be unable to satisfy our obligations and operate our business. In addition, as a
result of not satisfying a covenant, an event of default could occur under the New Facility and
cross-defaults could occur under the indentures governing the Senior Notes and the Senior
Subordinated Notes. If such events were to occur, we would not be able to draw on our revolving
credit and delayed draw term loan facilities and the lenders and holders could accelerate the obligations under these
instruments and we would be unable to satisfy those obligations.
Consent Solicitations
We are subject to certain financial reporting covenants under the indentures governing the
Senior Notes and the Senior Subordinated Notes. On April 10, 2006, we completed the consent
solicitations to amend the indentures governing the Senior Notes and the Senior Subordinated Notes
to waive any default through certain dates 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 quarters ended March 31, 2006 and June 30, 2006.
In connection with the consent solicitations on March 30, 2006, we entered into the Third
Amendment and Waiver with the lenders under our Credit Agreement that among other things 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, permitted payment of the consent fees to the holders of the Senior
Notes and the Senior Subordinated Notes and excluded fees and expenses incurred in connection with
the consent solicitation from the computation of financial covenants.
42
In connection with these consents, we issued 1,956,195 shares of unregistered common stock
valued at $17.4 million and paid $0.8 million in fees to the holders of the Senior Notes and the
Senior Subordinated Notes, paid the lenders under the Credit Agreement $2.5 million in fees, and
recorded $20.7 million in deferred finance charges. Additionally, on April 11, 2006, we 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
Notes and Senior Subordinated 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, we entered into the Fourth Amendment to the Credit Agreement which extended
the 10-day period to 28 days after which a cross-default will occur upon receipt of any financial
reporting covenant default notice for the third quarter of 2006 under the indentures governing the
Senior Notes or Senior Subordinated Notes. We paid the lenders under the Credit Agreement fees of
$0.5 million in connection with the Fourth Amendment. Pursuant to the New Facility, the
cross-default period has been extended to 28 days from any future financial covenant default
notices received under the indentures. If in the future we are unable to file our financial reports
on a timely basis and cannot obtain additional consents from our bondholders and lenders and such a
cross-default or indenture event of default occurs, the lenders under the New Facility and the
holders of the Senior Notes and Senior Subordinated Notes could accelerate the obligations under
these instruments and we would be unable to satisfy those obligation and continue operating our
business.
Other Secured Debt
The Companys unrestricted Canadian subsidiary was not in compliance with the terms of its
credit agreement at September 30, 2006. As a result, the outstanding amount of $0.5 million has 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 June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return, and provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This Interpretation is effective for
fiscal years beginning after December 15, 2006. Bally is currently assessing the impact of the
Interpretation on its financial statements.
In July 2006, the FASB issued Staff Position (FSP) on FAS 13, FSP FAS 13-2, Accounting for
a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a
Leveraged Lease Transaction. FSP FAS 13-2 addresses how a change or projected change in the timing
of cash flows relating to income taxes generated by a leveraged lease transaction affects the
accounting by a lessor for that lease and amends FAS 13, Accounting for Leases. FSP FAS 13-2 is
effective for fiscal years beginning after December 15, 2006 with earlier application permitted.
Bally is evaluating the impact, if any, of FSP FAS 13-2 on its financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (FAS 157). This Standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We have not yet determined
the effect, if any, the adoption of FAS 157 will have on our financial position, results of
operations or cash flows.
In
September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB
43
108 eliminates the diversity of practice surrounding how public companies quantify financial
statement misstatements. It establishes an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of the companys
financial statements and the related financial statement disclosures. We do not expect SAB 108 to
have a material impact on our financial condition or results of operations. SAB 108 must be applied
to annual financial statements for their first fiscal year ending after November 15, 2006.
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 revolving credit and term loan balance under its Credit Agreement
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 nine months ended September 30, 2006, a 100 basis point change in rates would have changed
interest expense by approximately $1.5 million for the nine 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% (11.38% at September 30,
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 $1.5 million for the nine 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.
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 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 September 30, 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 in internal controls over financial reporting described in our Annual Report on Form
10-K for the year ended December 31, 2005, our management, including our PEO and PFO, determined
the Companys disclosure controls and procedures were not effective as of September 30, 2006 or the
filing date of this Form 10-Q. 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.
