e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
for the quarterly period ended March 31, 2007
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 o No: þ
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 August 31, 2007, there were 41,221,512 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 |
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 |
BTF/CFI, Inc. |
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Delaware |
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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 |
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 |
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 |
The address for service of each of the additional registrants is c/o Bally Total Fitness
Holding Corporation, 8700 West Bryn Mawr Avenue, 3rd Floor, Chicago, Illinois 60631, telephone
773-380-3000. The primary industrial classification number for each of the additional registrants
is 7991.
In this Quarterly Report on Form 10-Q, references to the Company, Bally, we, us, and
our mean Bally Total Fitness Holding Corporation and its consolidated subsidiaries.
BALLY TOTAL FITNESS HOLDING CORPORATION
Quarterly Report on Form 10-Q for the Period Ended March 31, 2007
TABLE OF CONTENTS
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Page |
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Number |
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INTRODUCTORY STATEMENT |
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1 |
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FORWARD-LOOKING STATEMENTS |
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2 |
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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 March 31, 2007 (Unaudited) and December 31, 2006 |
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Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2007 and 2006 |
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5 |
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Consolidated Statement of Stockholders Deficit and Comprehensive Income (Unaudited) for the Three
Months Ended March 31, 2007 |
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6 |
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Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2007 and 2006 |
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7 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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8 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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32 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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46 |
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Item 4. Controls and Procedures |
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46 |
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PART II. OTHER INFORMATION |
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47 |
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Item 1. Legal Proceedings |
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47 |
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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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49 |
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Item 3. Defaults Upon Senior Securities |
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50 |
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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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INTRODUCTORY STATEMENT
On July 31, 2007, Bally Total Fitness Holding Corporation (the Company) and substantially
all of its domestic affiliates (collectively, the Debtors) filed voluntary petitions for relief
commencing reorganization cases (the Chapter 11 Cases) under chapter 11 of the United States
Bankruptcy Code (the Bankruptcy Code) with the United States Bankruptcy Court for the Southern
District of New York (the Bankruptcy Court). As part of the Chapter 11 Cases, the Debtors also
filed with the Bankruptcy Court their Joint Prepackaged Chapter 11 Plan of Reorganization dated
June 27, 2007 (the Original Plan) and accompanying Disclosure Statement of same date, which,
among other things, described the terms of the Original Plan.
The Debtors will continue to operate their businesses as debtors-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy
Code and orders of the Bankruptcy Court.
The Debtors conducted a prepetition solicitation of consents to accept the Original Plan in
July 2007. The Original Plan was accepted by 98.8% in number and $203,877,690 (or 99.9%) in
aggregate principal amount of the voting holders of the Companys 10-1/2% Senior Notes due 2011
(the Senior Notes) and by 78.0% in number and $276,532,800 (or 98.9%) in aggregate principal
amount of the voting holders of the Companys 9-7/8% Senior Subordinated Notes due 2007 (the
Senior Subordinated Notes). After filing the Original Plan, the Debtors extensively negotiated
modifications to the Plan with equity holders Harbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund, L.P. (collectively Harbinger). On August 13
and 17, 2007, the Company filed an amended Plan (the Amended Plan) with the Bankruptcy Court
which, along with an Investment Agreement with Harbinger and Restructuring Support Agreements with
Harbinger and other parties, reflect a Harbinger-led restructuring and recapitalization and the
support of critical constituencies of the Company. On August 21, 2007, the Bankruptcy Court (i)
approved the modifications to the Original Plan and held that the Company did not need to resolicit
acceptances of the Amended Plan and (ii) authorized the Company to enter into the Investment
Agreement and new restructuring support agreements. On September 17, 2007, the Bankruptcy Court
confirmed the Amended Plan, which, assuming the conditions to consummation of the Amended Plan are
satisfied, should result in completion of the Harbinger-led restructuring during late September or
early October 2007.
Prior to the Companys bankruptcy filing, it faced substantial liquidity concerns, and would
not have had sufficient operating cash flows to meet its expected needs for working capital,
capital investment in operations, interest expense and debt repayments through December 31, 2007.
The Company did not make the interest payment of $14.8 million due April 16, 2007 on the $300
million of its Senior Subordinated Notes; the Company also did not make the interest payment of
$12.3 million due July 16, 2007 on the $235 million of its Senior Notes. Even if the Amended Plan
becomes effective as anticipated, the Company will emerge from bankruptcy in late September or
early October 2007, but will still be highly leveraged and have substantial cash interest expense
obligations. See Note 11 of Notes to Condensed Consolidated Financial Statements for more detail on
the Amended Plan.
The information and discussion in this Quarterly Report on Form 10-Q (the Form 10-Q),
should be considered in the context of the following overall trends and factors:
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The Companys financial and liquidity positions have been
deteriorating and are expected to continue to deteriorate. This
situation reflects several factors discussed in this Form 10-Q. |
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The Company reported losses from continuing operations for the first
quarter 2007 and for the years 2002 through 2005; income from
continuing operations for 2006 was modest. Impairment charges in 2006
associated with goodwill and long-lived assets were $39.8 million and
were $62.9 million in the three-year period 2004 through 2006. The
primary drivers of these impairment charges are the declining
projections of future operating cash flow. |
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The Companys revenue recognition policies require the deferral of a
majority of membership cash payments to be recognized in subsequent
periods over the expected membership term of members. As a result,
revenue recognition does not reflect current cash collection trends.
Additionally, the level of our deferred revenue is highly sensitive to
changes in estimated membership term. Negative attrition expectations
result in downward adjustments of deferred revenue which are reflected
in larger amounts of recognized revenue. The Companys change in
estimated term length effected in the fourth quarter of 2006 resulted
in a reduction of deferred revenue of $71.0 million and increased
reported revenue by the same amount. Through March 31, 2007, we
increased revenue recognized by $1.9 million and decreased deferred
revenue to adjust to our current estimate of membership term. Through
June 30, 2007, adjustments of estimated term length have resulted in
reductions in deferred revenue and increased reported revenue by $6.6
million. |
1
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The Companys total membership cash collections declined in the first
quarter 2007 and in each quarter of 2006 when compared to the prior
year levels. Total 2006 membership cash collections were $757.6
million, down $25.4 million from 2005 collections of $783.0 million.
Approximately $10.9 million (43%) of the year-over-year decline in
total membership cash collections occurred in the fourth quarter of
2006. Cash collections for the three months ended March 31, 2007 and
six months ended June 30, 2007 were $181.8 million and $350.6 million,
respectively, down $12.8 million and $30.8 million, respectively, from
the 2006 periods. |
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The Companys primary markets have become more competitive, with
competitors opening new fitness centers. At the same time, the
Companys ability to invest in its fitness centers has been
constrained by its deteriorating financial and liquidity condition. |
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q, including, without limitation, statements
relating to (i) our plans, strategies, objectives, expectations, intentions, and adequacy of
resources, (ii) our expectation that our strategies will enable us to create economic value, and
(iii) the anticipated future performance of our business are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934 (as amended, the Act or the
Exchange Act).
Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. These statements are based on beliefs and assumptions
by our management, and on information currently available to management. Forward-looking statements
speak only as of the date they are made, and we undertake no obligation to update publicly any of
them in light of new information or future events. In addition, these forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
A number of factors could cause actual results to differ materially from those contained in
any forward-looking statement. These factors include, among others:
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the outcome of our Chapter 11 Cases and consummation of our Amended Plan under the
current terms or at all; |
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the length of time it will take us to complete the restructuring contemplated by the
Amended Plan; |
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the effect of any alternative proposals or competing plans of reorganization; |
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the success of our Amended Plan and the outcome of the restructuring in general; |
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the ability to maintain existing or obtain new sources of debt or equity financing, on
acceptable terms or at all, to satisfy our cash needs and obligations; |
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the response of creditors, customers and suppliers, including financial intermediaries
such as credit card payment processors, to the matters discussed herein, particularly as
those matters relate to liquidity and the Amended Plan, and the presence of an explanatory
paragraph in the audit report on our consolidated financial statements for the year ended
December 31, 2006, indicating that substantial doubt exists as to our ability to continue
as a going concern; |
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the effect of material weaknesses in internal control over financial reporting on our
ability to prepare financial statements and file timely reports with the Securities and
Exchange Commission (the SEC) or as required by our debt agreements; |
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the success of operating initiatives, advertising and promotional efforts to attract and
retain members; |
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competition, including the ongoing effect of increased competition from well-financed
competitors and our limited ability to invest in capital improvements due to our
constrained liquidity and overall financial condition; |
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the acceptance of our product and service offerings; |
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changes in business strategy or plans; |
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the refusal of our suppliers to provide key products and services, or any requirement by
suppliers that we change the terms and conditions associated with these products and
services; |
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the outcome of SEC and Department of Justice investigations; |
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the existence of adverse publicity or litigation (including stockholder litigation and
insurance rescission actions), the outcome thereof and the costs and expenses associated
therewith; |
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the changes in, or the failure to comply with, government regulations; |
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the ability to attract, retain and motivate highly skilled employees, including a
permanent Chief Executive Officer and Chief Financial Officer; |
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the business abilities and judgment of personnel; |
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general economic and business conditions; and |
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other factors described in this Form 10-Q, including the risk factors identified in Item
1A Risk Factors, and prior filings of the Company with the SEC, including the Annual
Report on Form 10-K for the year ended December 31, 2006. |
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALLY TOTAL FITNESS HOLDING CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
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March 31 |
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December 31 |
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2007 |
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2006 |
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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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$ |
71,873 |
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$ |
34,799 |
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Prepaid expenses |
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19,094 |
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18,937 |
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Other current assets |
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22,771 |
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21,479 |
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Current assets of discontinued operations held for sale |
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1,106 |
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1,118 |
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Total current assets |
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114,844 |
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76,333 |
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Property and equipment, less accumulated depreciation and amortization of
$565,822 and $571,381 |
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242,850 |
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244,052 |
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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 $528 and $528 |
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6,507 |
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6,507 |
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Intangible assets, net of accumulated amortization of $9,562 and $9,527 |
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378 |
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413 |
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Deferred financing costs, net of accumulated amortization of $33,468 and $28,661 |
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23,151 |
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27,922 |
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Other assets |
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19,901 |
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17,442 |
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Non-current assets of discontinued operations held for sale |
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4,501 |
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4,368 |
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$ |
431,866 |
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$ |
396,771 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
48,989 |
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$ |
49,197 |
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Income taxes payable |
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1,219 |
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1,430 |
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Accrued liabilities |
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111,819 |
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115,435 |
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Current maturities of long-term debt |
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801,489 |
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513,913 |
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Deferred revenues |
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273,645 |
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274,399 |
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Current liabilities of discontinued operations held for sale |
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5,664 |
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5,424 |
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Total current liabilities |
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1,242,825 |
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959,798 |
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Long-term debt, less current maturities |
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11,401 |
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247,434 |
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Deferred rent liability |
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83,322 |
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83,215 |
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Deferred income taxes |
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1,657 |
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|
1,925 |
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Other liabilities |
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52,024 |
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|
42,746 |
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Deferred revenues |
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442,669 |
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449,653 |
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Non-current liabilities of discontinued operations held for sale |
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12,708 |
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12,422 |
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Stockholders deficit |
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(1,414,740 |
) |
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(1,400,422 |
) |
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|
|
|
|
|
|
|
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$ |
431,866 |
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$ |
396,771 |
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See accompanying notes to condensed consolidated financial statements.
4
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
(in thousands, except share data)
(Unaudited)
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Three months ended |
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March 31 |
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2007 |
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2006 |
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Net revenues: |
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|
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|
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Membership services |
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$ |
218,794 |
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$ |
230,531 |
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Retail products |
|
|
9,711 |
|
|
|
11,343 |
|
Miscellaneous |
|
|
4,910 |
|
|
|
4,471 |
|
|
|
|
|
|
|
|
|
|
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233,415 |
|
|
|
246,345 |
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|
|
|
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Operating costs and expenses: |
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Membership services |
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162,469 |
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|
164,676 |
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Retail products |
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8,747 |
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|
|
10,710 |
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Marketing and advertising |
|
|
19,290 |
|
|
|
18,538 |
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General and administrative |
|
|
22,129 |
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|
|
20,834 |
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Net gain on sale of land and building |
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|
(175 |
) |
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|
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Depreciation and amortization |
|
|
10,755 |
|
|
|
13,464 |
|
|
|
|
|
|
|
|
|
|
|
223,215 |
|
|
|
228,222 |
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|
|
|
|
|
|
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Operating income |
|
|
10,200 |
|
|
|
18,123 |
|
|
|
|
|
|
|
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Interest expense, net |
|
|
(25,752 |
) |
|
|
(22,970 |
) |
Other, net |
|
|
509 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
(25,243 |
) |
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|
(22,852 |
) |
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Loss from continuing operations before income taxes |
|
|
(15,043 |
) |
|
|
(4,729 |
) |
Income tax
benefit (provision) |
|
|
160 |
|
|
|
(201 |
) |
|
|
|
|
|
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Loss from continuing operations |
|
|
(14,883 |
) |
|
|
(4,930 |
) |
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|
|
|
|
|
|
|
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Discontinued operations: |
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|
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|
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Loss from discontinued operations |
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(16 |
) |
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|
(775 |
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Gain on disposal |
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|
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38,375 |
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|
|
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|
|
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Income (loss) from discontinued operations |
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(16 |
) |
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|
37,600 |
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|
|
|
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Net income (loss) |
|
$ |
(14,899 |
) |
|
$ |
32,670 |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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Basic income (loss) per common share: |
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|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.37 |
) |
|
$ |
(0.13 |
) |
Income from discontinued operations |
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
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Net income (loss) |
|
$ |
(0.37 |
) |
|
$ |
0.87 |
|
|
|
|
|
|
|
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|
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|
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.37 |
) |
|
$ |
(0.13 |
) |
Income from discontinued operations |
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.37 |
) |
|
$ |
0.87 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Stockholders Deficit and Comprehensive Loss
(in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Other |
|
|
Total |
|
|
|
Shares |
|
|
Par |
|
|
Contributed |
|
|
Accumulated |
|
|
Stock in |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Outstanding |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Treasury |
|
|
loss |
|
|
Deficit |
|
Balance at December 31, 2006 |
|
|
41,286,512 |
|
|
$ |
420 |
|
|
$ |
691,631 |
|
|
$ |
(2,072,051 |
) |
|
$ |
(11,635 |
) |
|
$ |
(8,787 |
) |
|
$ |
(1,400,422 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,899 |
) |
|
|
|
|
|
|
|
|
|
|
(14,899 |
) |
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,851 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533 |
|
Forfeiture of restricted stock |
|
|
(48,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
41,238,012 |
|
|
$ |
420 |
|
|
$ |
692,164 |
|
|
$ |
(2,086,950 |
) |
|
$ |
(11,635 |
) |
|
$ |
(8,739 |
) |
|
$ |
(1,414,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(14,899 |
) |
|
$ |
32,670 |
|
Gain on disposal and income (loss) from discontinued operations |
|
|
16 |
|
|
|
(37,600 |
) |
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(14,883 |
) |
|
|
(4,930 |
) |
Adjustments to reconcile to cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including amortization included in interest expense |
|
|
15,601 |
|
|
|
16,905 |
|
Changes in operating assets and liabilities |
|
|
4,864 |
|
|
|
(2,397 |
) |
Deferred income taxes, net |
|
|
87 |
|
|
|
92 |
|
Loss (gain) on sale of assets |
|
|
251 |
|
|
|
(157 |
) |
Realized gain on sale/leaseback transaction |
|
|
(175 |
) |
|
|
|
|
Stock-based compensation |
|
|
533 |
|
|
|
991 |
|
Cash provided by discontinued operations |
|
|
1,247 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
7,525 |
|
|
|
10,577 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases, advances on and construction of property and equipment |
|
|
(21,395 |
) |
|
|
(11,629 |
) |
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
45,490 |
|
Proceeds from sales of properties |
|
|
|
|
|
|
598 |
|
Cash provided by (used in) discontinued operations |
|
|
(129 |
) |
|
|
1,328 |
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
(21,524 |
) |
|
|
35,787 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net borrowings (repayments) under credit agreement |
|
|
52,500 |
|
|
|
(40,000 |
) |
Repayments of other long-term debt |
|
|
(1,534 |
) |
|
|
(3,952 |
) |
Debt issuance and refinancing costs |
|
|
(35 |
) |
|
|
(2,474 |
) |
Proceeds from issuance of common stock under stock option plans |
|
|
|
|
|
|
151 |
|
Cash used in discontinued operations |
|
|
(165 |
) |
|
|
(1,723 |
) |
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
50,766 |
|
|
|
(47,998 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
36,767 |
|
|
|
(1,634 |
) |
Effect of exchange rate changes on cash balance |
|
|
307 |
|
|
|
164 |
|
Cash, beginning of period |
|
|
34,799 |
|
|
|
17,454 |
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
71,873 |
|
|
$ |
15,984 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in other current and other assets |
|
$ |
(4,080 |
) |
|
$ |
(18,328 |
) |
Increase
(decrease) in accounts payable |
|
|
2,352 |
|
|
|
(8,196 |
) |
Increase
(decrease) in income taxes payable |
|
|
(270 |
) |
|
|
17 |
|
Increase in accrued liabilities |
|
|
10,387 |
|
|
|
26,048 |
|
Increase in other liabilities |
|
|
3,857 |
|
|
|
4,186 |
|
Decrease in deferred revenues |
|
|
(7,382 |
) |
|
|
(6,124 |
) |
|
|
|
|
|
|
|
Change in operating assets and liabilities |
|
$ |
4,864 |
|
|
$ |
(2,397 |
) |
|
|
|
|
|
|
|
Cash payments for interest and income taxes were as follows
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
18,962 |
|
|
$ |
18,495 |
|
Interest capitalized |
|
|
(56 |
) |
|
|
(192 |
) |
Income taxes paid, net |
|
|
23 |
|
|
|
98 |
|
Investing and financing activities exclude the following non-cash transactions
|
|
|
|
|
|
|
|
|
Reclassification of unearned compensation balance to contributed capital |
|
$ |
|
|
|
$ |
5,534 |
|
Property disposal related to sales/leaseback transaction |
|
|
8,973 |
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
7
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 and Going Concern
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 374 fitness centers at March 31,
2007 concentrated in 26 states and Canada. Additionally, as of March 31, 2007, 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, 2006 filed with the SEC on June 29, 2007.