44
Changes in Internal Control over Financial Reporting (ICFR)
Management is committed to improving the overall disclosure controls and procedures within the
Company and to remediating the material weaknesses in internal controls
over financial reporting identified in our Annual Report on Form 10-K for the
year ended December 31, 2005, and to implement mitigating controls where necessary.
Therefore, as part of our remediation efforts, the Company has
developed a formal remediation plan which it has split into 2006 and 2007 phases, targeting
specific material weaknesses for remediation during each of these periods. Remediation includes
effective re-design of control procedures and verification, through
managements self-assessment
and testing by the Companys Internal Audit Department and its external auditors, that the revised
control procedures are operating effectively. The Companys
remediation efforts are ongoing, and there can be no assurance that
remediation will be effectively implemented within the targeted time
periods. The remediation timeline may extend if tests
indicate that control deficiencies remain.
The
2006 phase focuses on the following areas: leases, accrued liabilities, capitalized software, equity compensation, journal
entry preparation and review and account reconciliation preparation and review, each of which is
described in detail below.
Accounting for Leases
The Company is enhancing the policies and procedures related to (i) recording rent expense on
a straight-line basis over the lease term, when appropriate, and to recording a related deferred
rent obligation and (ii) the review and approval of the accounting for landlord incentives. In
addition, the Company is enhancing its procedures to help ensure that (i) leasehold improvements
are properly depreciated over the lesser of the economic useful life
or the lease term and (ii)
leases are appropriately accounted for as capital or operating. The Company is also developing
policies and procedures to identify, value, and disclose contingent liabilities related to lease
guarantees.
Accounting for Accrued Liabilities
The Company is developing a monitoring program to periodically review its assumptions with
respect to workers compensation, health care and general liability risk exposures. The Company is
enhancing its procedures to (i) identify, value and disclose contingent liabilities related to
legal claims and litigation, (ii) evaluate liabilities related to its obligations to former members
to refund member fees in future periods and (iii) timely communicate liabilities incurred and
review invoices paid in the subsequent periods to ensure that liabilities are recorded in the
appropriate period. In addition, the Company is enhancing its policies and procedures to identify
and value escheatment obligations, including the identification of escheatable property, and has
engaged a third party to help value the escheatment obligation. Further, Company is enhancing the
account reconciliation procedures relating to commission and other payroll-related liabilities and
is developing policies and procedures to identify, value and disclose obligations related to
accrued liabilities. The Company has also discontinued assignment of membership receivables to
third parties; therefore, no new procedures were developed. However, the Company has instituted
monitoring procedures to verify on an ongoing basis that membership
receivables are not assigned to third parties.
Accounting for Computer Software
The Company is enhancing its policies and procedures to ensure appropriate determination,
review, adequate supporting documentation and proper valuation of capitalized expenditures relating
to computer software development for internal use.
Equity Compensation Monitoring and Review Procedures
The Company is developing a control checklist and additional review procedures with respect to
equity compensation plans designed to ensure that events under the equity compensation plans are
properly recorded and disclosed.
Financial Statement Preparation and Review Procedures
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Journal Entry Preparation and Review Procedures:The Company
is modifying the journal entry preparation process and is developing a checklist designed
to ensure that journal entries have the proper supporting documentation and are reviewed
timely by an independent reviewer. The Company is in the process of preparing a complete
list of all recurring journal entries. |
45
|
|
|
Account Reconciliation Preparation and Review Procedures:
The Company is modifying
the account reconciliation process designed to help ensure that (i) accounts are reconciled
on a timely basis, (ii) the reconciliation is independently reviewed, (iii) any reconciling
items are cleared on a timely basis and (iv) the accuracy of the underlying supporting
detail, or sub ledger, has been substantiated and independently reviewed. The Company is
also developing a control checklist designed to ensure that accounting personnel are
complying with the account reconciliation standards. |
To further improve internal control over financial reporting, the Company has committed to
increase corporate management review and oversight of all accounting and financial reporting
functions. Managements remediation plan for 2006 has assigned responsibility for remediation of
key deficiencies to specific executives to help ensure that new policies and procedures are created
and implemented to remediate existing material weaknesses or significant deficiencies. In addition,
management updates the Audit Committee regularly on the progress of the remediation process.
Management believes that these actions will assist with the remediation of the identified
material weaknesses. However, the Company has not completed its
evaluation of the
corrective processes and procedures, including documentation and
testing, as it will be required to do for the fiscal year ending
December 31, 2006 under Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules and
regulations. The Company cannot provide assurances that these material weaknesses will be
remediated prior to the conclusion of this evaluation, or that it will not uncover additional
material weaknesses. In addition, the Companys projections of the effectiveness of internal
control over financial reporting in future periods are subject to the risk that the controls may
become inadequate because of changes in conditions (including, but not limited to, lack of
resources) or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
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, and adding
the Companys former outside audit firm, Ernst & Young LLP as an additional defendant. On July 12,
2006, the Court granted defendants motions to dismiss the amended consolidated complaint and
dismissed the complaint in its entirety, without prejudice to plaintiffs filing an amended
complaint on or before August 14, 2006. An amended complaint was filed on August 14, 2006. The
Company filed a motion to dismiss the amended complaint on September 28, 2006. 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, John Rogers, Jr., Lee Hillman, John Dwyer, J.
Kenneth Looloian, Stephen Swid, George Aronoff, Martin Franklin and Liza Walsh, who are current or
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
46
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. Shortly before oral argument on that motion, the parties executed a Memorandum of
Understanding memorializing a settlement in principle of all claims. The Court has continued the
motion to dismiss pending completion and Court approval of a final settlement agreement. It is not
yet possible to determine the ultimate outcome of these actions.
Stockholder Derivative Lawsuit in Illinois Federal Court
On April 5, 2005, a stockholder derivative lawsuit was filed in the United States District
Court for the Northern District of Illinois, purportedly on behalf of the Company against certain
current and former officers and directors of the Company by another of the Companys stockholders,
Albert Said. This lawsuit asserts claims for breaches of fiduciary duty in failing to supervise
properly its financial and corporate affairs and accounting practices. Plaintiff also requests
restitution and disgorgement of bonuses and trading proceeds under Delaware law and the
Sarbanes-Oxley Act of 2002. By stipulation of the parties, the lawsuit was stayed pending
restatement of the Companys financial statements in November 2005. An amended consolidated
complaint was filed on February 27, 2006. Bally filed a motion to dismiss on May 30, 2006, directed
solely to the issues of whether the court has subject matter jurisdiction and whether plaintiffs
have adequately alleged demand futility as required by applicable Delaware law in order to
establish standing to sue derivatively. That motion is currently pending. It is not yet possible to
determine the ultimate outcome of this action.
Individual Securities Action in Illinois
On March 15, 2006, a lawsuit captioned Levine v. Bally Total Fitness Holding Corporation, et
al., Case No. 06 C 1437 was filed in the United States District Court for the Northern District of
Illinois against the Company, certain of its former and current officers and directors, and its
former outside audit firm, Ernst & Young, LLP. Plaintiffs complaint alleges violations of Sections
10(b), 18 and 20(a) of the Exchange Act, SEC Rule 10b-5, and the Illinois Consumer Fraud and
Deceptive Practices Act, as well common law fraud in connection with the Companys restatement. The
Court found this action related to the consolidated securities class action discussed above, and
transferred it to the judge before whom the class action cases were pending. After defendants filed
motions to dismiss the complaint and after the Court granted motions to dismiss the class action
cases, plaintiff moved for leave to amend its complaint. On July 19, 2006, the Court denied
plaintiffs motion and ordered completion of briefings on defendants motions to dismiss on statute
of limitations issues. On September 29, 2006, the Court granted defendants motion to dismiss
plaintiffs Section 18 claim as untimely, denied the motion as to Sections 10(b) and 20(a),
dismissed Ernst & Young, LLP as a defendant and granted plaintiff leave to amend his complaint. An
amended complaint was filed on November 3, 2006. 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.
On July 27, 2006, the presiding Magistrate Judge issued proposed Findings and Conclusions
recommending that summary judgment be entered in favor of all defendants on all remaining claims.
The parties thereafter reached agreement under which plaintiffs would dismiss their case without
appealing the Magistrate Judges recommendation. The parties executed a final Settlement Agreement
on October 16, 2006, and expect to soon file a stipulation of dismissal.
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, Case No. 03-CV-10295 MEL, 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 cash and shares of Bally stock. The
2005 amended complaint asserted new claims against the Company for violation of state securities
laws on the basis of allegations that misrepresentations in Ballys financial statements resulted
in Ballys stock price to be
47
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 former 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 were due on October 16, 2006. A tentative settlement
agreement was reached on October 4, 2006, wherein plaintiffs agreed to dismiss all claims and
execute mutual releases, which was memorialized in a final settlement agreement on October 18,
2006.