All
adjustments have been recorded which are, in the opinion of management, necessary for a
fair presentation of the condensed consolidated balance sheet of the Company at March 31, 2007, its
consolidated statements of operations for the three months ended March 31, 2007 and 2006, its
consolidated statement of stockholders deficit and comprehensive income for the three months ended
March 31, 2007 and its consolidated statements of cash flows for the three months ended March 31,
2007 and 2006. For purposes of our December 31, 2006 condensed consolidating balance sheet provided
in Note 12, the Company reclassified $4,114 of deferred revenue from the non-guarantor subsidiaries
to the guarantor subsidiaries. This reclassification of deferred revenue is attributable to the
Companys Canadian operations. In prior periods the deferred revenue reported for the Canadian
operations was based on an allocation methodology. In the current period, as a result of the sale
of the Canadian operations, the deferred revenue balance has been measured based on specific
identification.
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).
The
accompanying condensed consolidated financial statements have been prepared using the same
U.S. generally accepted accounting principles as applied by the Company prior to filing a
pre-packaged chapter 11 plan of reorganization as fully described below. While the Company has
filed for and been granted creditor protection, these consolidated financial statements continued
to be prepared using the going concern concept, which assumes that the Company will be able to
realize its assets and discharge its liabilities in the normal course of business for the
foreseeable future. The creditor protection proceedings provide the Company with a period of time
to stabilize its operations and financial condition and implement a restructuring plan.
Management
believes that these actions make the going concern basis appropriate. However, it
is not possible to predict with certainty the ultimate outcome of these proceedings and accordingly
substantial doubt exists as to whether the Company will be able to continue as a going concern.
Further, it is not possible to predict whether the actions taken in any restructuring will result
in improvements to the financial condition of the Company sufficient to allow it to continue as a
going concern.
The
Companys ability to continue as a going concern is uncertain because the Company has
recurring losses from continuing operations and negative cash flows, a net capital deficiency, and
short-term obligations that cannot be satisfied by available funds. As such, the Companys
realization of assets and discharge of liabilities are subject to significant uncertainty. If the
going concern assumptions were not appropriate for these financial statements, then adjustments
would be necessary in the carrying values of assets and liabilities, in the reported expenses and
in the balance sheet classifications used.
Planned reorganization and bankruptcy filing
On June 18,
2007, the Company announced its intention to restructure its obligations and
recapitalize its businesses through a prepackaged chapter 11 plan of reorganization.
The solicitation of
votes for the prepackaged chapter 11 plan commenced on June 27, 2007 and
was concluded on July 27, 2007, with more than 99% of the holders of the Companys 10-1/2% Senior
Notes due 2011 (the Senior Notes) in aggregate principal
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)
amount and 78% of the holders of the Companys 9-7/8% Senor Subordinated Notes due 2007 (the
Senior Subordinated Notes) in aggregate principal amount who actually voted, voting in favor of
the plan. On July 31, 2007, the Company and substantially all of its domestic affiliates
(collectively, the Debtors) filed voluntary petitions for relief commencing reorganization cases
(the Chapter 11 Cases) under chapter 11 of the United States Bankruptcy Code (the Bankruptcy
Code) with the United States Bankruptcy Court for the Southern District of New York (the
Bankruptcy Court). As part of the Chapter 11 Cases, the Debtors also filed with the Bankruptcy
Court their Joint Prepackaged Plan of Reorganization dated June 27, 2007 (the Original Plan),
which contemplated the restructuring arrangements reflected in the solicitation, and accompanying
Disclosure Statement of same date, which, among other things, described the terms of the Original
Plan.
After filing the Original Plan, the Debtors extensively negotiated modifications to the
Original Plan with Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners
Special Situations Fund, L.P. (collectively Harbinger). On August 13 and 17, 2007, the Company
filed a First Amended Joint Prepackaged Chapter 11 Plan of Reorganization of Bally Total Fitness
Holding Corporation And Its Affiliated Debtors (the Amended Plan) with the Bankruptcy Court
which, along with an Investment Agreement with Harbinger (the Investment Agreement) and
Restructuring Support Agreements (collectively, the Restructuring Support Agreements) with
Harbinger, the Senior Noteholders party thereto, the Senior Subordinated Noteholders party thereto
and with Liberation Investments, L.P. and Liberation Investments, Ltd. (collectively,
Liberation), reflect a Harbinger-led restructuring and recapitalization and the support of
critical constituencies of the Company. On August 21, 2007, the Bankruptcy Court (i) approved the
modifications to the Original Plan and held that the Company did not need to resolicit acceptances
to the Amended Plan and (ii) authorized the Company to enter into the Investment Agreement and new
restructuring support agreements. On September 17, 2007, the Bankruptcy Court confirmed the Amended
Plan; accordingly, assuming the conditions to consummation are satisfied, this should result in
completion of the Harbinger-led restructuring during late September or early October 2007.
Pending emergence from bankruptcy, the Debtors will continue to operate their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
American Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), which is applicable
to companies in chapter 11, generally does not change the basis of preparation for financial
statements. However, it does require that the financial statements for periods subsequent to the
filing of the chapter 11 petition distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business.
Upon emergence from chapter 11
our assets and liabilities will be recorded at fair value using either fresh start accounting or
purchase accounting methodology. The fair value of our assets and liabilities may differ materially
from the recorded values of assets and liabilities on our consolidated balance sheets included
herein. In addition, our financial results after the application of fresh start or purchase
accounting may be different from historical trends. Accordingly, the values at which assets are
realized and the amounts at which liabilities are liquidated may differ from those recorded in the
accompanying financial statements.
Seasonal factors
The Companys operations are subject to seasonal factors and, therefore, the results of
operations for the three months ended March 31, 2007 and 2006 are not necessarily indicative of the
results of operations for the full year.
Market risk
The Company is exposed to market risk from changes in the interest rates on certain of its
outstanding debt. The outstanding revolving credit and term loan balance under its Amended and
Restated Credit Agreement dated October 16, 2006 (the New Facility) bears interest at variable
rates based upon prevailing short-term interest rates in the United States and Europe.
The Company has entered into interest rate swap agreements whereby the fixed interest
commitment on $200,000 of outstanding principal on the Companys Senior Subordinated Notes was
swapped for a variable rate commitment based on the LIBOR rate plus 6.01%. The swaps expire in
October 2007.
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)
Fair value of financial instruments
The Company determined by using quoted market prices that the fair value of the Senior
Subordinated Notes was $236,250 and $276,930 at March 31, 2007 and December 31, 2006, respectively,
and that the carrying value at March 31, 2007 was $298,552. The Company determined by using quoted
market prices that the fair value of the Companys Senior Notes was $219,138 and $229,907 at March
31, 2007 and December 31, 2006, respectively, and that the carrying value at March 31, 2007 was
$235,188. 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. The carrying values of accounts
payable, income taxes payable, and accrued liabilities approximate fair value due to the short
maturity of these instruments.
Note 2 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. The Company has
presented the operating results of Crunch as a discontinued operation for all periods presented.
In addition, on April 24, 2007, the Companys subsidiaries, Bally Matrix Fitness Centre Ltd., an
Ontario, Canada corporation, and BTF Canada Corporation, an Ontario, Canada corporation entered
into Asset Purchase Agreements to sell the Companys Canadian operations. These transactions
closed on June 1, 2007, resulting in the sale of substantially all of the Companys Canadian
operations. In accordance with the reporting requirements of SFAS 144, the Company has reclassified
amounts from the statement of operations to discontinued operations and amounts from the balance
sheet to assets and liabilities held for sale for all periods presented.
The assets and liabilities for the Canadian operations have been reclassified in the Condensed
Consolidated Balance Sheet as assets and liabilities held for sale and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Prepaid expenses and other current assets |
|
$ |
1,106 |
|
|
$ |
1,118 |
|
Property and equipment, net |
|
|
3,881 |
|
|
|
3,745 |
|
Intangible assets, net |
|
|
558 |
|
|
|
562 |
|
Other long-term assets |
|
|
62 |
|
|
|
61 |
|
|
|
|
|
|
|
|
Total assets of discontinued operations held for sale |
|
$ |
5,607 |
|
|
$ |
5,486 |
|
|
|
|
|
|
|
|
Deferred rent |
|
$ |
5,038 |
|
|
$ |
4,956 |
|
Deferred revenue |
|
|
13,334 |
|
|
|
12,890 |
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations held for sale |
|
$ |
18,372 |
|
|
$ |
17,846 |
|
|
|
|
|
|
|
|
The financial results for Crunch Fitness and the Canadian operations, included in discontinued
operations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenue |
|
$ |
8,334 |
|
|
$ |
13,508 |
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes |
|
$ |
(16 |
) |
|
$ |
(769 |
) |
Income tax provision |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(16 |
) |
|
|
(775 |
) |
Gain on disposal of discontinued operations |
|
|
|
|
|
|
38,375 |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
(16 |
) |
|
$ |
37,600 |
|
|
|
|
|
|
|
|
10
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note 3 Commitments and Contingencies
Operating leases: The Company leases various fitness center facilities, office facilities, and
equipment under operating leases expiring in periods ranging from one to 25 years, excluding
optional renewal periods. Certain leases contain contingent rental provisions generally related to
cost-of-living criteria or revenues of the respective fitness centers.
Litigation:
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.
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 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, 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.
Defendants filed motions to dismiss the amended complaint on September 28, 2006. On February 20,
2007 the Court issued a Memorandum Opinion and Order dismissing claims against all defendants with
prejudice. Plaintiffs filed a Notice of Appeal on March 23, 2007. On April 18, 2007, the Court
granted Plaintiffs unopposed Motion to Suspend Briefing, suspending briefing pending a ruling by
the United States Supreme Court regarding the Seventh Circuits standard for pleading scienter in
Makor Issues & Rights v. Tellabs and directing the parties to file position statements within 14
days of the issuance of the Supreme Courts decision. The Supreme Courts decision was issued on
June 21, 2007. The parties filed position statements with the United States Court of Appeals for
the Seventh Circuit on July 5, 2007. On July 13, 2007, the Court suspended the briefing schedule
and ordered that a settlement conference be held August 10, 2007. On August 6, 2007, following
commencement of the Chapter 11 Cases, the Court entered an order staying the appeal and vacated the
settlement conference. It is not yet possible to determine the ultimate outcome of this action.
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
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. The Company filed a motion to dismiss on May 30, 2006, directed solely to the issues of
whether the court has subject matter
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)
jurisdiction and whether plaintiff had adequately alleged demand futility as required by
applicable Delaware law in order to establish standing to sue derivatively. On March 27, 2007, the
Court entered an order indicating its intention to convert the Companys motion to a motion for
summary judgment and requiring the Company to file a new motion and brief, which the Company did on
April 13, 2007. On June 18, 2007, the Company and plaintiff reached an agreement in principle to
resolve the action. On July 6, 2007, the Court granted Defendants Motion for Summary Judgment.
On July 25, 2007, the parties executed a settlement agreement wherein plaintiff agreed not to
pursue an appeal and which terminated the litigation.
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 officers and directors, and its former outside
audit firm, Ernst & Young, LLP. Plaintiffs complaint alleged 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. The Company filed a motion to dismiss the amended
complaint on January 5, 2007. On April 2, 2007, the Court granted the Companys motion and
dismissed the case with prejudice. Plaintiff did not file a timely Notice of Appeal of this
dismissal, but instead filed a new action in the Circuit Court of Cook County, Illinois, Case No.
07 L 4280, asserting only claims for common law fraud and under the Illinois Consumer Fraud and
Deceptive Practices Act. A Notice of Pendency of Cases under Chapter 11 of the Federal Bankruptcy
Code and of Automatic Stay was filed on August 2, 2007. The Company has not yet answered or
otherwise responded to the complaint, given that the action was stayed prior to the deadline for
the Companys answer or responsive pleading. It is not yet possible to determine the ultimate
outcome of this action.
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, and a motion for advancement of
defense costs and to compel interim funding on October 20, 2006. On November 16, 2006, the Court
granted Defendants motion to dismiss.
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)
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. On April 26, 2007, the Court denied
Defendants motion. On June 8, 2007, plaintiff filed a motion for summary judgment, which motion
remains pending. On June 11, 2007, the Company filed its answer and counterclaims to Great
Americans complaint for rescission, as well as a third-party complaint against RLI Insurance
Company and the other excess insurance providers. Third party responses and answers were filed by
the insurance carriers on or about July 26, 2007. A Notice of Pendency of Cases under Chapter 11
of the Federal Bankruptcy Code and of Automatic Stay was filed on August 2, 2007. It is not yet
possible to determine the ultimate outcome of the insurance litigation.
Other
On July 31, 2007, the Company and substantially all of its domestic affiliates filed voluntary
petitions for relief with the Bankruptcy Court, commencing the Chapter 11 Cases. The Debtors
continue to operate their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court.
The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, from time to time, customer
complaints are investigated by various governmental bodies. In the opinion of management, none of
these other complaints or investigations currently pending should have a material adverse effect on
our financial condition or results of operations.
In addition, the Company is, and has been in the past, named as defendants in a number of
purported class action lawsuits based on alleged violations of state and local consumer protection
laws and regulations governing the sale, financing and collection of membership fees. To date 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 that it will be
able to successfully defend or settle all pending or future purported class action claims, and the
failure to do so may have a material adverse effect on its financial condition or results of
operations.
Note 4 Debt
On June 18, 2007, the Company announced its intention to restructure its obligations and
recapitalize its businesses through a prepackaged chapter 11 plan of reorganization. On July 31,
2007, the Debtors filed their Original Plan with the Bankruptcy Court reflecting the restructuring
arrangements reflected in the solicitation. On September 17, 2007, the Bankruptcy Court confirmed
the Amended Plan; accordingly, assuming the conditions to consummation are satisfied, this should
result in completion of the Harbinger-led restructuring during late September or early October
2007. These actions have affected the Companys various debt obligations as described below and in
Note 11 Subsequent Events.
New Facility
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 amounts
outstanding under the Companys existing Credit Agreement and to fund capital expenditures and
provide for additional liquidity. The termination date of the New Facility was 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 New Facility was refinanced by the DIP
Facility on August 22, 2007 as discussed below.
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)
At March 31, 2007, pursuant to the New Facility, the Company had $24,500 in borrowings and
$19,352 of letters of credit outstanding under its $44,000 revolving credit facility. At March 31,
2007, availability under the revolving credit facility was $148. The amount outstanding on the term
loan under the New Facility was $205,900. At March 31, 2007, the amount outstanding under the
$34,100 delayed-draw term loan was $33,000. At March 31, 2007, the average rate on borrowings
under the revolving credit and term loan facility was 9.67%. As of April 2, 2007, the Company was
not in compliance with the financial reporting requirements of the New Facility.
Forbearance Agreements
On March 15, 2007, the Company announced that it would not meet the March 16, 2007 deadline
for filing its Annual Report on Form 10-K for the year ended December 31, 2006. Although the delay
in filing resulted in defaults of the financial reporting covenants under the indentures governing
the Senior Notes and the Senior Subordinated Notes, it did not constitute an event of default
without delivery of notice and the expiration of a 30-day grace period. Pursuant to the New
Facility a cross-default occurs 28 days from the delivery of such notice. On April 2, 2007, the
Company failed to comply with certain financial reporting covenants under the New Facility. On
April 16, 2007, the Company did not make the $14,812 interest payment due on its Senior
Subordinated Notes.
On April 12, 2007, the Company entered into a
Forbearance Agreement (the Lender Forbearance
Agreement) with the lenders under the New Facility. Under this agreement the lenders agreed to
forbear from exercising any remedies under the New Facility as a result of defaults arising from
the Companys failure to deliver audited financial statements for the fiscal year ended December
31, 2006, and cross defaults arising from defaults under the indentures governing its Senior
Subordinated Notes and Senior Notes due to the Companys inability to timely file its 2006 Annual
Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ending March 31, 2007 with
the SEC, and the failure to make a scheduled interest payment due April 16, 2007 on the Senior
Subordinated Notes. The Lender Forbearance Agreement contained restrictions during its term on
additional indebtedness, liens, investments, asset sales and sale/leasebacks. However, the Lender
Forbearance Agreement permitted the Company to sell its Canadian assets and retain the net
proceeds. The Lender Forbearance Agreement required the Company to deliver its audited financial
statements within three days of receipt, to provide a restructuring plan by June 28, 2007, to
provide additional monthly reporting and waives the requirement for the Accountants Certificate.
Furthermore, the Lender Forbearance Agreement required that the Company enter into forbearance
agreements with respect to defaults under its public indentures with the holders of at least a
majority of the Senior Notes and at least 75% of the Senior Subordinated Notes. The Lender
Forbearance Agreement terminated on July 13, 2007. The Company paid fees of $587 related to the
Lender Forbearance Agreement.
On May 14, 2007, the Company entered into a forbearance agreement (the Senior Notes
Forbearance Agreement) with holders representing over 80% of the aggregate principal amount
outstanding of the Senior Notes. Pursuant to the Senior Notes Forbearance Agreement, holders of
the Senior Notes waived defaults arising from the Companys failure to (i) timely file its 2006
Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ending March 31, 2007
with the SEC, (ii) make a scheduled interest payment on the Senior Subordinated Notes due April 16,
2007, (iii) provide the required notices of default to the trustee, and (iv) potential failure to
satisfy conditions regarding the execution of sale and leaseback transactions, and agreed to
forbear from exercising any related remedies until July 13, 2007. Holders of the Senior Notes also
consented to amend certain provisions of the Senior Notes Indenture in connection with the waiver
of the defaults. The Company paid fees in the amount of $279 to holders of the Senior Notes that
executed the Senior Note Forbearance Agreement and consented to the related amendments to the
Senior Notes Indenture.
On May 14, 2007, the Company also entered into a forbearance agreement (the Senior
Subordinated Notes Forbearance Agreement) with holders representing over 80% of the aggregate
principal amount outstanding of the Senior Subordinated Notes. Pursuant to the Senior Subordinated
Notes Forbearance Agreement, holders of the Senior Subordinated Notes waived defaults arising from
the Companys failure to (i) make the scheduled interest payment on the Senior Subordinated Notes
due April 16, 2007, (ii) timely file its 2006 Annual Report on Form 10-K and Quarterly Report on
Form 10-Q for the quarter ending March 31, 2007 with the SEC, (iii) provide the required notices of
default to the trustee, and (iv) potential failure to satisfy conditions regarding the execution of
sale and leaseback transactions, and agreed to forbear from exercising any related remedies until
July 13, 2007. Holders of the Senior Subordinated Notes also consented to amend certain provisions
of the Senior Subordinated Notes Indenture in connection with the waiver of the defaults. The
Company did not pay a consent fee to holders of the Senior Subordinated Notes in connection with
the Senior Subordinated Notes Forbearance Agreement.
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)
On May 22, 2007, the Company entered into a supplemental indenture (the Senior Notes
Supplemental Indenture) with the trustee under the indenture governing the Senior Notes (the
Senior Notes Indenture), which amended the Senior Notes Indenture. On May 22, 2007 the Company
also entered into a supplemental indenture (the Senior Subordinated Notes Supplemental Indenture,
and together with the Senior Notes Supplemental Indenture, the Supplemental Indentures), with the
trustee under the indenture governing the Senior Subordinated Notes (the Senior Subordinated Notes
Indenture) which amended the Senior Subordinated Notes Indenture. The Supplemental Indentures
were entered into in connection with the successful completion of the Companys solicitation of
consents from holders of the Senior Notes and Senior Subordinated Notes.