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.
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 requested 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. The motion to dismiss was granted on September 11, 2006.
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 requested the Court to declare the Companys
excess policy for the year 2002-2003 void, voidable and/or subject to rescission. Defendants filed
motions to dismiss or stay the proceedings on July 10, 2006, which motions are currently pending.
Defendants filed a motion for advancement of defense costs and to compel interim funding on
October 20, 2006.
On August 22, 2006, the Companys primary directors and officers insurance provider for the
policy years 2001-2002 and 2002-2003 filed a complaint captioned Great American Insurance Company
v. Bally Total Fitness Holding Corporation, Case No. 06 C 4554 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 2001-2002 and
2002-2003 policy years was materially false and misleading. Plaintiff requested the Court to
declare the Companys primary policies for those years void ab initio and rescinded, and to award
plaintiff all sums that plaintiff has paid pursuant to an Interim Funding and Non-Waiver Agreement
between the parties, which consists of the $10,000,000 limit of the 2002-2003 primary policy and
additional amounts paid pursuant to
48
the 2001-2002 primary policy. The Company filed a motion to dismiss or stay the proceedings
on October 12, 2006, which motion is currently pending.
It is not yet possible to determine the ultimate outcome of these actions.
None of the settlements or agreements in principle regarding settlements discussed above will,
individually or in the aggregate, have a material effect on the Companys liquidity or results of
operations.
Other
The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, from time to time, customer
complaints are investigated by various governmental bodies. In the opinion of management, none of
these other complaints or investigations currently pending should have a material adverse effect on
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.
Item 1A. Risk Factors
This Quarterly Report on Form 10-Q should be read in conjunction with the risk factors
disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2005. In addition, the factors discussed in Part 1 Item 2- Managements Discussion and Analysis
of Financial Condition and Results of Operations and the following factors may affect our future
results. If any of the following risks actually occur, our business, financial condition or
operating results could be materially adversely affected. In such case, the trading price of our
underlying common stock could decline and investors may lose part or all of their investment.
Additional risks and uncertainties, not presently known to us or that we currently deem immaterial,
may also impair our business operations. As a result, we cannot predict every risk factor, nor can
we assess the impact of all of the risk factors on our business or the extent to which any factor,
or combination of factors, may impact our financial condition and results of operations.
Our substantial leverage could adversely affect our financial health.
We have a substantial amount of debt. As of September 30, 2006, our total consolidated debt
was approximately $747.3 million. Our substantial indebtedness could adversely affect our financial
health by, among other things:
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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of
clubs and other general corporate requirements; |
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continuing to require us to dedicate a substantial portion of any cash flows from operations to make interest payments on
our debt, which reduces funds available for operations and future business opportunities;
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increasing our vulnerability to adverse economic conditions; |
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limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
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making us more highly leveraged than some of our competitors, which could potentially decrease our ability to compete in
our industry. |
49
Our inability to comply with covenants under the New Facility and indentures governing our Senior
Notes and Senior Subordinated Notes could adversely impact our ability to operate our business.
The New Facility and indentures governing our Senior Notes and Senior Subordinated Notes
contain covenants that include, among others, financial reporting covenants; restrictions on
incurring additional indebtedness; incurring liens; certain types of payments (including capital
stock dividends and redemptions, and payments on existing indebtedness); capital expenditures;
investments; and sale and leaseback transactions. Additionally, the New Facility contains a
covenant that requires us to enter into transactions that will raise $20 million of liquidity by
December 31, 2006. We closed a sale/leaseback transaction with respect to four properties on
October 25, 2006, which generated approximately $8.9 million of
proceeds to date that applies to the $20 million requirement. While we intend to close on other transactions with sufficient net proceeds to
meet the covenant requirement, there can be no assurance that future liquidity transactions will be
consummated.
In addition, the New Facility requires the Company to meet certain minimum cash EBITDA and
minimum liquidity tests, as such tests are defined in the New Facility. If we are unable to comply
with these covenants there would be a default under the New Facility which could result in a
cross-default under the indentures governing the Senior Notes and Senior Subordinated Notes. Upon a
default under the New Facility, we would not have access to the revolving credit facility and the
delayed draw term loan and would not have adequate liquidity to meet our operating needs. Changes in
economic or business conditions, results of operations or other factors could also cause the
Company to default under its debt instruments. A default, if not waived by Ballys lenders, could
result in acceleration of the obligations under the New Facility and the Senior Notes and Senior
Subordinated Notes, which we would be unable to satisfy.
In 2004, 2005 and the first two quarters of 2006, we did not comply with the financial
reporting covenants under the indentures governing our Senior Notes and Senior Subordinated Notes
because we did not make our periodic filings with the SEC on a timely basis; however, we obtained
waivers of these covenants for those periods and filed within the agreed extended period. Pursuant
to the New Facility, the cross-default period has been extended to 28 days from any future
financial covenant default notices received under the indentures.
Nonetheless, we cannot assure you that we will be able to comply
with these financial reporting covenants in the future. If we are unable to
file our financial reports on a timely basis and cannot obtain additional consents from our
bondholders and lenders and such a cross-default or indenture event of default occurs, the lenders
under the New Facility and the holders of the Senior Notes and Senior Subordinated Notes could
accelerate the obligations under these instruments and we would be unable to satisfy those
obligation and continue operating our business.
Recent declines in our liquidity and upcoming obligations on our debt instruments will require us
to obtain additional financing and/or restructure or refinance our debt. If we are unable to do so,
we will not be able to continue to operate our business.
The Company requires substantial cash flows to fund its capital spending and working capital
requirements. We maintain a substantial amount of debt, the terms of which require significant
interest payments each year. Our liquidity (cash and unutilized revolving credit facility) declined
by $14.0 million from $68.9 million to $54.9 million during the first nine months of 2006. We
currently anticipate our cash flow and availability under our revolving credit facility and delayed
draw term loan will be sufficient to meet our expected needs for working capital and other cash
requirements through the first three quarters of 2007. However, as discussed below, we do not
believe that we will have sufficient liquidity in the event we are
unable to refinance or extend the maturity of our Senior
Subordinated Notes and as a result our New Facility terminates on October 1, 2007. Additionally,
our cash flows and liquidity may be negatively impacted by various
items, including declines in membership revenues, 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 noteholders if required
and unexpected capital requirements. We have substantial interest payments
due on our Senior Notes in January and July 2007 and our Senior Subordinated Notes in April 2007,
and we also may be required to provide additional letters of credit or cash deposits to
support certain insurance programs, which will reduce available liquidity under our revolving
credit facility. Accordingly, we cannot assure you we will have sufficient liquidity to meet all
known and unforeseen requirements.
On October 1, 2007, our New Facility will terminate in the event that the Senior Subordinated
Notes due in October 2007 have not been refinanced or their maturity extended. If this occurs, we
will not have access to our revolving credit and delayed draw term
loan facilities and amounts
outstanding under the New Facility will become due. Absent an agreement by the lenders to extend
the maturity of the New Facility, we will not have sufficient liquidity to operate our business and
will be unable to satisfy the New Facility obligations when due. If such events were to occur, the
holders of the Senior Notes and Senior Subordinated Notes could accelerate the obligations under
those instruments, and we would be unable to satisfy those obligations. The Companys process to
evaluate strategic alternatives, which prior to August 2006 had focused on a sale or merger of the
Company, is now focused on refinancing alternatives. In order to effect a refinancing of the Senior
Subordinated Notes, we will 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.
50
In the event we fail to maintain adequate liquidity, as a result of decreased revenues or
increased expenses or as a result of a default under our New Facility
(whether directly or as a result
of a cross-default to other indebtedness) and are unable to draw on our revolving credit facility
and our delayed draw term loan, we would be unable to meet our obligations and continue operating
our business.
Our success depends in significant part upon the continuing service of management and the Companys
ability to attract a sufficient number of qualified personnel to meet its business needs.
Our success depends in significant part upon the continuing service and capabilities of our
management team. The failure to retain management could have a material adverse effect on our
business. Our success will be dependent on our continued ability to attract, retain and motivate
highly skilled employees. On August 11, 2006, we announced the
departure of Mr. Toback as our
Chairman, President and Chief Executive Officer, and the appointment of Don R. Kornstein as interim
Chairman and Barry R. Elson as acting Chief Executive Officer. Each of our interim Chairman and
acting Chief Executive Officer was and remains a member of the Board of Directors. The Board of
Directors is currently conducting a search for a permanent Chief Executive Officer. We cannot
assure you that we will be able to identify and hire a permanent Chief Executive Officer. Even if
we are successful at finding and hiring a suitable Chief Executive Officer, leadership transitions
can be inherently difficult to manage and may cause disruption to our business or some turnover in
our workforce or management team.