On July 16, 2007, the Company did not make the $12,338 interest payment due on the Senior
Notes. On the same day, the Company entered into an amendment (the Senior Notes Forbearance
Extension) to the Senior Notes Forbearance Agreement with holders of the Companys Senior Notes.
Pursuant to the Senior Notes Forbearance Extension, holders of the Senior Notes agreed to forbear
from exercising any remedies under the Senior Notes (or their underlying indenture) until July 31,
2007, in accordance with the terms of the Senior Notes Forbearance Agreement.
On July 16, 2007, the Company entered into an amendment (the Senior Subordinated Notes
Forbearance Extension) to the Senior Subordinated Notes Forbearance Agreement with holders of the
Companys Senior Subordinated Notes. Pursuant to the Senior Subordinated Notes Forbearance
Extension, holders of the Senior Subordinated Notes agreed to forbear from exercising any remedies
under the Senior Subordinated Notes (or their underlying indenture) until July 31, 2007, in
accordance with the terms of the Senior Subordinated Notes Forbearance Agreement.
On July 16, 2007, the Company entered into an amendment (the Lender Forbearance Extension,
and together with the Senior Notes Forbearance Extension and the Senior Subordinated Notes
Forbearance Extension, the Forbearance Extensions) to the Lender Forbearance Agreement. Pursuant
to the Lender Forbearance Extension, the lenders agreed to forbear from exercising any remedies
under the New Facility as a result of certain defaults until July 31, 2007, in accordance with the
terms of the Lender Forbearance Agreement.
The Company did not pay a consent fee to the lenders under the New Facility, or to holders of
the Senior Notes or the Senior Subordinated Notes, in connection with any of the Forbearance
Extensions. The Company filed the Chapter 11 Cases prior to expiration of the Forbearance
Extensions on July 31, 2007. As a result, an event of default occurred under each of the New
Facility, Senior Notes Indenture and Senior Subordinated Notes Indenture and the Companys
indebtedness therefore was immediately accelerated and, as such, classified as current maturities
of long-term debt on its condensed consolidated balance sheet.
Cash Collateral and DIP Facility
On August 1, 2007, following the Companys bankruptcy filing, the Bankruptcy Court authorized
the Companys continued use of cash on hand and subsequent cash collections.
On August 21, 2007 the Bankruptcy Court approved, and on August 22, 2007, Bally entered into a
superpriority debtor-in-possession credit agreement (the DIP Facility) arranged by Morgan Stanley
Senior Funding, Inc. with Morgan Stanley Senior Funding, Inc., as Administrative Agent and
Collateral Agent, Wells Fargo Foothill, LLC, as Revolving Credit Agent and the CIT Group/Business
Credit, Inc., as Revolving Syndication Agent and certain other lenders party thereto (collectively,
the DIP Lenders), providing up to $292,000 of debtor-in possession financing consisting of a
$50,000 secured revolving credit facility with a $40,000 sublimit for letters of credit (the DIP
Revolving Credit) and a $242,000 secured term loan facility (the DIP Term Loan). The rate of
interest on the borrowings under the DIP Revolving Credit is, at the Companys option, either the
reference rate (higher of the prime rate or federal funds rate plus 0.50%) plus a margin of 1.00%
or a Eurodollar rate plus a margin of 2.00%. Commitment fees of 0.50% per annum are payable on the
unused portion of the DIP Revolving Credit. The rate of interest on the borrowings under the DIP
Term Loan is, at the Companys option, either the reference rate plus a margin of 3.25% or a
Eurodollar rate plus a margin of 4.25% per annum. A fee of 2.00% per annum is paid on outstanding
letters of credit.
The DIP Facility grants the DIP Lenders a first perfected lien on all of the Companys pre-
and post-petition real and personal property, subject only to certain unavoidable prior liens and
to a carve out for specified professional fees and superpriority administrative expense claims.
The Companys obligations under the DIP Facility are guaranteed by most of its domestic
subsidiaries. The proceeds of the DIP Facility were used to repay amounts borrowed under the
pre-petition New Facility and to pay fees and expenses associated with the DIP Facility.
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)
As of September 21, 2007 there was $242,000 outstanding under the DIP Term Loan, no borrowings
under the DIP Revolving Credit and $24,707 of letters of credit were issued. The amount available
under the DIP Revolving Credit is reduced by letters of credit issued.
The Company paid fees in the amount of $3,700 for the DIP Facility and the DIP Term Loan was
subject to original issue discount of 1.5%.
Upon the Companys emergence from bankruptcy, subject to the Company meeting certain
performance criteria, the DIP Lenders will convert the DIP Facility into a senior secured exit
credit facility under the Amended Plan (the Exit Credit Facility) providing up to $292,000,
consisting of up to a five-year, $50,000 senior secured revolving credit facility with a $40,000
sublimit for letters of credit (the Exit Revolving Credit) and a $242,000 senior secured term
loan facility (the Exit Term Loan) which will mature six years from closing or such earlier date
pursuant to the terms of the Exit Credit Facility. The interest rate margins on the Exit Credit
Facility will be no more than 0.25% and 0.75% higher on the Exit Revolving Credit and the Exit Term
Loan, respectively, than under the DIP Facility. Certain other terms, including financial
covenants, will differ from the DIP Facility. The Exit Credit Facility is secured by substantially
all the Companys real and personal property, including member obligations under installment
contracts. The Companys obligations under the Exit Credit Facility will be guaranteed by most of
its domestic subsidiaries. The Company will pay additional fees related to the Exit Credit
Facility in the amount of $2,600. See Note 11 for more detailed information on the Exit Credit
Facility.
Other Secured Debt
As of March 31, and April 15, 2007, the Company was not in compliance with the financial
reporting covenants under two mortgage agreements and certain capital lease obligations. Upon
filing its Form 10-K for 2006 on June 29, 2007, the Company cured the related violations. As a
result of the Companys Chapter 11 Cases on July 31, 2007, events of default have occurred under
mortgages and capital leases in the amount of $9,271. Upon consummation of the Amended Plan, these
will be paid in accordance with their terms.
Liquidity
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
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 and delayed-draw term loan) declined by
approximately $16,600 from $89,700 to $73,100 during the first three months of 2007. The decline in
liquidity was due primarily to the funding of advances to vendors and capital expenditures for club
equipment.
16
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
Note 5 Deferred Revenue
Deferred revenue represents cash received from members, but not yet earned. The summary set
forth below of the activity and balances in deferred revenue at March 31, 2007 and 2006 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. Total deferred revenue at December 31, 2006 and 2005, has been
reduced by $12,890 and $10,430, respectively, from previously reported amounts due to the
reclassification of balances related to discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
Cash |
|
|
Revenue |
|
|
March 31, |
|
|
|
2006 |
|
|
Additions |
|
|
Recognized |
|
|
2007 |
|
Deferral of receipts from financed members: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments |
|
$ |
408,798 |
|
|
$ |
42,670 |
|
|
$ |
(58,307 |
) |
|
$ |
393,161 |
|
Down payments |
|
|
80,263 |
|
|
|
10,217 |
|
|
|
(10,420 |
) |
|
|
80,060 |
|
Deferral of receipts representing advance payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full membership fees collected upon origination |
|
|
101,546 |
|
|
|
13,564 |
|
|
|
(6,588 |
) |
|
|
108,522 |
|
Advance payments of periodic dues and membership fees |
|
|
117,654 |
|
|
|
29,410 |
|
|
|
(31,593 |
) |
|
|
115,471 |
|
Receipts collected and earned without deferral during period |
|
|
|
|
|
|
85,909 |
|
|
|
(85,909 |
) |
|
|
|
|
Deferral of receipts for personal training services |
|
|
15,793 |
|
|
|
29,284 |
|
|
|
(25,977 |
) |
|
|
19,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
724,054 |
|
|
$ |
211,054 |
|
|
$ |
(218,794 |
) |
|
$ |
716,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
Cash |
|
|
Revenue |
|
|
March 31, |
|
|
|
2006 |
|
|
Additions |
|
|
Recognized |
|
|
2007 |
|
Deferral of receipts from financed members: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments |
|
$ |
515,159 |
|
|
$ |
59,261 |
|
|
$ |
(68,553 |
) |
|
$ |
505,867 |
|
Down payments |
|
|
97,510 |
|
|
|
13,947 |
|
|
|
(13,846 |
) |
|
|
97,611 |
|
Deferral of receipts representing advance payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full membership fees collected upon origination |
|
|
106,712 |
|
|
|
9,704 |
|
|
|
(9,042 |
) |
|
|
107,374 |
|
Advance payments of periodic dues and membership fees |
|
|
119,697 |
|
|
|
27,077 |
|
|
|
(26,722 |
) |
|
|
120,052 |
|
Receipts collected and earned without deferral during period |
|
|
|
|
|
|
84,539 |
|
|
|
(84,539 |
) |
|
|
|
|
Deferral of receipts for personal training services |
|
|
16,402 |
|
|
|
29,577 |
|
|
|
(27,829 |
) |
|
|
18,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
855,480 |
|
|
$ |
224,105 |
|
|
$ |
(230,531 |
) |
|
|
849,054 |
|
SAB 108 transitional deferred revenue adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
843,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon adoption of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements, in the quarter
ended December 31, 2006, the Company recorded a transitional adjustment to deferred revenue of
$5,709 related to prior period misstatements of deferred revenue that were not considered material
to the Companys financial statements. This adjustment was recorded at January 1, 2006 as a
decrease to the deferred revenue balance and a decrease to accumulated deficit.
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)
Note 6 Income (loss) per Common Share
Income (loss) per share is computed in accordance with SFAS No. 128 Earnings per Share.
Basic income (loss) per share is computed on the basis of the weighted average number of common
shares outstanding. Diluted income per share is computed on the basis of the weighted average
number of common shares outstanding plus the effect of outstanding stock options and warrants using
the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Weighted average number of common shares outstanding |
|
|
40,718,262 |
|
|
|
37,685,264 |
|
Effect of outstanding stock options and warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding |
|
|
40,718,262 |
|
|
|
37,685,264 |
|
|
|
|
|
|
|
|
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 |
|
|
4,054,927 |
|
|
|
1,722,640 |
|
Range of exercise prices per share: |
|
|
|
|
|
|
|
|
High |
|
$ |
36.00 |
|
|
$ |
36.00 |
|
Low |
|
$ |
2.30 |
|
|
$ |
2.91 |
|
Note 7 Income Taxes
At
March 31, 2007, the Company had approximately $783,831 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 2005 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.
Depending upon how the pending restructuring is accomplished, certain federal and state tax loss
and AMT credit carryforwards could be severely limited and may not be utilizable in full or at all
by the Company.
Based on the Companys past performance and the expiration dates of its carryforwards, and the
change in ownership under IRC Section 382, the ultimate realization of all of the Companys
deferred tax assets cannot be assured. Accordingly, a valuation allowance has been recorded to
reduce deferred tax assets to a level which, more likely than not, will be realized. Included in
the deferred tax asset and valuation allowance is $7,037 resulting from the exercise of stock
options and the Company-sponsored stock purchase plan. The related benefit will be included as
additional paid-in-capital when realized. Also included in the deferred tax asset and valuation
allowance is $795 resulting from loss carryovers acquired. The related benefit will be credited to
goodwill when realized.
The Company files income tax returns in the U.S. federal jurisdiction and various states and
foreign jurisdictions.
The Internal Revenue Service (IRS) examined the Companys 1980-1984 U.S. Federal Income Tax
Returns. On September 15, 2006, the statute of limitation to assess tax expired for the 2002 tax
year for federal tax purposes. As such, the only currently open tax years are 2003 through 2006.
The State of Illinois has audited the Company through December 31, 2005 and did not propose
any adjustments. In the State of New York, the Company is currently under audit for the 2002 and
2003 tax years. There are no other state income tax audits in progress.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, on January 1, 2007; the effect was not
significant. As of January 1, 2007, the amount of unrecognized tax benefit was $1,331. Of this balance,
$1,331 of tax positions, if
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)
recognized, would affect the effective tax rate. The Company believes that it will have
between a zero and $1,155 change in its unrecognized tax benefits in 2007. The Company recognizes
interest and penalties accrued related to unrecognized tax benefits in the income tax provision.
At the time of adoption, accrued interest amounted to $362.
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 has elected to recognize compensation expense on a straight-line basis over the
vesting period of the award. Total stock-based compensation expense for the three months ended
March 31, 2007 and 2006 was $498 and $1,090, respectively, which is comprised of $164 and $561
related to stock options, $369 and $430 related to restricted shares and $(35) and $99 related to
estimated income tax obligations which are liability classified.
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 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 March 31, 2007, 138,166 shares remain available for
issuance under the Inducement Plan.
On December 19, 2006, the Companys stockholders approved the adoption of the 2007 Omnibus
Equity Compensation Plan (the Omnibus Plan), which was previously approved by the Companys Board
of Directors. The Omnibus Plan provides for the issuance of a maximum of 3,000,000 shares of the
Companys common stock in connection with the grant of stock options, stock units, stock awards,
dividend equivalents and other stock-based awards. The Omnibus Plan was intended to replace the
Incentive Plan. To date, there have been no awards under the Omnibus Plan.
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)
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 three months ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
|
|
Number of Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Outstanding at December 31, 2006 |
|
|
3,386,426 |
|
|
$ |
13.34 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(26,998 |
) |
|
|
5.11 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(39,702 |
) |
|
|
8.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
3,319,726 |
|
|
|
13.46 |
|
|
|
5.3 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
2,897,737 |
|
|
$ |
14.62 |
|
|
|
4.9 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information pertaining to option activity during the three months ended March 31, 2007
and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Weighted average grant-date fair value of stock options granted (per share) |
|
$ |
|
|
|
$ |
4.60 |
|
Total intrinsic value of stock options exercised |
|
$ |
|
|
|
$ |
92 |
|
There were no exercises of stock options during the three months ended March 31, 2007. At
March 31, 2007, there was approximately $870 of total unrecognized compensation cost related to
non-vested stock options. This cost will be recognized over a weighted average period of 1.48
years.
The fair value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model. No options were granted during the three months ended March 31,
2007.
The expected life of an option granted is calculated using historical experience. Expected
volatility is 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
three months of 2007.
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)
A summary of restricted stock activity for the three months ended March 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
Fair |
|
|
Number of Shares |
|
Value |
Outstanding at December 31, 2006 |
|
|
568,250 |
|
|
$ |
6.90 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(48,500 |
) |
|
$ |
6.84 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
519,750 |
|
|
$ |
6.91 |
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, the total amount of unrecognized compensation expense related to
non-vested restricted stock awards and estimated income tax obligations was approximately $2,581
and $31, respectively. Both amounts are expected to be recognized on a straight-line basis over a
weighted-average period of approximately 2.8 years. The total grant date fair value of shares
vested during the three months ended March 31, 2007 and 2006 was $0 and $20, respectively.
Note 9 Guarantees
In connection with the Companys January 2006 sale of its Crunch Fitness business along
with certain additional health clubs located in San Francisco, California, the Company and/or
certain of its subsidiaries remain liable for the obligations on certain leases transferred to the
purchaser in the amount of $79,588 as of March 31, 2007.
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 of $600.
Note 10 Sale/Leaseback Transactions
In the fourth quarter 2006, the Company entered into a transaction involving the sale of land,
buildings, and related building improvements and the subsequent leaseback of the same property over
a period of twenty years. This transaction did not qualify for sale/leaseback treatment as of
December 31, 2006 and therefore the transaction, which generated $8,919 of proceeds and resulted in
a deferred gain of $6,117, was recorded as a financing on the financial statements for the year
ended December 31, 2006, according to SFAS No. 98, Accounting for Leases. During the first quarter
of 2007, upon amending the transaction, the Company recorded the sale and subsequent leaseback
transaction.
Note 11 Subsequent Events
Sale of Canada Clubs
On April 24, 2007, the Companys subsidiaries, Bally Matrix Fitness Centre Ltd., an Ontario,
Canada corporation (Matrix), and BTF Canada Corporation, an Ontario, Canada corporation (BTF,
and together with Matrix, the Sellers), entered into an Asset Purchase Agreement (the Purchase
Agreement) pursuant to which, among other things, the Sellers transferred five health clubs and
certain related assets located in greater metropolitan Toronto in Ontario, Canada, to Extreme
Fitness, Inc., an Alberta, Canada unlimited liability corporation (Extreme Fitness). In addition,
the Sellers entered into an Asset Purchase Agreement with Goodlife Fitness Centres Inc., an
Ontario, Canada corporation (Goodlife), to sell 10 additional health clubs located in greater
metropolitan Toronto in Ontario, Canada. The Sellers closed on the agreements with Extreme Fitness
and Goodlife on June 1, 2007, realizing cash proceeds of approximately $19,000. The completion of
the transactions resulted in the sale of substantially all of the Companys Canadian operations.
The Company recorded a gain of approximately $21,200 in the second quarter of 2007 as a result of
the sales.
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)
Non-payment
of Interest and Forbearance Agreement
On
April 16, 2007 and July 15, 2007, the Company did not make
interest payments of $14,812 on its Senior Subordinated Noes and
$12,338 on its Senior Notes, respectively, resulting in defaults
under the applicable indentures, and as a result of cross-default
provisions, under the New Facility. On April 12, 2007,
May 14, 2007 and July 16, 2007 the Company entered into
forbearance agreements and amendments thereto related to the interest
payments and other defaults with lenders under the New Facility and
the noteholders under the Indentures. The effect of these events is
further described in Note 4 Debt.
Planned Reorganization and Chapter 11 Bankruptcy Proceeding
On June 18, 2007, the Company announced its intention to restructure its obligations and
recapitalize its businesses through a prepackaged chapter 11 plan of reorganization.
The solicitation of votes for the
prepackaged chapter 11 plan commenced on June 27, 2007 and
was concluded on July 27, 2007, with more than 99% of the holders of the Companys Senior Notes in
aggregate principal amount and 78% of the holders of the Companys Senior Subordinated Notes in
aggregate principal amount who actually voted, voting in favor of the plan. On July 31, 2007, the
Debtors filed their Original Plan with the Bankruptcy Court reflecting the restructuring
arrangements reflected in the solicitation.