In addition, pursuant to the terms of their respective employment agreements, the Companys
Chief Administrative Officer and Chief Operating Officer may terminate their employment with the
Company within 120 days after the date that Paul A. Toback is no longer the Chief Executive Officer
of the Company and receive a lump-sum payment of 60% of their annual base salary and target annual
bonus. There is no guarantee that such officers will not exercise their termination right. Further,
there can be no assurance that the Company will be able to find a suitable replacement if either
officer resigns.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Common Stock
The Company does not have a share repurchase program and does not intend to repurchase shares
of common stock, which would generally be prohibited by the terms of the New Facility and the
indentures governing the Senior Notes and the Senior Subordinated Notes.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:
3.1 |
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Amendment to the Bylaws of Bally Total Fitness Holding Corporation
(incorporated by reference to Exhibit 3.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, filed August 11, 2006). |
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4.1 |
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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). |
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4.2 |
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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).
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4.3 |
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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). |
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4.4 |
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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). |
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+10.1 |
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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). |
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10.2 |
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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, dated March 22, 2006 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated April 18, 2006). |
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10.3 |
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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., dated March 22, 2006 (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, file no.
001-13997, dated April 18,
2006). |
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10.4 |
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Consent Agreement by and between Bally Total Fitness Holding
Corporation and Pardus European Special Opportunities Master Fund
L.P., dated March 22, 2006 (incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K, file no. 001-13997, dated April 18,
2006). |
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10.5 |
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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). |
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10.6 |
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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). |
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10.7 |
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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). |
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+10.8 |
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Confidential Settlement and General Release, dated July 21, 2006,
between the Company and Carl J. Landeck. (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K, file
no. 001-13997, filed August 7, 2006). |
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+10.9 |
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Amendment to Employment Agreement between Bally Total Fitness
Holding Corporation and Paul Toback, dated August 6, 2006
(incorporated by reference to Exhibit 10.9 to the Companys
Quarterly Report on Form 10-Q, file no. 001-13997, for the three
months ended June 30, 2006). |
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+10.10 |
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Confidential Settlement Agreement and General Release, dated August
10, 2006, between the Company and Paul A. Toback (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, filed August 11, 2006). |
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+10.11 |
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Form of Indemnification Agreement between the Company members of
the Board of Directors (incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K, file no. 001-13997,
filed September 13, 2006). |
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+10.12 |
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Amendment to Employment Agreement, dated September 14, 2006,
between the Company and Marc D. Bassewitz (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, filed September 15, 2006). |
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+10.13 |
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Amendment to Employment Agreement, dated September 14, 2006,
between the Company and James A. McDonald (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form
8-K, file no. 001-13997, filed September 15, 2006). |
52
10.14 |
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Amended and Restated Credit Agreement, dated as of October 16,
2006, by and among, Bally Total Fitness Holding Corporation, as
Borrower, the several banks and other financial institutions
parties thereto, JPMorgan Chase Bank, N.A., as Agent, and Morgan
Stanley Senior Funding, Inc., as Syndication Agent (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, filed October 20, 2006). |
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*10.15 |
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Reaffirmation of the Guarantee And Collateral Agreement And
Operating Bank Guaranty, dated October 16, 2006, made by the
Company in favor of JPMorgan Chase Bank, N.A., as Collateral Agent. |
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* 31.1 |
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Certification of the Acting Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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* 31.2 |
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Certification of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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* 32.1 |
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Certification of the Acting 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. |
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99.1 |
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Managements Report on Internal Control Over Financial Reporting,
included in Item 9A Controls and Procedures from the Companys
Annual Report on Form 10-K for the year ended December 31, 2005
(incorporated by reference to Exhibit 99.1 to the Companys
Quarterly Report on Form 10-Q for the three
months ended June 30, 2006, file no. 001-13997, filed
September 11, 2006). |
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+ |
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Management contract or compensatory plan or arrangement. |
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* |
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Filed herewith. |
53
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.
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BALLY TOTAL FITNESS HOLDING CORPORATION |
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Registrant
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By:
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/s/ Ronald G. Eidell
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Ronald G. Eidell |
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Senior Vice President and Chief Financial Officer |
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(principal financial officer) |
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Dated: November 9, 2006
54