After filing the Original Plan, the Debtors extensively negotiated modifications to the
Original Plan with equity holder Harbinger. On August 13 and 17, 2007, the Company filed the
Amended Plan with the Bankruptcy Court which, along with the Investment Agreement with Harbinger
and Restructuring Support Agreements, reflect a Harbinger-led restructuring and recapitalization
and the support of critical constituencies of the Company. On August 21, 2007, the Bankruptcy
Court (i) approved the modifications to the Original Plan and held that the Company did not need to
resolicit acceptances to the Amended Plan and (ii) authorized the Company to enter into the
Investment Agreement and new Restructuring Support Agreements. On September 17, 2007, the
Bankruptcy Court confirmed the Amended Plan; accordingly, assuming the conditions to consummation
are satisfied, this should result in completion of the Harbinger-led restructuring during late
September or early October 2007.
Under the Investment Agreement, Harbinger would acquire the new common stock of the
reorganized Company in exchange for approximately $233,600 in cash. Under the Amended Plan, and
subject to the terms thereof, assuming the Harbinger-led restructuring is consummated:
|
|
|
The Company would issue up to $247,337.5 of 13% Senior Second Lien Notes (the New
Senior Second Lien Notes) to holders of the Senior Notes, who will receive, in exchange
for their total claims (including unpaid interest), their pro rata share of the New Senior
Second Lien Notes in addition to a fee equal to 2% of the principal amount of the Senior
Notes. The maturity of, and subsidiary guarantees for, the New Senior Second Lien Notes
would be the same as for the Senior Notes. |
|
|
|
|
The Company would issue up to $200,000 of 15-5/8% Senior Subordinated Notes due 2013
(the New Senior Subordinated Notes) to holders of the Companys Senior Subordinated Notes
who will receive their pro rata share of the New Senior Subordinated Notes. These notes
bear interest at 15-5/8% if paid-in-kind and 14% if paid in cash, at the Companys option
upon satisfaction of a toggle covenant of $200,000 minimum cash EBITDA and $75,000 minimum
liquidity. Such holders would also receive their pro rata share of a cash payment of
$123,500 (which includes unpaid interest). |
|
|
|
|
Holders of the Companys existing common stock and the holders of certain other claims
treated as equity in bankruptcy would receive $16,500 in the aggregate. |
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)
Pursuant to the Amended Plan, if the Harbinger-led restructuring were for some reason not
consummated, the restructuring contemplated by the Original Plan will be completed, subject to the
terms and condition of the Original Plan. The principal terms of that restructuring are:
|
|
|
Holders of the Companys Senior Notes would receive the same consideration as under the
Amended Plan, except that the rate of interest on the New Senior Second Lien Notes would be
12-3/8% per annum. |
|
|
|
|
The Company would issue up $80,000 of 13-5/8% Subordinated Notes due 2013 and $70,000 of
13-5/8% Junior Subordinated Notes due 2013 (collectively, the New Subordinated Notes) to
holders of the Companys Senior Subordinated Notes. These notes bear interest at 13-5/8%
if paid-in-kind and 11.5% if paid in cash, at the Companys option upon satisfaction of a
toggle covenant of $200,000 minimum cash EBITDA and $75,000 minimum liquidity. The
holders of the Senior Subordinated Notes would not receive any cash payments but would also
receive their pro rata share of all of the newly issued common stock in the reorganized
Company and the right to purchase their pro rata share of $90,000 of 13-5/8% Senior
Subordinated Notes due 2013, pursuant to a rights offering (the Rights Offering Senior
Subordinated Notes); the terms of these notes have similar economic terms to those of the
New Subordinated Notes, but will rank senior to the New Subordinated Notes. Certain of the
holders of Senior Subordinated Notes entered into a Subscription and Backstop Purchase
Agreement, dated June 27, 2007, and agreed to backstop the rights offering by purchasing
any of the Rights Offering Senior Subordinated Notes that are not subscribed for upon the
expiration of the offering period. |
|
|
|
|
The Companys existing common stock would be extinguished for no consideration. |
Under either restructuring alternative, upon the Companys emergence from bankruptcy, the
Company intends to deregister its common stock under the Exchange Act and cease being a reporting
company.
DIP Financing
August 22, 2007, Bally entered into the DIP Facility with the DIP Lenders. The DIP Facility
provides up to $292,000 of debtor-in-possession financing consisting of the $50,000 DIP Revolving
Credit with a $40,000 sublimit for letters of credit and a $242,000 DIP Term Loan. The DIP Facility
was approved by the Court on August 21, 2007. The Order approving the DIP Facility authorized the
Company to enter into the DIP Facility and use amounts thereunder (i) to pay in full all
obligations under the prepetition New Facility, except for letters of credit and interest rate
hedging obligations which are included in the DIP Facility, (ii) for working capital, and (iii) to
pay interest, fees and expenses. The DIP Facility grants the DIP Lenders a first perfected lien on
all of the Companys pre- and post-petition property, subject only to certain unavoidable prior
liens and to a carve out for specified professional fees and superpriority administrative
expense claims. The Companys obligations under the DIP Facility are guaranteed by most of its
domestic subsidiaries.
The DIP Facility will terminate on the earliest to occur of (i) March 31, 2008, (ii) the
consummation of the Amended Plan (the Consummation Date), and (iii) the termination or
expiration of Borrowers exclusive right to propose and solicit acceptances to a chapter 11 plan
pursuant to Section 1121 of the Bankruptcy Code. The rate of interest on the borrowings under the
DIP Revolving Credit is, at the Companys option, either the reference rate (higher of the prime
rate or federal funds rate plus .50%) plus a margin of 1.00% or a Eurodollar rate plus a margin of
2.00%. Commitment fees of 0.50% per annum are payable on the unused portion of the revolving credit
facility. The rate of interest on the borrowings under the DIP Term Loan is, at the Companys
option, either the reference rate plus a margin of 3.25% or a Eurodollar rate plus a margin of
4.25% per annum. A fee of 2.00% per annum is paid on outstanding letters of credit. On September
21, 2007 there was $242,000 outstanding on the DIP Term Loan and $24,707 letters of credit issued
and no borrowings on the DIP Revolving Credit.
The DIP Facility contains restrictive covenants that include minimum monthly liquidity
requirements, financial reporting 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, asset sales and acquisitions;
transactions with subsidiaries; conduct of business; sale and leaseback transactions; incurrence of
judgments; and changing our fiscal year; all subject to certain exceptions.
The Company paid fees in the amount of $3,700 for the DIP Facility, and the DIP Term Loan was
subject to original issue discount of 1.5%.
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)
Exit Credit Facility
Upon the Consummation Date the DIP Facility provides for conversion into the Exit Credit
Facility arranged by Morgan Stanley Senior Funding, Inc. with Morgan Stanley Senior Funding, Inc.,
as Administrative Agent and Collateral Agent, Wells Fargo Foothill, LLC, as Revolving Credit Agent
and the CIT Group/Business Credit, Inc., as Revolving Syndication Agent and certain other lenders
party thereto (collectively, the Exit Lenders), providing up to $292,000 consisting of the
$50,000 Exit Revolving Credit with a $40,000 sublimit for letters of credit and the $242,000 Exit
Term Loan. The Exit Revolving Credit terminates on the earlier of (i) five years from closing and
(ii) 30 days prior to the maturity of the first to mature of the New Second Lien Notes or the New
Senior Subordinated Notes (the Revolving Credit Maturity Date). The Exit Term Loan maturity date
(the Term Loan Maturity Date) is the earlier of (i) six years from closing and (ii) the Revolving
Credit Maturity Date.
The Exit Credit Facility is available to the Company on the Consummation Date and upon meeting
the conditions precedent which include (i) a confirmation order entered in accordance with the
Bankruptcy Code, (ii) minimum cash EBITDA, as defined in the agreement, of $70,000, (iii) minimum
liquidity of $100,000 after giving pro forma effect to the consummation of the Amended Plan, (iv)
receipt of cash capital infusion of at least $233,000 in exchange for common equity of Borrower
pursuant to the Investment Agreement of which no more than $140,000 will be used to pay claims to
holders of the Senior Subordinated Notes and existing common stock under the Amended Plan.
The Exit Term Loan is payable in quarterly installments of $605 beginning on June 30, 2008
with a final installment of the balance at the Term Loan Maturity Date. The rate of interest on the
borrowings under the Exit Revolving Credit is, at the Companys option, either the reference rate
(higher of the prime rate or federal funds rate plus 0.50%) plus a margin of 1.25% or a Eurodollar
rate plus a margin of 2.25%. Commitment fees of 0.50% per annum are payable on the unused portion
of the revolving credit facility. The rate of interest on the borrowings under the Exit Term Loan
is, at the Companys option, either the reference rate plus a margin of 4.00% or a Eurodollar rate
plus a margin of 5.00% per annum. A fee of 2.25% per annum is paid on outstanding letters of
credit. The proceeds from the term loan and revolving credit will be used to refinance the amounts
outstanding under the Companys DIP Facility and to provide additional working capital.
The Exit Credit Facility is secured by substantially all the Companys real and personal
property, including member obligations under installment contracts. The Companys obligations under
the Credit Facility are guaranteed by most of its domestic subsidiaries. The Exit Credit Facility
contains restrictive covenants that include minimum quarterly senior secured leverage ratio and
minimum monthly liquidity requirements, financial reporting requirements that will require we
provide audited financial statements to the lenders within 180 days of year end for 2007 and 90
days after year end for each subsequent calendar year, 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, asset sales and acquisitions;
transactions with subsidiaries; conduct of business; sale and leaseback transactions; incurrence of
judgments; and changing our fiscal year; all subject to certain exceptions. Under the terms of the
Exit Credit Facility, the Company may sell assets and enter into sales and leaseback transactions,
subject to a pro-forma cash EBITDA threshold condition, and reinvest the proceeds within 330 days
of sale. The Company may also enter into up to $100,000 aggregate amount of purchase money finance
and capital lease transactions.
The Company will pay additional fees related to the Exit Facility in the amount of $2,600.
If the Harbinger-led plan is not consummated and the restructuring contemplated by the
Original Plan is completed, the Exit Credit Facility will instead provide for (i) conditions
precedent to effectiveness of minimum cash EBITDA of $62,500, and receipt of $90,000 from the
issuance of Rights Offering Senior Subordinated Notes, (ii) a rate of interest on the Exit
Revolving Credit based on a reference rate plus a margin of 1.00% or a Eurodollar rate plus a
margin of 2.00%, (iii) a rate of interest on the Exit Term Loan based on a reference rate plus a
margin of 3.25% or a Eurodollar rate plus a margin of 4.25%, (iv) a minimum quarterly cash EBITDA
covenant to be tested only if liquidity is less than $50,000 and (v) a less restrictive senior
secured leverage ratio covenant. No additional fees will be paid.
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)
Harry Schwartz Settlement
The Company is party to an Employment Agreement and Covenant Not to Compete, and a Consulting
Agreement, each dated as of October 26, 1979, with Harry Schwartz, a former consultant to a
predecessor of the Company (as amended, collectively, the Schwartz Agreements), which provided
for certain payments to Mr. Schwartz during his lifetime, and to his estate for ten years after his
death, based on revenues generated by designated fitness clubs operated by the Company. In
connection with the Chapter 11 Cases, the Company and Mr. Schwartz negotiated a settlement pursuant
to which the Company will pay the sum of $4,500 in cash to Schwartz and Schwartz will release the
Company from any and all claims, including claims under the Schwartz Agreements and dismissal of
related litigation that is pending in the Supreme Court of the State of New York. The Company will
record an expense of $2,500 in the third quarter related to this liability.
Note 12 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:
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 Connecticut Coast, Inc.; Bally Total Fitness of Connecticut
Valley, Inc.; 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.; 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.; Tidelands Holiday
Health Clubs, Inc. and; U.S. Health, Inc.
The following tables present the condensed consolidating balance sheets at March 31, 2007 and
December 31, 2006, the condensed consolidating statements of operations for the three months ended
March 31, 2007 and 2006, and the condensed consolidating statements of cash flows for the three
months ended March 31, 2007 and 2006. The Eliminations column reflects the elimination of
investments in subsidiaries and intercompany balances and transactions. The Company has
reclassified amounts from the statement of operations to discontinued operations and amounts from
the balance sheet to assets and liabilities held for sale for all periods presented to reflect the
sale of its Canadian operations. For purposes of these reclassifications the deferred revenue
attributable to the Canadian operations has been measured based on specific identification. In
prior periods the deferred revenue reported for the Canadian operations was based on an allocation
methodology.
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 BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
67,471 |
|
|
$ |
4,402 |
|
|
$ |
|
|
|
$ |
71,873 |
|
Other current assets |
|
|
|
|
|
|
41,169 |
|
|
|
696 |
|
|
|
|
|
|
|
41,865 |
|
Current assets of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
1,106 |
|
|
|
|
|
|
|
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
108,640 |
|
|
|
6,204 |
|
|
|
|
|
|
|
114,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
235,065 |
|
|
|
7,785 |
|
|
|
|
|
|
|
242,850 |
|
Goodwill, net |
|
|
|
|
|
|
19,734 |
|
|
|
|
|
|
|
|
|
|
|
19,734 |
|
Trademarks, net |
|
|
6,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,507 |
|
Intangible assets, net |
|
|
|
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to
subsidiaries |
|
|
(617,113 |
) |
|
|
221,315 |
|
|
|
|
|
|
|
395,798 |
|
|
|
|
|
Other assets |
|
|
23,137 |
|
|
|
16,930 |
|
|
|
2,985 |
|
|
|
|
|
|
|
43,052 |
|
Non-current assets of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
4,501 |
|
|
|
|
|
|
|
4,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(587,469 |
) |
|
$ |
602,062 |
|
|
$ |
21,475 |
|
|
$ |
395,798 |
|
|
$ |
431,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
48,745 |
|
|
$ |
244 |
|
|
$ |
|
|
|
$ |
48,989 |
|
Income taxes payable |
|
|
|
|
|
|
1,073 |
|
|
|
146 |
|
|
|
|
|
|
|
1,219 |
|
Accrued liabilities |
|
|
24,497 |
|
|
|
78,479 |
|
|
|
8,843 |
|
|
|
|
|
|
|
111,819 |
|
Current maturities of long-term debt |
|
|
799,032 |
|
|
|
539 |
|
|
|
1,918 |
|
|
|
|
|
|
|
801,489 |
|
Deferred revenues |
|
|
|
|
|
|
273,645 |
|
|
|
|
|
|
|
|
|
|
|
273,645 |
|
Current liabilities of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
5,664 |
|
|
|
|
|
|
|
5,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
823,529 |
|
|
|
402,481 |
|
|
|
16,815 |
|
|
|
|
|
|
|
1,242,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
3,742 |
|
|
|
5,299 |
|
|
|
2,360 |
|
|
|
|
|
|
|
11,401 |
|
Net affiliate payable |
|
|
|
|
|
|
457,774 |
|
|
|
64,810 |
|
|
|
(522,584 |
) |
|
|
|
|
Other liabilities |
|
|
|
|
|
|
131,261 |
|
|
|
5,742 |
|
|
|
|
|
|
|
137,003 |
|
Deferred revenues |
|
|
|
|
|
|
442,669 |
|
|
|
|
|
|
|
|
|
|
|
442,669 |
|
Non-current liabilities of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
12,708 |
|
|
|
|
|
|
|
12,708 |
|
Stockholders deficit |
|
|
(1,414,740 |
) |
|
|
(837,422 |
) |
|
|
(80,960 |
) |
|
|
918,382 |
|
|
|
(1,414,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(587,469 |
) |
|
$ |
602,062 |
|
|
$ |
21,475 |
|
|
$ |
395,798 |
|
|
$ |
431,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
31,911 |
|
|
$ |
2,888 |
|
|
$ |
|
|
|
$ |
34,799 |
|
Other current assets |
|
|
|
|
|
|
39,646 |
|
|
|
770 |
|
|
|
|
|
|
|
40,416 |
|
Current assets of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
71,557 |
|
|
|
4,776 |
|
|
|
|
|
|
|
76,333 |
|
Property and equipment, net |
|
|
|
|
|
|
234,689 |
|
|
|
9,363 |
|
|
|
|
|
|
|
244,052 |
|
Goodwill, net |
|
|
|
|
|
|
19,734 |
|
|
|
|
|
|
|
|
|
|
|
19,734 |
|
Trademarks, net |
|
|
6,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,507 |
|
Intangible assets, net |
|
|
|
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
413 |
|
Investment in and advances to subsidiaries |
|
|
(662,464 |
) |
|
|
221,315 |
|
|
|
|
|
|
|
441,149 |
|
|
|
|
|
Other assets |
|
|
27,898 |
|
|
|
14,540 |
|
|
|
2,926 |
|
|
|
|
|
|
|
45,364 |
|
Non-current assets of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
4,368 |
|
|
|
|
|
|
|
4,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(628,059 |
) |
|
$ |
562,248 |
|
|
$ |
21,433 |
|
|
$ |
441,149 |
|
|
$ |
396,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
48,963 |
|
|
$ |
234 |
|
|
$ |
|
|
|
$ |
49,197 |
|
Income taxes payable |
|
|
|
|
|
|
1,284 |
|
|
|
146 |
|
|
|
|
|
|
|
1,430 |
|
Accrued liabilities |
|
|
21,957 |
|
|
|
77,759 |
|
|
|
15,719 |
|
|
|
|
|
|
|
115,435 |
|
Current maturities of long-term debt |
|
|
511,205 |
|
|
|
658 |
|
|
|
2,050 |
|
|
|
|
|
|
|
513,913 |
|
Deferred revenues |
|
|
|
|
|
|
274,399 |
|
|
|
|
|
|
|
|
|
|
|
274,399 |
|
Current liabilities of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
5,424 |
|
|
|
|
|
|
|
5,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
533,162 |
|
|
|
403,063 |
|
|
|
23,573 |
|
|
|
|
|
|
|
959,798 |
|
Long-term debt, less current maturities |
|
|
239,201 |
|
|
|
5,373 |
|
|
|
2,860 |
|
|
|
|
|
|
|
247,434 |
|
Net affiliate payable |
|
|
|
|
|
|
426,151 |
|
|
|
61,911 |
|
|
|
(488,062 |
) |
|
|
|
|
Other liabilities |
|
|
|
|
|
|
126,526 |
|
|
|
1,360 |
|
|
|
|
|
|
|
127,886 |
|
Deferred revenues |
|
|
|
|
|
|
449,653 |
|
|
|
|
|
|
|
|
|
|
|
449,653 |
|
Non-current liabilities of discontinued
operations held for sale |
|
|
|
|
|
|
|
|
|
|
12,422 |
|
|
|
|
|
|
|
12,422 |
|
Stockholders deficit |
|
|
(1,400,422 |
) |
|
|
(848,518 |
) |
|
|
(80,693 |
) |
|
|
929,211 |
|
|
|
(1,400,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(628,059 |
) |
|
$ |
562,248 |
|
|
$ |
21,433 |
|
|
$ |
441,149 |
|
|
$ |
396,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
218,794 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
218,794 |
|
Retail products |
|
|
|
|
|
|
9,711 |
|
|
|
|
|
|
|
|
|
|
|
9,711 |
|
Miscellaneous |
|
|
|
|
|
|
4,910 |
|
|
|
|
|
|
|
|
|
|
|
4,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,415 |
|
|
|
|
|
|
|
|
|
|
|
233,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
162,991 |
|
|
|
(522 |
) |
|
|
|
|
|
|
162,469 |
|
Retail products |
|
|
|
|
|
|
8,747 |
|
|
|
|
|
|
|
|
|
|
|
8,747 |
|
Marketing and advertising |
|
|
|
|
|
|
19,290 |
|
|
|
|
|
|
|
|
|
|
|
19,290 |
|
General and administrative |
|
|
989 |
|
|
|
21,132 |
|
|
|
8 |
|
|
|
|
|
|
|
22,129 |
|
Gain on sales of land and buildings |
|
|
|
|
|
|
(120 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
(175 |
) |
Depreciation and amortization |
|
|
|
|
|
|
10,541 |
|
|
|
214 |
|
|
|
|
|
|
|
10,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
989 |
|
|
|
222,581 |
|
|
|
(355 |
) |
|
|
|
|
|
|
223,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(989 |
) |
|
|
10,834 |
|
|
|
355 |
|
|
|
|
|
|
|
10,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income (loss) from continuing
operations of subsidiaries |
|
|
10,797 |
|
|
|
|
|
|
|
|
|
|
|
(10,797 |
) |
|
|
|
|
Interest expense |
|
|
(25,243 |
) |
|
|
(409 |
) |
|
|
(718 |
) |
|
|
618 |
|
|
|
(25,752 |
) |
Other, net |
|
|
552 |
|
|
|
339 |
|
|
|
236 |
|
|
|
(618 |
) |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,894 |
) |
|
|
(70 |
) |
|
|
(482 |
) |
|
|
(10,797 |
) |
|
|
(25,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
(14,883 |
) |
|
|
10,764 |
|
|
|
(127 |
) |
|
|
(10,797 |
) |
|
|
(15,043 |
) |
Income tax benefit |
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(14,883 |
) |
|
|
10,924 |
|
|
|
(127 |
) |
|
|
(10,797 |
) |
|
|
(14,883 |
) |
Income (loss) from discontinued operations |
|
|
(16 |
) |
|
|
172 |
|
|
|
(188 |
) |
|
|
16 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(14,899 |
) |
|
$ |
11,096 |
|
|
$ |
(315 |
) |
|
$ |
(10,781 |
) |
|
$ |
(14,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
$ |
|
|
|
$ |
230,531 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
230,531 |
|
Retail products |
|
|
|
|
|
|
11,343 |
|
|
|
|
|
|
|
|
|
|
|
11,343 |
|
Miscellaneous |
|
|
|
|
|
|
4,471 |
|
|
|
|
|
|
|
|
|
|
|
4,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,345 |
|
|
|
|
|
|
|
|
|
|
|
246,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
|
|
|
|
165,285 |
|
|
|
(609 |
) |
|
|
|
|
|
|
164,676 |
|
Retail products |
|
|
|
|
|
|
10,710 |
|
|
|
|
|
|
|
|
|
|
|
10,710 |
|
Marketing and advertising |
|
|
|
|
|
|
18,538 |
|
|
|
|
|
|
|
|
|
|
|
18,538 |
|
General and administrative |
|
|
1,283 |
|
|
|
19,542 |
|
|
|
9 |
|
|
|
|
|
|
|
20,834 |
|
Depreciation and amortization |
|
|
|
|
|
|
13,225 |
|
|
|
239 |
|
|
|
|
|
|
|
13,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,283 |
|
|
|
227,300 |
|
|
|
(361 |
) |
|
|
|
|
|
|
228,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1,283 |
) |
|
|
19,045 |
|
|
|
361 |
|
|
|
|
|
|
|
18,123 |
|
Equity in income (loss) from continuing
operations of subsidiaries |
|
|
18,114 |
|
|
|
|
|
|
|
|
|
|
|
(18,114 |
) |
|
|
|
|
Interest expense |
|
|
(22,345 |
) |
|
|
(344 |
) |
|
|
(914 |
) |
|
|
633 |
|
|
|
(22,970 |
) |
Other, net |
|
|
584 |
|
|
|
89 |
|
|
|
78 |
|
|
|
(633 |
) |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,647 |
) |
|
|
(255 |
) |
|
|
(836 |
) |
|
|
(18,114 |
) |
|
|
(22,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
(4,930 |
) |
|
|
18,790 |
|
|
|
(475 |
) |
|
|
(18,114 |
) |
|
|
(4,729 |
) |
Income tax provision |
|
|
|
|
|
|
(201 |
) |
|
|
|
|
|
|
|
|
|
|
(201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(4,930 |
) |
|
|
18,589 |
|
|
|
(475 |
) |
|
|
(18,114 |
) |
|
|
(4,930 |
) |
Income from discontinued operations |
|
|
37,600 |
|
|
|
37,503 |
|
|
|
97 |
|
|
|
(37,600 |
) |
|
|
37,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
32,670 |
|
|
$ |
56,092 |
|
|
$ |
(378 |
) |
|
$ |
(55,714 |
) |
|
$ |
32,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(14,899 |
) |
|
$ |
11,096 |
|
|
$ |
(315 |
) |
|
$ |
(10,781 |
) |
|
$ |
(14,899 |
) |
Adjustments to reconcile to cash provided |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including
amortization included in interest expense |
|
|
4,796 |
|
|
|
10,590 |
|
|
|
215 |
|
|
|
|
|
|
|
15,601 |
|
Changes in operating assets and liabilities |
|
|
2,540 |
|
|
|
4,399 |
|
|
|
(2,075 |
) |
|
|
|
|
|
|
4,864 |
|
Changes in net affiliate balances |
|
|
|
|
|
|
30,856 |
|
|
|
2,899 |
|
|
|
(33,755 |
) |
|
|
|
|
Other, net |
|
|
533 |
|
|
|
218 |
|
|
|
(39 |
) |
|
|
|
|
|
|
712 |
|
Cash provided by discontinued operations |
|
|
|
|
|
|
|
|
|
|
1,247 |
|
|
|
|
|
|
|
1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
|
(7,030 |
) |
|
|
57,159 |
|
|
|
1,932 |
|
|
|
(44,536 |
) |
|
|
7,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
|
|
|
|
(21,395 |
) |
|
|
|
|
|
|
|
|
|
|
(21,395 |
) |
Investment in and advances to subsidiaries |
|
|
(44,536 |
) |
|
|
|
|
|
|
|
|
|
|
44,536 |
|
|
|
|
|
Cash used in discontinued operations |
|
|
|
|
|
|
|
|
|
|
(129 |
) |
|
|
|
|
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(44,536 |
) |
|
|
(21,395 |
) |
|
|
(129 |
) |
|
|
44,536 |
|
|
|
(21,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under credit agreement |
|
|
52,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,500 |
|
Repayments of other long-term debt |
|
|
(899 |
) |
|
|
(204 |
) |
|
|
(431 |
) |
|
|
|
|
|
|
(1,534 |
) |
Debt issuance and refinancing costs |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35 |
) |
Cash used in discontinued operations |
|
|
|
|
|
|
|
|
|
|
(165 |
) |
|
|
|
|
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
51,566 |
|
|
|
(204 |
) |
|
|
(596 |
) |
|
|
|
|
|
|
50,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
|
|
|
|
35,560 |
|
|
|
1,207 |
|
|
|
|
|
|
|
36,767 |
|
Effect of exchange rate changes on cash balances |
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
307 |
|
Cash, beginning of period |
|
|
|
|
|
|
31,911 |
|
|
|
2,888 |
|
|
|
|
|
|
|
34,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
|
|
|
$ |
67,471 |
|
|
$ |
4,402 |
|
|
$ |
|
|
|
$ |
71,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,670 |
|
|
$ |
54,564 |
|
|
$ |
1,150 |
|
|
$ |
(55,714 |
) |
|
$ |
32,670 |
|
Adjustments to reconcile to cash provided |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including
amortization included in interest expense |
|
|
3,250 |
|
|
|
13,476 |
|
|
|
179 |
|
|
|
|
|
|
|
16,905 |
|
Changes in operating assets and liabilities |
|
|
(112 |
) |
|
|
(4,406 |
) |
|
|
2,121 |
|
|
|
|
|
|
|
(2,397 |
) |
Changes in net affiliate balances |
|
|
|
|
|
|
(63,693 |
) |
|
|
(1,245 |
) |
|
|
64,938 |
|
|
|
|
|
Other net |
|
|
991 |
|
|
|
(38,469 |
) |
|
|
877 |
|
|
|
|
|
|
|
(36,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
|
36,799 |
|
|
|
(38,528 |
) |
|
|
3,082 |
|
|
|
9,224 |
|
|
|
10,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of property and equipment |
|
|
|
|
|
|
(11,543 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
(11,629 |
) |
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
45,490 |
|
|
|
|
|
|
|
|
|
|
|
45,490 |
|
Proceeds from sale of property |
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
1,926 |
|
Investment in and advances to subsidiaries |
|
|
9,224 |
|
|
|
|
|
|
|
|
|
|
|
(9,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
9,224 |
|
|
|
35,873 |
|
|
|
(86 |
) |
|
|
(9,224 |
) |
|
|
35,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving credit agreement |
|
|
(40,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,000 |
) |
Net borrowings (repayments) of other long-term debt |
|
|
(3,700 |
) |
|
|
204 |
|
|
|
(2,179 |
) |
|
|
|
|
|
|
(5,675 |
) |
Debt issuance and refinancing costs |
|
|
(2,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,474 |
) |
Proceeds from stock purchase and options plans |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
(46,023 |
) |
|
|
204 |
|
|
|
(2,179 |
) |
|
|
|
|
|
|
(47,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
|
|
|
|
(2,451 |
) |
|
|
817 |
|
|
|
|
|
|
|
(1,634 |
) |
Effect of exchange rate changes on cash balances |
|
|
|
|
|
|
|
|
|
|
164 |
|
|
|
|
|
|
|
164 |
|
Cash, beginning of period |
|
|
|
|
|
|
16,238 |
|
|
|
1,216 |
|
|
|
|
|
|
|
17,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
|
|
|
$ |
13,787 |
|
|
$ |
2,197 |
|
|
$ |
|
|
|
$ |
15,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
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, 2006.
Executive Summary of Business
Bally is among the largest full-service commercial operators of fitness centers in North
America in terms of members, revenues and square footage of its facilities. As of March 31, 2007,
we operated 374 fitness centers collectively serving approximately 3.5 million members. These 374
fitness centers occupied a total of 11.8 million square feet.
Our fitness centers are concentrated in major metropolitan areas in 26 states and the
District of Columbia, with 299 fitness centers located in the top 25 metropolitan areas in the
United States. As of March 31, 2007, we operated fitness centers in over 45 major metropolitan
areas representing 62% of the United States population. In 2006, approximately 69% of new joining
members elected 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. At March 31, 2007, 86% of our members had
multiple club access memberships.
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.
Financial Condition
On July 31, 2007, the Company and substantially all of its domestic affiliates filed
voluntary petitions for relief with the Bankruptcy Court, commencing the Chapter 11 Cases. The
Debtors will continue to operate their businesses as debtors-in-possession under the jurisdiction
of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and
orders of the Bankruptcy Court.
On August 21, 2007, the Bankruptcy Court approved, and on August 22, 2007, we entered into
the DIP Facility with Morgan Stanley Senior Funding, Inc., acting as the DIP Agent for the DIP
Lenders. The $292 million DIP Facility is comprised of a $50 million DIP Revolving Credit and a
$242 million DIP Term Loan. We have granted security interests, liens, mortgages, and superpriority
claims to the DIP Agent on behalf and for the benefit of the DIP Lenders. Our obligations under
the DIP Facility are guaranteed by certain of our subsidiaries who are Debtors pursuant to a
Guarantee and Collateral Agreement. We used borrowings under the DIP Facility to repay all
outstanding indebtedness under the New Facility. Upon our emergence from bankruptcy, the DIP
Lenders will provide an exit financing facility under the Amended Plan. Upon our emergence from
bankruptcy, the DIP Lenders will provide an exit financing facility comprised of a $50 million
revolver and a $242 million term loan. See Note 11 of Notes to Condensed Consolidated Financial
Statements for more detailed information regarding the DIP Facility and the Exit Credit Facility.
We reported losses from continuing operations for the first quarter 2007 and for each of the
years 2002 through 2005. These losses are expected to persist despite a modest profit from
continuing operations in 2006 of $5.6 million. Further, we expect to continue to be affected by
increased competition from well-financed competitors and our own limited ability to invest in
capital improvements, including new fitness equipment, due to our constrained liquidity and overall
financial condition. We expect the persisting increase in competition to continue to have an
adverse effect on our business, liquidity, financial condition and results of operations. In
addition, the constraints on our liquidity have limited our ability to invest our operating cash
flow in improvements to our fitness centers and address the aging of our facilities, which may
affect our ability to compete. Public perception of our declining liquidity, financial condition
and results of operations, in particular with regard to our potential failure to meet our debt
obligations, may result in additional decreases in cash membership revenues (particularly those
associated with longer term membership contracts) and increases in member attrition. In addition,
if liquidity problems persist, our suppliers could refuse to provide key products and services in
the future. Continuing liquidity concerns could also negatively affect our relationship with
employees by decreasing productivity and increasing turnover.
Our reported consolidated assets increased from $396.8 million as of December 31, 2006 to
$431.9 million as of March 31, 2007. This increase of $35.1 million was due primarily to an
increase of $37.1 million in our cash balance.
32
In accordance with SFAS 144, we assess the recoverability of long-lived assets (excluding
goodwill) and identifiable acquired intangible assets with finite lives on an annual basis or
whenever events or changes in circumstances indicate we may not be able to recover the assets
carrying amount.
Upon
emergence from chapter 11 our assets and liabilities will be recorded at fair value
using either fresh start accounting or purchase accounting methodology. The fair value of our
assets and liabilities may differ materially from the recorded values of assets and liabilities on
our consolidated balance sheets included herein. In addition, our financial results after the
application of fresh start or purchase accounting may be different from historical trends.
Accordingly, the values at which assets are realized and the amounts at which liabilities are
liquidated may differ from those recorded in the accompanying financial statements.
Liquidity and Capital Resources
The following table summarizes the Companys liquidity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
Cash and equivalents |
|
$ |
71.9 |
|
|
$ |
34.8 |
|
|
$ |
37.1 |
|
Unutilized revolving credit facility |
|
|
0.1 |
|
|
|
25.8 |
|
|
|
(25.7 |
) |
|
|
|
|
|
|
|
|
|
|
Liquidity before delayed draw term loan |
|
|
72.0 |
|
|
|
60.6 |
|
|
|
11.4 |
|
Undrawn delayed draw term loan |
|
|
1.1 |
|
|
|
29.1 |
|
|
|
(28.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
$ |
73.1 |
|
|
$ |
89.7 |
|
|
$ |
(16.6 |
) |
|
|
|
|
|
|
|
|
|
|
The Companys liquidity declined by $16.6 million during the first three months of 2007. The
decline in liquidity was due primarily to the funding of capital expenditures for equipment in our
clubs. On June 1, 2007 we received proceeds of approximately $19 million from the sale of
substantially all of our health clubs in Canada. As of September 21, 2007 our liquidity was
approximately $50 million.
We maintain a substantial amount of debt, the terms of which require significant interest
payments each year. On April 16, 2007 and July 15, 2007, we did not make interest payments of $14.8
million on our Senior Subordinated Notes and $12.3 million on our Senior Notes, respectively,
resulting in defaults under the applicable indentures, and as a result of cross-default provisions,
under the New Facility. On April 12, 2007, May 14, 2007 and July 16, 2007 we entered into
forbearance agreements and amendments thereto related to the interest payments and other defaults
with our lenders under the New Facility and the noteholders under the Indentures.
On June 18, 2007 we announced our intention to restructure our obligations and recapitalize
the business through a prepackaged chapter 11 plan of reorganization. The solicitation of votes
for the prepackaged plan commenced on June 27, 2007 and was concluded on July 27, 2007 with the
requisite votes in favor of the plan. On July 31, 2007, prior to expiration of the forbearance
agreements with our lenders and noteholders, we filed voluntary petitions for relief commencing
reorganization under chapter 11 of the Bankruptcy Code.
On August 1, 2007, the Bankruptcy Court authorized our continued use of cash on hand and
subsequent cash collections, giving us continued access to the liquidity needed to operate our
business. On August 22, 2007, we entered into the DIP Facility, which provides up to $292 million
of debtor-in-possession financing consisting of a $50 million DIP Revolving Credit and a $242
million DIP Term Loan. The DIP Facility refinanced the New Facility, and is available to provide
working capital during the pendency of the Chapter 11 Cases.
Upon emergence from bankruptcy and the implementation of the new capital structure
contemplated in the Amended Plan (see Note 11 of Notes to Condensed Consolidated Financial
Statements for more detail on the Amended Plan) we believe that our operating cash flows and funds
available under the applicable Exit Credit Facility will be sufficient to meet our needs for
working capital and other cash requirements for the next twelve months. We must have a minimum of
$100 million of liquidity after giving effect to the Amended Plan as a condition to closing the
Exit Credit Facility and emerging from bankruptcy.
Our cash flows and liquidity may be negatively affected by various items, including declines
in membership cash collections, changes in terms or other requirements by vendors, including our
credit card payment processor; 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 been required to provide additional letters of credit,
and cash deposits to support vendors, credit card payment processing, and insurance programs, which
have reduced our available liquidity. These items may continue to affect us after emergence from
bankruptcy.
33
In addition, the Exit Credit Facility and the indentures to which the Company will be party
when it emerges from chapter 11 (the New Indentures) contain covenants that include, among other
things, certain financial tests and timely financial reporting requirements, as well as
restrictions on incurring, making or entering into additional indebtedness, liens, certain types of
payments (including common stock dividends and redemptions and payments on existing indebtedness),
capital expenditures, investments, assets sales, and sale leaseback transactions. There can be no
assurance that we will be able to comply with these covenants. For example, our Exit Credit
Facility will require that we provide audited financial statements to the lenders within 180 days
of year end for 2007 and 90 days after year end for each subsequent calendar year. Moreover, under
the New Indentures, we will be required to complete our 2007 audit by June 30, 2008 or an event of
default will occur thereunder. If our 2007 audit is not completed by April 15, 2008, the interest
rate on our New Senior Secured Lien Notes will increase until the audit is completed. If we are
unable to complete our financial reports on a timely basis and cannot obtain the requisite consents
from our noteholders and lenders, a default or an event of default may occur under the Exit Credit
Facility or our New Indentures, in which case the lenders under the Exit Credit Facility, the
trustee under the applicable indenture or the requisite holders of Notes could accelerate the
related obligations and exercise any other available rights and remedies. In such event, we could
be unable to satisfy those obligations.
Interest Expense
Interest expense for the three months ended March 31, 2007 increased $2.8 million to $25.8
million as compared to the prior year period, due to increased amortization of deferred financing
costs and increases in general interest rate levels and higher average outstanding debt.
Amortization of deferred financing costs was approximately $4.8 million in the three months ended
March 31, 2007, a $1.4 million increase over the 2006 period.
Of our total debt outstanding of $812.9 million at March 31, 2007, approximately 57% 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.
Cash Flows
The following table summarizes the Companys cash flows for the three months ended March 31,
2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
Change from |
|
|
|
2007 |
|
|
2006 |
|
|
Previous Period |
|
Cash provided by operating activities |
|
$ |
7.5 |
|
|
$ |
10.6 |
|
|
$ |
(3.1 |
) |
Cash provided by (used in) investing activities |
|
|
(21.5 |
) |
|
|
35.8 |
|
|
|
(57.3 |
) |
Cash provided by (used in) financing activities |
|
|
50.8 |
|
|
|
(48.0 |
) |
|
|
98.8 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
$ |
36.8 |
|
|
$ |
(1.6 |
) |
|
$ |
38.4 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net
cash provided by operating activities of $7.5 million in the first three months of 2007
represented a decrease of $3.1 million from the 2006 period. Cash received from memberships
decreased $12.8 million in the current year period compared to the prior year period.
Investing Activities and Capital Expenditures
Net
cash used in investing activities totaled $21.5 million in the first three months of 2007
compared to cash provided of $35.8 million in 2006. The 2006 period benefited from proceeds of
$47.4 million from the sale of assets (including $45 million from the sale of Crunch Fitness)
offset by capital expenditures of $11.6 million.
Financing Activities
Net
cash provided by financing activities totaled $50.8 million in the first three months of
2007 compared to cash used of $48.0 million in the 2006 period. During the quarter the Company
borrowed $28 million on its delayed draw term loan and $24.5 million on its revolving credit
facility. In the 2006 period, the Company applied $30 million of proceeds from the sale of Crunch
Fitness as a mandatory debt repayment and reduced borrowings under its revolving credit.
34
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.
Debt
Forbearance Agreements
On April 2, 2007, we failed to comply with certain financial reporting covenants under the
New Facility. On April 12, 2007, we entered into the Lender Forbearance Agreement with the lenders
under the New Facility. Under this agreement the lenders agreed to forbear from exercising any
remedies under the New Facility as a result of certain defaults arising from, among other things,
our inability to meet financial reporting covenants including delivery of audited financial
statements for the fiscal year ended December 31, 2006, and the cross default arising from the
non-payment of interest due April 16, 2007 on the Senior Subordinated Notes. The Forbearance
Agreement contained restrictions during its term on additional indebtedness, liens, investments,
asset sales and sale/leasebacks. Furthermore, the agreement required that we enter into forbearance
agreements with respect to defaults under our public indentures with the holders of at least a
majority of the Senior Notes and at least 75% of the Senior Subordinated Notes.
On May 14, 2007, we entered into the Senior Notes Forbearance Agreement with holders
representing over 80% of the aggregate principal amount outstanding of our Senior Notes. Pursuant
to the Senior Notes Forbearance Agreement, holders of the Senior Notes waived certain defaults
under the Senior Notes Indenture and agreed to forbear from exercising any related remedies until
July 13, 2007. Holders of the Senior Notes also consented to amend certain provisions of the
Senior Notes Indenture in connection with the waiver of the defaults. We agreed to pay a one-time
cash consent fee of $1.25 per $1,000 principal amount of Senior Notes to holders of the Senior
Notes that executed the Senior Note Forbearance Agreement and consented to the related amendments
to the Senior Notes Indenture.
On May 14, 2007, we also entered into the Senior Subordinated Notes Forbearance Agreement with
holders representing over 80% of the aggregate principal amount outstanding of our Senior
Subordinated Notes. Pursuant to the Senior Subordinated Notes Forbearance Agreement, holders of the
Senior Subordinated Notes waived certain defaults under the Senior Subordinated Notes Indenture and
agreed to forbear from exercising any related remedies until July 13, 2007. Holders of the Senior
Subordinated Notes also consented to amend certain provisions of the Senior Subordinated Notes
Indenture in connection with the waiver of the defaults. We did not pay a consent fee to holders
of the Senior Subordinated Notes in connection with the Senior Subordinated Notes Forbearance
Agreement.
Extension of Forbearance Agreements
On July 16, 2007, the Company entered into the Senior Notes Forbearance Extension with
holders of the Companys Senior Notes. Pursuant to the Senior Notes Forbearance Extension, holders
of the Senior Notes agreed to forbear from exercising any remedies under the Senior Notes (or their
underlying indenture) until July 31, 2007, in accordance with the terms of the Senior Notes
Forbearance Agreement. The Company did not make the interest payment due on July 15, 2007 under
the Senior Notes.
On July 16, 2007, the Company entered into the Senior Subordinated Notes Forbearance
Extension with holders of the Companys Senior Subordinated Notes. Pursuant to the Senior
Subordinated Notes Forbearance Extension, holders of the Senior Subordinated Notes agreed to
forbear from exercising any remedies under the Senior Subordinated Notes (or their underlying
indenture) until July 31, 2007, in accordance with the terms of the Senior Subordinated Notes
Forbearance Agreement.
On July 16, 2007, the Company entered into the Lender Forbearance Extension. Pursuant to the
Lender Forbearance Extension, the Agent and the Lenders agreed to forbear from exercising any
remedies under the Credit Agreement as a result of certain defaults until July 31, 2007, in
accordance with the terms of the Lender Forbearance Agreement.
The Company did not pay a consent fee to the Agent, Syndication Agent or Lenders under the
Credit Agreement, or to holders of the Senior Notes or the Senior Subordinated Notes, in connection
with any of the Forbearance Extensions. The Company filed the Chapter 11 Cases prior to expiration
of the Forbearance Extensions on July 31, 2007. As a result, an event of default occurred under
each of the New Facility, Senior Notes Indenture and Senior Subordinated Notes Indenture and the
Companys indebtedness therefore was immediately accelerated and, as such, classified as current
maturities of long-term debt on its condensed consolidated balance sheet.
At July 31, 2007, we had $23.5 million in outstanding borrowings and $20.1 million in
letters of credit issued under the revolving credit facility. The term loan balance under the new
facility was $205.9 million and there was $33.0 million borrowed on the delayed-draw term loan
facility.
35
DIP Financing
On August 21, 2007 the Bankruptcy Court approved, and on August 22, 2007, Bally entered into
the DIP Facility with Morgan Stanley Senior Funding, Inc., as the DIP Agent for the DIP Lenders.
The $292 million DIP Facility is comprised of a $50 million DIP Revolving Credit with a $40 million
sublimit for letters of credit and a $242 million DIP Term Loan. The rate of interest on the
borrowings under the DIP Revolving Credit is, at the Companys option, either the reference rate
(higher of the prime rate or federal funds rate plus .50%) plus a margin of 1.00% or a Eurodollar
rate plus a margin of 2.00%. Commitment fees of 0.50% per annum are payable on the unused portion
of the revolving credit facility. The rate of interest on the borrowings under the DIP Term Loan
is, at the Companys option, either the reference rate plus a margin of 3.25% or a Eurodollar rate
plus a margin of 4.25% per annum. A fee of 2.00% per annum is paid on outstanding letters of
credit. The DIP Facility grants the DIP Lenders a first perfected
lien on all of the Companys pre-
and post-petition property, subject only to certain unavoidable prior liens and to a carve out
for specified professional fees and superpriority administrative expense claims. The Companys
obligations under the DIP Facility are guaranteed by most of its domestic subsidiaries.
The proceeds of the DIP Facility were used to repay amounts borrowed under the pre-petition
New Facility and to pay fees and expenses associated with the DIP Facility.
As of September 21, 2007, there was $242 million outstanding under the DIP Term Loan, no
borrowings under the DIP Revolving Credit and $24.7 million letters of credit were issued. The
amount available under the DIP Revolving Credit is reduced by letters of credit issued.
The Company paid fees in the amount of $3.7 million for the DIP Facility and the term loan was
subject to original issue discount of 1.5%.
Upon our emergence from bankruptcy, the DIP Lenders will convert the DIP Facility into the
Exit Credit Facility providing up to $292 million, consisting of up to a five-year, $50 million
Exit Revolving Credit, with a $40 million sublimit for letters of credit and a $242 million Exit
Term Loan which matures six years from closing or such earlier date pursuant to the terms of the
Exit Credit Facility. The interest rate margins on the Exit Credit Facility will be no more than
0.25% and 0.75% higher on the Exit Revolving Credit and the Exit Term Loan, respectively than under
the DIP Facility. Certain other terms, including financial covenants, will differ from the DIP
Facility. The Exit Credit Facility will be secured by substantially all the Companys real and
personal property, including member obligations under installment contracts. The Companys
obligations under the Exit Credit Facility will be guaranteed by most of its domestic subsidiaries.
The Company will pay additional fees related to the Exit Credit Facility in the amount of $2,600.
See Note 11 of Notes to Condensed Consolidated Financial Statements for more detailed
information regarding the DIP Facility and the Exit Credit Facility.
Other Secured Debt
As of March 31, and April 15, 2007, we were not in compliance with the financial reporting
covenants under two mortgage agreements and certain capital lease obligations. Upon filing our Form
10-K for 2006 on June 29, 2007, we cured the related violations.
As a result of our Chapter 11
Cases on July 31, 2007, events of default have occurred under mortgages and capital leases in the
amount of $9,271. Upon consummation of the Amended Plan of Reorganization, these will be paid in
accordance with their terms.
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.
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 2 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, 2006 filed with the Securities and Exchange Commission.
36
The preparation of financial statements in conformity with GAAP requires management to make
judgments, estimates and assumptions at a specific point in time that affect the reported amounts
of certain assets, liabilities, revenues, and expenses, and related disclosures of contingent
assets and liabilities. We base our estimates on historical experience and other factors we believe
to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities not readily obtainable from other sources.
Actual results could differ from those estimates.
The accounting policies and estimates that can have a significant impact on the operating
results, financial position and footnote disclosures of the Company are described in Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
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 |
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
Change from |
|
|
|
March 31, |
|
|
% of Net |
|
|
March 31, |
|
|
% of Net |
|
|
Previous Period |
|
|
|
2007 |
|
|
revenues |
|
|
2006 |
|
|
revenues |
|
|
Dollars |
|
|
% |
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership |
|
$ |
192,817 |
|
|
|
83 |
% |
|
$ |
202,702 |
|
|
|
82 |
% |
|
$ |
(9,885 |
) |
|
|
(5) |
% |
Personal training |
|
|
25,977 |
|
|
|
11 |
% |
|
|
27,829 |
|
|
|
11 |
% |
|
|
(1,852 |
) |
|
|
(7) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue |
|
|
218,794 |
|
|
|
94 |
% |
|
|
230,531 |
|
|
|
93 |
% |
|
|
(11,737 |
) |
|
|
(5) |
% |
Retail products |
|
|
9,711 |
|
|
|
4 |
% |
|
|
11,343 |
|
|
|
5 |
% |
|
|
(1,632 |
) |
|
|
(14) |
% |
Miscellaneous |
|
|
4,910 |
|
|
|
2 |
% |
|
|
4,471 |
|
|
|
2 |
% |
|
|
439 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
233,415 |
|
|
|
100 |
% |
|
|
246,345 |
|
|
|
100 |
% |
|
|
(12,930 |
) |
|
|
(5) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services |
|
|
162,469 |
|
|
|
70 |
% |
|
|
164,676 |
|
|
|
67 |
% |
|
|
(2,207 |
) |
|
|
(1) |
% |
Retail products |
|
|
8,747 |
|
|
|
3 |
% |
|
|
10,710 |
|
|
|
4 |
% |
|
|
(1,963 |
) |
|
|
(18) |
% |
Marketing and advertising |
|
|
19,290 |
|
|
|
8 |
% |
|
|
18,538 |
|
|
|
8 |
% |
|
|
752 |
|
|
|
4 |
% |
General and administrative |
|
|
22,129 |
|
|
|
10 |
% |
|
|
20,834 |
|
|
|
8 |
% |
|
|
1,295 |
|
|
|
6 |
% |
Gain on sales of land and buildings |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175 |
) |
|
NM |
Depreciation and amortization |
|
|
10,755 |
|
|
|
5 |
% |
|
|
13,464 |
|
|
|
6 |
% |
|
|
(2,709 |
) |
|
|
(20) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
223,215 |
|
|
|
96 |
% |
|
|
228,222 |
|
|
|
93 |
% |
|
|
(5,007 |
) |
|
|
(2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10,200 |
|
|
|
4 |
% |
|
|
18,123 |
|
|
|
7 |
% |
|
|
(7,923 |
) |
|
|
(44) |
% |
Interest expense |
|
|
(25,752 |
) |
|
|
(11) |
% |
|
|
(22,970 |
) |
|
|
(9) |
% |
|
|
(2,782 |
) |
|
|
12 |
% |
Other income, net |
|
|
509 |
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
391 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes |
|
|
(15,043 |
) |
|
|
(7) |
% |
|
|
(4,729 |
) |
|
|
(2) |
% |
|
|
(10,314 |
) |
|
NM |
Income tax
benefit (provision) |
|
|
160 |
|
|
|
|
|
|
|
(201 |
) |
|
|
|
|
|
|
361 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(14,883 |
) |
|
|
(7) |
% |
|
$ |
(4,930 |
) |
|
|
(2) |
% |
|
$ |
(9,953 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not meaningful
37
Key Operating Data
Membership rollforward and statistics (in thousands, except dollars and fitness center data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2007 |
|
2006 |
|
change |
|
% change |
Members at beginning of period |
|
|
3,422 |
|
|
|
3,467 |
|
|
|
(45 |
) |
|
|
(1) |
% |
Number of new members joining during the period |
|
|
282 |
|
|
|
317 |
|
|
|
(35 |
) |
|
|
(11) |
% |
Number of net member drops during the period |
|
|
(251 |
) |
|
|
(252 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members at end of period |
|
|
3,453 |
|
|
|
3,532 |
|
|
|
(79 |
) |
|
|
(2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of members during the period (1) |
|
|
3,438 |
|
|
|
3,500 |
|
|
|
(62 |
) |
|
|
(2) |
% |
Total membership cash collections |
|
$ |
181,770 |
|
|
$ |
194,528 |
|
|
$ |
(12,758 |
) |
|
|
(7) |
% |
Average monthly cash received per member (2) |
|
$ |
17.63 |
|
|
$ |
18.53 |
|
|
$ |
(0.90 |
) |
|
|
(5) |
% |
Fitness centers open at end of period |
|
|
374 |
|
|
|
384 |
|
|
|
(10 |
) |
|
|
(3) |
% |
|
|
|
(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
the quarter by two. |
|
(2) |
|
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. |
Revenues and expenses
Bally memberships in most markets historically required a two or three year commitment from
the member with payments comprised of an initiation fee, interest and monthly dues. Since late
2003, we have expanded these offers to include month-to-month membership options to provide
greater flexibility to members. Beginning in late 2004, we implemented the Build Your Own
Membership (BYOM) 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,
which include down payments on financed contracts and dues payments.
It also includes revenue generated from provision of personal training
services. |
|
|
|
|
Membership services revenue comprised 94% and 93% of our revenue for the three months ended
March 31, 2007 and 2006, respectively. Membership services revenue is recognized at the later
of when membership services fees are collected or earned. Membership services fees collected
but not yet earned are included as a deferred revenue liability on the balance sheet. |
|
|
|
|
Currently, the majority of our members choose to purchase their membership under our
multi-year value plan by paying a membership fee down payment to their financed members
contract and by making monthly membership fee payments throughout the obligatory contract term
of their membership. After the obligatory contract term, 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 the BYOM program implementation
beginning in late 2004, renewal payments were substantially discounted from those required in
the obligatory period. As BYOM members enter renewal, we anticipate that these renewal
payments will likely carry a smaller discount from the obligatory period monthly payment level
in most markets. Members in our first BYOM markets began entering their renewal stage in late
2006. Our initial experience with these renewals indicates monthly renewal payments at levels
higher than we have historically experienced, but lower than the initial obligatory term
monthly rate. Beginning in the fourth quarter of 2006, we again began to offer more
significantly discounted renewals on our multi-club access memberships in many markets. |
|
|
|
|
In addition to our multi-year value plan financed membership program, members may choose to
prepay their multi-year membership for periods of up to three years, or may choose
paid-in-full nonrenewable memberships with closed-end contract terms of up to three years.
Month-to-month nonobligatory memberships are also available, which allow a member to pay
monthly non-obligatory dues payments after making an initial membership fee payment at the
start of the membership. Multi-year value plan financed membership contracts, including those
that have been prepaid, are renewable past the initial obligatory contract period, after which
members maintain their membership by making monthly or annual dues payments. |
38
|
|
|
Cash collection of membership services revenue generally occurs before the associated revenue
is recognized. This results in the deferral of significant cash collection 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 revenue on a straight-line
basis over the longer of the contractual period or the estimated member term. For the members
expected to maintain membership through renewal periods, we make estimates of membership term
on a composite basis of all multi-year value plan members joining in a monthly period and
establish discrete amortization pools based on estimated group membership term length
averages. Estimated membership term used to create the separate amortization groups for
revenue recognition are based on historical average membership terms experienced by our
members. |
|
|
|
|
Membership services revenue for our multi-year value plan financed members expected to enter
renewal is deferred as collected. Our historical experience has resulted in a determination
that approximately 37% of originated monthly payments from our members is subject to deferral,
to be recognized over the related estimated membership term. As a result, we defer all
collections received from members expected to enter renewal, and recognize as membership
services revenue these amounts based on five amortization pools with amortization periods of
39 months to 255 months (39 months to 252 months in 2006). These represent average
membership terms of our members in the five amortization pools expected to enter renewal and
maintain membership for periods of between 37 months and 360 months. Memberships whose
initial contract terms have been prepaid in their entirety are recognized in a similar manner,
except that the estimate of the group expected to remain a member for only the obligatory
period is amortized over the length of the contract (generally 36 months). Our historical
experience has resulted in a determination that approximately 61% of such memberships
originated in 2006 is subject to deferral, to be recognized over the related estimated
membership term using the same five amortization pools as described for monthly collections of
multi-year value plan financed contracts. These average membership terms are based on
estimates that change over time as we evaluate our membership term experience. |
|
|
|
|
We evaluate the estimates of membership term for each of our deferred revenue pools each
quarter and make adjustments to our estimates based on the most recent actual membership term
experience. As we determine that our new estimated membership term should be modified from the
previous estimate, we recognize as a change in accounting estimate a charge or credit to
membership services revenue in the period of evaluation to cumulatively adjust recognized
revenue and deferred revenue. As a consequence of our deferred revenue methodology, an
increase in membership attrition is expected to result in an increase in revenue in the period
of adjustment as it is determined that amounts previously deferred to future periods should be
deferred over a shorter expected period. Alternatively, a decrease in membership attrition can
reduce membership services revenue as it is determined that amounts previously considered
earned are required to be deferred for recognition over a longer expected period. |
|
|
|
|
Beginning in the fourth quarter of 2004, we increased contractual renewal rates associated
with our typical membership offering. Historically, when the member reaches renewal, our
business practice is to reduce renewal rates in order to increase retention during the renewal
period. Because we have included a discount in our membership contract and do not have a
demonstrated history of collecting the contractual renewal rate, we use the current
collections of members in renewal to estimate both ultimate collections and the portion
attributable to the initial term. |
|
|
|
|
To the extent that actual cash collected in renewal is different from the estimated amount,
revenues in the period of the change in estimate may be materially impacted. If we are
successful in collecting the contractual renewal rate, revenue deferred during the initial
term is expected to decline. If we offer discounts to renewing members that are more
significant than those that have been offered in the past, revenue required to be deferred
during the initial contract term will increase. The potential effects of this change in
estimate may be amplified if, for example, the collections of higher contractual renewal rates
results in a decline in membership retention, which will reduce our estimate of total
membership term, and further reduce the amount of deferred revenue recorded. Changes in member
behavior, competition and our performance may cause actual collected renewal rates to differ
significantly from estimated renewal rates. A resulting change in estimated renewal rates may
have a material effect on reported revenues in the period in which the change of estimate is
made. |
|
|
|
|
Our membership mix impacts the amount of revenue that we defer for later recognition, and the
period of time over which it is recognized. Since 2004 we have increased our sales of
month-to-month, nonobligatory add-on, and nonrenewable paid-in-full memberships. These
alternative membership programs result in a lower level of deferred revenue than our
multi-year value plan financed membership plans. Nonobligatory membership programs include our
month-to-month memberships which allow a member to make a membership fee payment, generally
between $99 and $149, and then make monthly dues payments for the membership term on a
nonobligatory basis. Add-on memberships to our multi-year value plan membership contracts
allow added members to maintain membership on a nonobligatory basis by making monthly payments
with no additional down payment requirements. Our nonrenewable memberships primarily result
from our paid-in-full membership option. |
39
|
|
|
Nonrenewable members prepay their membership for contract periods of 12 to 36 months, and
then are required to purchase a new membership after the expiration of the contract membership
term to maintain membership. A shift in membership mix from our multi-year value plan financed
membership to month-to-month and nonrenewable memberships generally results in a reduction in
the deferral of cash collections because the membership term of month-to-month contracts is
much shorter than the membership term of multi-year value plan financed memberships, and the
nonrenewable contract revenue is recognized over the contract term, which is typically 36
months or less. As a result of these shorter deferral periods, cash is recognized as revenue
more quickly for month-to-month and nonrenewable paid in full memberships than for our
multi-year value plan financed memberships. Our pricing of add-on memberships typically
results in an equal increase to monthly payments required in the initial term and the renewal
term. As a result, to the extent the membership mix shifts to include more add-on memberships
and fewer multi-year value plan members, the amount of required deferred revenue is expected
to decrease. |
|
|
|
|
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. |
|
|
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 4% and 5% of total revenue in the first quarter of 2007
and 2006, respectively. |
|
|
3) |
|
The balance of our revenue (2% for the first quarter of 2007 and 2006)
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 primary sources of cash are down payments, paid-in-full and monthly membership fees and
dues payments made by our members and sales of products and services, including personal training.
Because down payments, membership fees and monthly membership dues are recognized over the later of
when such payments are collected or earned, cash from membership fees and monthly membership dues
will often be received before such payments are recognized as revenue in the consolidated statement
of operations.
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. |
|
|
3) |
|
Marketing and advertising expenses consist of our marketing
department, national and local 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 expenses such as legal, consulting and
auditing as well as expenses related to the various legal and
accounting investigations. |
|
|
5) |
|
Impairment of goodwill and other intangibles includes the write-down
of the net book value of these assets pursuant to SFAS No. 142.
Under SFAS No. 142, the carrying value of our indefinite life
intangible assets is annually evaluated and compared to the fair value
of such assets. Impairments are recorded when we determine that the
net book value of these assets exceeds their fair value. |
|
|
6) |
|
Asset impairment charges include the write-down of the net book value
of our assets (other than indefinite life intangible assets evaluated
under SFAS No. 142) pursuant to SFAS No. 144. Under SFAS No.
144, the carrying value of our assets, primarily property and
equipment assets, is evaluated when circumstances indicate that the
carrying value may have been impaired. Asset impairment charges
represent the excess of the carrying value of the assets over their
fair value. |
40
|
7) |
|
Depreciation and amortization represent primarily the depreciation on
our fitness centers (equipment and buildings, where owned), and
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. |
Given the nature of our revenue and cost structure, we believe that inflation has not had any
material impact on our net revenues or on our operating expenses.
We measure performance using key operating statistics such as profitability per club, per area
and per region. We also evaluate average revenue per member and fitness center operating expenses,
with an emphasis on payroll and occupancy costs as a percentage of sales. We use fitness center
cash contribution and cash revenue to evaluate overall performance and profitability on an
individual fitness center basis. In addition, we focus on several membership statistics on a
fitness center-level and system-wide basis. These metrics include new membership sales, growth of
fitness center membership base and growth of system-wide members, fitness center number of workouts
per month, fitness center membership sales mix among various membership types and membership
retention.
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 will lead ultimately to increased profitability. Accordingly, we are focusing on member
acquisition and member retention as key objectives.
A portion of our capital expenditures relates 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 approximate $3.5 million, on average, which varies based on the costs of
construction labor, as well as on the planned service offerings, size and configuration of the
facility and on the market. Capital expenditures also include fitness equipment, usually as a
replacement for equipment no longer operative at our fitness centers.
According to the IHRSAs Industry Data Survey of the Health and Fitness Club Industry,
industry wide 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.
Summary of revenue recognition method
Our 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. We rely upon a signed contract between us and the customer as the persuasive
evidence of a sales arrangement. Delivery of health club services extends throughout the membership
terms. Delivery of personal training services occurs when individual personal training sessions
have been rendered.
We receive membership fees and monthly dues from our 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. Our total membership cash collections include all
sources of cash for membership, including membership fees collected upon membership origination,
down payments on multi-year value plan financed membership contracts and paid-in-full membership
receipts, monthly collections of membership fee payments and dues, and amounts collected in advance
of the due date under our acceleration and dues prepayment programs. Significant portions of our
total cash collections are deferred upon receipt and recognized in future periods. As a result, our
revenue recognition patterns do not reflect our patterns of total membership cash collections.
A majority of our cash collected for membership revenues is deferred and recognized on a
straight-line basis over the longer of the contractual term or the estimated membership term. The
majority of members commit to a membership contract term of between 12 and 36 months. The majority
of these contracts are for 36 months and include a members right to renew the membership at a
discount compared to the payments made during the initial membership term. As of March 31, 2007
and 2006, the weighted average
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membership life for members that commit to a membership term of between 12 and 36 months was
35 months and 38 months, respectively. Members with these terms that finance their initial
membership fee had a weighted average membership life of 34 months and 36 months, respectively at
March 31, 2007 and 2006, while those members that pay their membership fee in full at point of
sale had a weighted average membership life of 49 months and 57 months at March 31, 2007 and
2006, respectively. Our estimates of membership life were up to 360 months during 2006 and 2005,
although the vast majority of our membership revenues are recognized over six years or less.
Members in the non-obligatory renewal period of membership may cancel their membership at any
time prior to their monthly or annual due date with 30 days written notice. Related revenue
recognized includes monthly dues 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.
Membership life for month-to-month members is currently estimated at between 2 and 68 months, with
an average of 16 months, as of March 31, 2007, and were estimated between 4 and 41 months, with
an average of 15 months, as of March 31, 2006. 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 we receive payment, 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.
We have historically concentrated our membership sales efforts on multi-year value plan
financed obligatory contracts. Our BYOM membership offer approach added more alternative plans to
prospective new members. These plans included a greater emphasis on nonobligatory memberships and
closed-end contracts that carry definite terms of membership. Our BYOM approach also included an
increase in renewal dues for our multi-year value plan financed membership contracts when compared
to the value plan financed contracts prior to BYOM.
The timing of recognition of cash received for memberships and the level of deferred revenue
recognized is a consequence of the membership type and the amount of discount offered in the
renewal term. Our multi-year value plan financed memberships with open-ended renewal periods that
have carried significant discounts to initial term membership payment levels have resulted in the
greatest level of deferred revenue. At March 31, 2007 and December 31, 2006, the combination of
down payments and deferred monthly collections of our financed obligatory memberships and deferred
prepayments of membership fees on our paid-in-full obligatory memberships made up 76% and 77%,
respectively, of our total deferred revenue balance. This results from the requirement to defer
higher initial term payments over periods up to 360 months for those members whose membership term
is greater than the initial obligatory term. Our alternative membership programs result in a much
lower level of deferred revenue than these membership plans. Nonobligatory membership programs
include our month-to-month memberships, which allow a member to make a membership fee payment,
generally between $99 and $149, and then make monthly dues payments for the membership term on a
nonobligatory basis. We also offer add-on memberships to our multi-year value plan financed
membership contracts, which allow added members to maintain membership on a nonobligatory basis by
making monthly payments for the add-on membership term with no additional down payment
requirements. At March 31, 2007 and December 31, 2006, approximately 1% of our total deferred
revenue balance related to the deferral of month-to-month membership fees. Our closed ended
nonrenewable memberships primarily result from our paid-in-full membership option. Nonrenewable
members prepay their membership for contract periods of 12 to 36 months, and then are required to
purchase a new membership after the expiration of the contract membership term to maintain
membership. The initial prepayment of these memberships is deferred and recognized on a
straight-line basis for the duration of the closed contract period. Unlike our traditional
renewable memberships, no deferred revenue or recognition is required past the contract term as we
have no further obligations to the members following expiration of the contract term. At March 31,
2007 and December 31, 2006, deferred revenue related to these nonrenewable contracts amounted to
approximately 4% and 3%, respectively, of our deferred revenue.
Estimates of membership term have a significant effect on the amount and timing of revenue
recognition and deferred revenue for our multi-year value plan financed memberships. Because of the
inability to create predictions on a member-by-member basis of ultimate membership term, we make
predictions on an aggregate basis using multiple attrition groups to cover the continuum of
potential membership term. We calculate expected average membership term for each attrition group
based on historical experience and use it to amortize deferred revenue over the estimated
membership term. As a result, the estimate of average membership term has a significant impact on
revenue recognition. Because we base our estimates on historical membership term experience updated
quarterly, such estimates are inherently subject to change. As a result, our revenue is subject to
a high degree of variability dependent on changes of estimates of membership term.
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Several factors affect our current estimates of average membership term and are expected to
continue to affect our estimates into future periods. Historical attrition trends have reflected
shorter estimated membership terms than in prior periods as a result of several factors described
herein. Capital constraints associated with our liquidity position have resulted in reduced capital
expenditures in our fitness centers, affecting the membership experience. Further, increased
competition in key markets has resulted in a higher number of alternatives for our members than in
prior periods, leading to shorter terms of membership. The late 2004 start of the phased
implementation of the BYOM membership program resulted in an increase in contracted renewal dues on
our multi-year value plan financed memberships to levels approximating the monthly initial term
payment. This change is expected to have a notable negative impact on the percentage of multi-year
value plan financed members renewing since the prior significantly discounted renewal dues
influenced member retention in renewal periods. We are monitoring the level of renewal of these
BYOM members in order to determine our business response.
Importantly, our response to membership term changes brought about by increased renewal
monthly payment rates may include concessions to contracted renewal rates in an effort to maintain
membership levels. Also influencing our expectations of future membership term of our multi-year
value plan financed memberships is the change in mix of memberships sold in recent periods to more
nonobligatory and closed-ended nonrenewable membership options. The growth in these alternative
payment memberships results in reduced estimated membership of our multi-year value plan financed
memberships, as it is expected that those members having higher credit scores may be attracted to
these alternatives, resulting in a higher proportion of lower credit score members purchasing our
multi-year value plan financed membership. Significant in our year-end 2006 evaluation of future
membership attrition was our consideration of forecasting results of expected future cash revenue.
This critical evaluation by our new senior management included estimates of future membership cash
flows that directly result from estimates of membership retention. Using a more conservative
approach to this forecasting, cash revenue trends were greatly reduced in our forecast as of
December 31, 2006, resulting in a need to consider the impact of this estimate on our membership
term estimate. This evaluation led us to conclude at year-end 2006 that our prior estimates of
membership attrition should be changed to reflect higher levels of early attrition coinciding with
our projected future operating cash flows. As a result, based on the influence of these factors on
our ongoing historical membership term experience, we reduced our deferred revenue balance to
reflect these shorter membership term expectations at December 31, 2006. These factors continued to
impact our evaluation of deferred revenue as we completed our March 31, 2007 evaluation. This
evaluation conducted as part of our quarterly close process did not result in significant
modification from the year-end 2006 estimates.
Because our deferred revenue balances that are subject to adjustment due to membership term
estimate changes make up most of our total deferred revenue balance, changes in expectations as to
estimated membership term can have a significant impact on our revenue recognized. In periods of
decreasing estimated membership term, deferred revenue is adjusted downward, representing the
decreasing periods over which it is necessary to spread cash collections of prior periods.
Alternatively, in periods in which estimated membership term is increasing, deferred revenue is
adjusted upward, representing increasing periods over which prior cash collections are spread. The
changes in deferred revenue are recorded in the period of the change as the adjustments to revenue
are recognized. These adjustments may produce short-term revenue results that are counter to the
expected impact of our business trends. For instance, negative trends in attrition reflecting
shorter membership term result in increases in revenue recognized in the period in which the
adjustment to deferred revenue was determined, while positive trends in membership term have the
opposite effect.
A consequence of our negative business trends and change in estimated membership term is the
reduction in deferred revenue available to be recognized as membership revenue in future periods.
Our deferred revenue also has declined due to the change in membership mix, brought about by our
alternative membership programs. As a higher proportion of our members select nonobligatory and
closed-ended nonrenewable membership programs, the level of deferred revenue has decreased since
these programs do not require the extensive spreading of early cash collections to extended
membership periods that our traditional committed renewable membership programs have required. As a
result of this change in membership mix, revenue declines due to reduced amortization from deferred
revenue are replaced with additional cash recognition from monthly dues and the amortization of our
closed-end nonrenewable memberships over the contract period.
We estimate membership term for contracts originated during each month. Each quarter we update
our estimate of membership term for each individual monthly origination group to take into account
attrition experience specific to that group. As monthly sales originations mature, each quarter we
monitor the specific attrition of each group and make adjustments to our estimated membership term.
During the first three years of our multi-year value plan financed memberships, we closely monitor
collection history and change our estimates of membership term based on this experience. During the
renewal term, we monitor membership term by reviewing actual membership term experience in each
membership term group.
Based on the continuing trend of membership attrition and our negative trends in cash
membership revenue expected in future periods, we expect to record additional adjustments to our
deferred revenue to reflect our changed estimates of membership attrition based on our historical
membership term experience. Historical attrition data has primarily reflected the consequence of
contracted renewal dues that represent a significant discount to the initial term monthly payment
level. Our BYOM contracts include renewal dues that are substantially similar in most cases to the
monthly payment level during the initial term, resulting in the reduction of the
43
influence of renewal period monthly payment decreases on member longevity. As a result, it may
become more difficult to predict our estimates of future membership term in light of this important
change in business practices. We also may need to alter our estimates of future attrition based on
our future actions to retain BYOM members. Because of the phased roll out of the BYOM membership
approach to our markets, and the distribution of term lengths, we will monitor the early results of
the shorter-term markets to determine the changes in estimated term length that may be necessary to
adjust our deferred revenue balances. We expect to observe the earliest indications of overall
increases in early attrition as members in the latter part of their initial committed membership
period increase the default rate, since the influence of discounted renewal dues has been removed.
Such increases will be reflected in our monitoring of collection rates and other historical
indicators of estimated membership term.
The estimate of our deferred revenue is sensitive to the changes in membership term estimates.
A 1% increase in annual attrition of our traditional committed multi-year renewable members would
result in a decrease in deferred revenue of approximately $35 million as of March 31, 2007.
Variability in future estimated membership term results from changes in the collection pattern of
multi-year value plan financed memberships, actual retention of such members through renewal term,
and membership mix changes resulting in lower deferred revenue requirements. Membership term
changes are influenced by changes in our business, including increases in competition for health
clubs services, lack of funding of remodeling and needed capital improvements, changes in consumer
tastes and the market for health club services, and changes in the prices we charge in renewal
periods to maintain membership.
Comparison of the Three Months Ended March 31, 2007 and 2006
Total
revenue for the three months ended March 31, 2007 was $233.4 million compared to $246.3
million in 2006, a decrease of $12.9 million (5%). The decrease in total revenue resulted from
the following:
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Membership revenue decreased from $202.7 million in the prior year
quarter to $192.8 million in the quarter ended March 31, 2007 representing
a decrease of $9.9 million (5%). |
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Amortization of previously deferred cash collections, included in the
above decrease in membership revenue, declined by $10.4 million (13%) to $67.2
million in the current year period. Amortization of deferred revenue in our
long-term deferred revenue pools has declined due to the increase in the mix of
nonobligatory membership programs, including add-on memberships added to
multi-year value plan membership programs, month-to-month membership contracts,
the continued increase in our paid-in-full nonrenewable membership programs,
and the year-end 2006 adjustments which reduced beginning deferred revenue in
the quarter to adjust for changes in estimated membership term. During the
quarter ended March 31, 2007, we increased revenue recognized by
$1.9 million
and decreased deferred revenue to adjust to our current estimate of membership
term. In the prior year quarter, revenue recognized was increased by $8.5
million and deferred revenue decreased to adjust for this estimate resulting in
a decrease in recognition related to our estimate of term length of
$6.6 million in the current quarter. We expect that amortization of our long-term
pools will continue to decline as a result of this membership mix change.
Declines in the recognition through amortization of amounts deferred from our
traditional obligatory membership programs are expected to be offset in part by
increases in recognition of cash collected for nonobligatory memberships,
month-to-month memberships, and paid-in-full nonrenewable memberships. |
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Total membership cash collections in the quarter ended March 31, 2007
were $181.8 million versus $194.5 million in the prior year quarter, a $12.7
million (7%) decrease. Gross collections of monthly membership fees and dues
declined from $175.7 million in the prior year to $161.3 million in the first
quarter 2007, a $14.4 million (8%) decrease. Total deferrals of gross
collections of monthly membership fees and dues declined from the prior year
period by $18.9 million, resulting in an increase in monthly membership fee
payments and dues recognized of $6.1 million. Prepayments of membership fees
originated increased by $1.6 million to $16.0 million during the quarter, but
were offset by declines in down payments on value plan contracts of $1.6
million, to $8.9 million in the current year quarter. Accelerations of
membership fee collections included in the above change in gross collections of
membership fees were $3.3 million in the current year quarter, versus $3.8
million in the prior year period. |
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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 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 add-on
programs. In the quarter ended March 31, 2007, new member signups were
approximately 70% value plan, 17% paid-in-full and 13% month-to-month. In the
year earlier period, new member signups |
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were approximately 72% value plan, 12% paid-in-full and 16% month-to-month.
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 our 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 has had a disproportionate impact on membership cash
collections in first quarter 2007 as compared to the 2006 period and will continue
to have a negative impact. |
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Personal training revenue decreased to $26.0 million in the first quarter, 2007 from $27.8 million in
2006, a decrease of $1.8 million (7%), reflecting the decline in new membership sales from the prior year. |
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Retail products revenue decreased to $9.7 million in the first quarter, 2007 from $11.3 million in 2006, a
decrease of $1.6 million (14%), 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
reduced workout traffic in the clubs. |
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Miscellaneous revenue increased to $4.9 million (10%) in the first quarter, 2007 from $4.5 million in 2006. |
Operating costs and expenses for the three months ended March 31, 2007 were $223.2 million
compared to $228.2 million during 2006, a decrease of $5.0 million (2%). This decrease resulted
from the following:
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Membership services expenses for the three
months ended March 31, 2007 decreased $2.2
million (1%) from 2006, reflecting
reductions in personnel costs as a result
of our cost reduction initiatives and
utility costs, offset by increases in
occupancy costs (primarily rent) and repair
and maintenance costs. |
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Retail products expenses, which include
labor costs, for the three months ended
March 31, 2007 decreased $2.0 million
(18%) from 2006, primarily as a result of a
decrease in cost of goods sold from lower
sales and reduced labor costs as a result
of our front desk retail model integration. |
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Marketing and advertising expenses for the
three months ended March 31, 2007
increased $0.8 million (4%) from 2006,
primarily from increases in media spending
and television production costs. |
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General and administrative expenses for the three months
ended March 31, 2007 increased $1.3 million (6%) from
2006. Increases in personnel costs were offset slightly by
a reduction in professional fees. |
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Depreciation expense for the three months
ended March 31, 2007 decreased $2.7
million (20%) from 2006, reflecting fewer
depreciable assets resulting from fixed
asset write-offs and impairment charges in
2006. |
Operating
income for the three months ended March 31, 2007 decreased
$7.9 million to $10.2 million as compared to the prior year period. This decrease is primarily due to the revenue
decrease, partially offset by decreases in expenses for membership services, retail, and
depreciation.
Interest expense for the three months ended March 31, 2007 increased $2.8 million to $25.8
million as compared to the prior year, due to increased amortization of deferred financing costs
and increases in general interest rate levels, and higher weighted average debt outstanding during
the period. Amortization of deferred financing costs was approximately $4.8 million for the three
months ended March 31, 2007, a $1.4 million increase over the 2006 period.
Discontinued Operations
Gain or loss from discontinued operations for the three months ended March 31, 2007 was zero
compared to a loss from discontinued operations of $0.8 million for the 2006 period. In addition, a
gain of $38.4 million was recorded in the 2006 period reflecting the sale of our Crunch Fitness
brand on January 26, 2006.
Recently Issued Accounting Standards
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for
Financial Assets or Financial Liabilities, which provides companies with an option to report
selected financial assets and liabilities at fair value. The objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective as of the
45
beginning of an entitys first fiscal year beginning after November 15, 2007. We have not yet
determined the effect, if any, the adoption of SFAS 159 will have on our financial position,
results of operations or cash flows.
Other Matters
NYSE Delisting
On May 2, 2007, the NYSE permanently suspended trading of the our common stock and delisted
the common stock in accordance with Section 12 of the Exchange Act and the rule promulgated
thereunder as of June 8, 2007. Since May 2, 2007, our common stock has been quoted on the Pink
Sheets Electronic Quotation Service.
Management Changes
On August 15, 2007, we terminated the Interim Executive Services Agreement dated April 12,
2006 between the Company and Tatum, LLC (Tatum) pursuant to which Ronald G. Eidell served as our
Senior Vice President and Chief Financial Officer, and the Interim Executive Services Agreement
dated December 11, 2006 between the Company and Tatum pursuant to which Michael Goldberg served as
Vice President, Corporate Controller. The terminations were principally the result of the our
inability to negotiate the retention of Tatum and Messrs. Eidell and Goldberg on terms satisfactory
to the U.S. Trustee in the Companys bankruptcy case.
On August 15, 2007, our Board of Directors appointed William G. Fanelli to serve as Senior
Vice President, Finance and Corporate Development and principal financial officer, effective August
16, 2007.
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 facility and term loan balance under its New
Facility bears interest at variable rates based upon prevailing short-term interest rates in the
United States and Europe. Based on the average outstanding balance of these variable rate
obligations for the three months ended March 31, 2007, a 100 basis point change in rates would
have changed interest expense by approximately $0.6 million for the three month period.
The Company has entered into interest rate swap agreements whereby the fixed interest
commitment on $200 million of outstanding principal on the Companys Senior Subordinated Notes was
swapped for a variable rate commitment based on the LIBOR rate plus 6.01% (11.35% at March 31,
2007). A 100 basis point change in the interest rate on the portion of the debt subject to the swap
would have changed interest expense by approximately $0.5 million for the three month period.
Foreign Exchange Risk
The Company had operations in Canada (substantially all of which were sold June 1, 2007),
which were denominated in local currency. Accordingly, the Company was exposed to the risk of
currency exchange rate fluctuations, which were 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 had an impact on the accumulated other
comprehensive loss component of stockholders equity reported by the Company. In addition, exchange
rate fluctuation had an impact on the U.S. dollar value realized from the settlement of
intercompany transactions. Effective June 1, 2007, the Companys foreign exchange risk has been
significantly reduced.
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, 2006 filed with the SEC on June 29, 2007.
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.
46
Our management, under the supervision and with the participation of our PEO and PFO, has
completed an evaluation of the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter
ended March 31, 2007. 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, 2006, our management, including our PEO and PFO, determined the Companys
disclosure controls and procedures were not effective as of March 31, 2007 or the filing date of
this Form 10-Q. In light of the material weaknesses, we have implemented additional analyses and
procedures to ensure that the financial statements we issue are prepared in accordance with GAAP
and are fairly presented in all material respects. The Company has performed the additional
analyses and procedures with respect to this Quarterly Report on Form 10-Q. Accordingly, we believe
that the unaudited condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q fairly present, in all material respects, the Companys financial position, results of
operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting (ICFR)
No changes in the period ended March 31, 2007; see Item 9A-Controls and Procedures in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of the
Companys controls and procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Litigation
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.
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 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, 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.
Defendants filed motions to dismiss the amended complaint on September 28, 2006. On February 20,
2007 the Court issued a Memorandum Opinion and Order dismissing claims against all defendants with
prejudice. Plaintiffs filed a Notice of Appeal on March 23, 2007. On April 18, 2007, the Court
granted Plaintiffs unopposed Motion to Suspend Briefing, suspending briefing pending a ruling by
the United States Supreme Court regarding the Seventh Circuits standard for pleading scienter in
Makor Issues & Rights v. Tellabs and directing the parties to file position statements within 14
days of the issuance of the Supreme Courts decision. The Supreme Courts decision was issued on
June 21, 2007. The parties filed position statements with the United States Court of Appeals for
the Seventh Circuit on July 5, 2007. On July 13, 2007, the Court suspended the briefing schedule
and ordered that a settlement conference be held August 10, 2007. On August 6, 2007, following
commencement of the Chapter 11 Cases, the Court entered an order staying the appeal and vacated the
settlement conference. It is not yet possible to determine the ultimate outcome of this action.
47
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
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. The Company filed a motion to dismiss on May 30, 2006, directed solely to the issues of
whether the court has subject matter jurisdiction and whether plaintiff had adequately alleged
demand futility as required by applicable Delaware law in order to establish standing to sue
derivatively. On March 27, 2007, the Court entered an order indicating its intention to convert the
Companys motion to a motion for summary judgment and requiring the Company to file a new motion
and brief, which the Company did on April 13, 2007. On June 18, 2007, the Company and plaintiff
reached an agreement in principle to resolve the action. On July 6, 2007, the Court granted
Defendants Motion for Summary Judgment. On July 25, 2007, the parties executed a settlement
agreement wherein plaintiff agreed not to pursue an appeal and which terminated the litigation.
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 officers and directors, and its former outside
audit firm, Ernst & Young, LLP. Plaintiffs complaint alleged 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. The Company filed a motion to dismiss the amended
complaint on January 5, 2007. On April 2, 2007, the Court granted the Companys motion and
dismissed the case with prejudice. Plaintiff did not file a timely Notice of Appeal of this
dismissal, but instead filed a new action in the Circuit Court of Cook County, Illinois, Case No.
07 L 4280, asserting only claims for common law fraud and under the Illinois Consumer Fraud and
Deceptive Practices Act. A Notice of Pendency of Cases under Chapter 11 of the Federal Bankruptcy
Code and of Automatic Stay was filed on August 2, 2007. The Company has not yet answered or
otherwise responded to the complaint, given that the action was stayed prior to the deadline for
the Companys answer or responsive pleading. It is not yet possible to determine the ultimate
outcome of this action.
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
48
year 2002-2003 void,
voidable and/or subject to rescission. Defendants filed motions to dismiss or stay the proceedings
on July 10, 2006, and a motion for advancement of defense costs and to compel interim funding on
October 20, 2006. On November 16, 2006, the Court granted Defendants motion to dismiss.
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 million 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. On April 26, 2007, the Court denied
Defendants motion. On June 8, 2007, plaintiff filed a motion for summary judgment, which motion
remains pending. On June 11, 2007, the Company filed its answer and counterclaims to Great
Americans complaint for rescission, as well as a third-party complaint against RLI Insurance
Company and the other excess insurance providers. Third party responses and answers were filed by
the insurance carriers on or about July 26, 2007. A Notice of Pendency of Cases under Chapter 11
of the Federal Bankruptcy Code and of Automatic Stay was filed on August 2, 2007. It is not yet
possible to determine the ultimate outcome of the insurance litigation.
Other
On July 31, 2007, the Company and substantially all of its domestic affiliates filed voluntary
petitions for relief with the Bankruptcy Court, commencing the Chapter 11 Cases. The Debtors
continue to operate their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court.
The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, from time to time, customer
complaints are investigated by various governmental bodies. In the opinion of management, none of
these other complaints or investigations currently pending should have a material adverse effect on
our financial condition or results of operations.
In addition, we are, and have been in the past, named as defendants in a number of purported
class action lawsuits based on alleged violations of state and local consumer protection laws and
regulations governing the sale, financing and collection of membership fees. To date we have
successfully defended or settled such lawsuits without a material adverse effect on our financial
condition or results of operations. However, we cannot assure you that we will be able to
successfully defend or settle all pending or future purported class action claims, and our failure
to do so may have a material adverse effect on our financial condition or results of operations.
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, 2006. In addition, the factors discussed in Part 1 Item 2- Managements Discussion and Analysis
of Financial Condition and Results of Operations may affect our future results. If any of these
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.
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.
49
Item 3. Defaults Upon Senior Securities
On March 15, 2007, the Company announced that it would not meet the March 16, 2007 deadline
for filing its Annual Report on Form 10-K for the year ended December 31, 2006. Although the delay
in filing resulted in defaults of the financial reporting covenants under the indentures governing
the Senior Notes and the Senior Subordinated Notes, it did not constitute an event of default
without delivery of notice and the expiration of a 30-day grace period. Pursuant to the New
Facility a cross-default occurs 28 days from the delivery of such notice. On April 2, 2007, the
Company failed to comply with certain financial reporting covenants under the New Facility. On
April 16, 2007, the Company did not make the $14,812 interest payment due on its Senior
Subordinated Notes.
On April 12, 2007, the Company entered into the Lender Forbearance Agreement with the lenders
under the New Facility. Under this agreement the lenders agreed to forbear from exercising any
remedies under the New Facility as a result of defaults arising from the Companys failure to
deliver audited financial statements for the fiscal year ended December 31, 2006, a certificate of
KPMG LLC or other independent public accountant of national reputation certifying that such
accountants have not obtained knowledge of any event or act which would constitute a default or
event of default with respect to financial covenant and certain computations (the Accountants
Certificate) and updated financial projections through December 2010 due to the lenders by April
2, 2007; and cross defaults arising from defaults under the indentures governing its Senior
Subordinated Notes and Senior Notes due to the Companys inability to timely file its 2006 Annual
Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ending March 31, 2007 with
the SEC, the failure to make a scheduled interest payment due April 16, 2007 on the Senior
Subordinated Notes. The Lender Forbearance Agreement contained restrictions during its term on
additional indebtedness, liens, investments, asset sales and sale/leasebacks. However, the Lender
Forbearance Agreement permitted the Company to sell its Canadian assets and retain the net
proceeds. The Lender Forbearance Agreement required the Company to deliver its audited financial
statements within three days of receipt, to provide a restructuring plan by June 28, 2007, to
provide additional monthly reporting and waives the requirement for the Accountants Certificate.
Furthermore, the Lender Forbearance Agreement required that the Company enter into forbearance
agreements with respect to defaults under its public indentures with the holders of at least a
majority of the Senior Notes and at least 75% of the Senior Subordinated Notes. The Company paid
fees of $587 related to the Lender Forbearance Agreement.
On May 14, 2007, the Company entered into the Senior Notes Forbearance Agreement with holders
representing over 80% of the aggregate principal amount outstanding of the Senior Notes. Pursuant
to the Senior Notes Forbearance Agreement, holders of the Senior Notes waived defaults arising from
the Companys failure to (i) timely file its 2006 Annual Report on Form 10-K and Quarterly Report
on Form 10-Q for the quarter ending March 31, 2007 with the SEC, (ii) make a scheduled interest
payment on the Senior Subordinated Notes due April 16, 2007, (iii) provide the required notices of
default to the trustee, and (iv) potential failure to satisfy conditions regarding the execution of
sale and leaseback transactions, and agreed to forbear from exercising any related remedies until
July 13, 2007. Holders of the Senior Notes also consented to amend certain provisions of the
Senior Notes Indenture in connection with the waiver of the defaults. The Company paid fees in the
amount of $279 to holders of the Senior Notes that executed the Senior Note Forbearance Agreement
and consented to the related amendments to the Senior Notes Indenture.
On May 14, 2007, the Company also entered into the Senior Subordinated Notes Forbearance
Agreement with holders representing over 80% of the aggregate principal amount outstanding of the
Senior Subordinated Notes. Pursuant to the Senior Subordinated Notes Forbearance Agreement, holders
of the Senior Subordinated Notes waived defaults arising from the Companys failure to (i) make the
scheduled interest payment on the Senior Subordinated Notes due April 16, 2007, (ii) timely file
its 2006 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ending March
31, 2007 with the SEC, (iii) provide the required notices of default to the trustee, and (iv)
potential failure to satisfy conditions regarding the execution of sale and leaseback transactions,
and agreed to forbear from exercising any related remedies until July 13, 2007. Holders of the
Senior Subordinated Notes also consented to amend certain provisions of the Senior Subordinated
Notes Indenture in connection with the waiver of the defaults. The Company did not pay a consent
fee to holders of the Senior Subordinated Notes in connection with the Senior Subordinated Notes
Forbearance Agreement.
On May 22, 2007, the Company entered into the Senior Notes Supplemental Indenture. On May 22,
2007 the Company also entered into the Senior Subordinated Notes Supplemental Indenture. The
Supplemental Indentures were entered into in connection with the successful completion of the
Companys solicitation of consents from holders of the Senior Notes and Senior Subordinated Notes.
On July 16, 2007, the Company did not make the $12.3 million interest payment due on the
Senior Notes. On the same day, the Company entered into the Senior Notes Forbearance Extension
with holders of the Companys Senior Notes. Pursuant to the Senior Notes Forbearance Extension,
holders of the Senior Notes agreed to forbear from exercising any remedies under the Senior Notes
(or their underlying indenture) until July 31, 2007, in accordance with the terms of the Senior
Notes Forbearance Agreement.
On July 16, 2007, the Company entered into the Senior Subordinated Notes Forbearance Extension
to the Senior Subordinated Notes Forbearance Agreement with holders of the Companys Senior
Subordinated Notes. Pursuant to the Senior Subordinated Notes
50
Forbearance Extension, holders of the
Senior Subordinated Notes agreed to forbear from exercising any remedies under the Senior
Subordinated Notes (or their underlying indenture) until July 31, 2007, in accordance with the
terms of the Senior Subordinated Notes Forbearance Agreement.
On July 16, 2007, the Company entered into the Lender Forbearance Extension. Pursuant to the
Lender Forbearance Extension, the lenders agreed to forbear from exercising any remedies under the
New Facility as a result of certain defaults until July 31, 2007, in accordance with the terms of
the Lender Forbearance Agreement.
The Company did not pay a consent fee to the lenders under the New Facility, or to holders of
the Senior Notes or the Senior Subordinated Notes, in connection with any of the Forbearance
Extensions. The Company filed the Chapter 11 Cases prior to the expiration of the Forbearance
Extensions, which resulted in an event of default under the New Facility and the Senior
Subordinated Notes and Senior Notes indentures and acceleration of amounts outstanding thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:
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Exhibit |
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Number |
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Name of Exhibit |
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4.1
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Senior Notes Supplemental Indenture, dated as of May 22, 2007, among Bally Total Fitness Holding
Corporation, the Guarantors listed on Schedule A thereto and U.S. Bank National Association, as
Trustee (incorporated by reference to Exhibit 10.1 to the Companys Current Report on 8-K, file
no. 001-13997, dated May 29, 2007). |
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4.2
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Senior Subordinated Notes Supplemental Indenture, dated as of May 22, 2007, among Bally Total
Fitness Holding Corporation and U.S. Bank National Association, as Trustee (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on 8-K, file no. 001-13997, dated May
29, 2007). |
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10.1
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Form of Senior Notes Forbearance Agreement relating to the Companys 10 1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on 8-K, file no.
001-13997, dated May 17, 2007). |
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10.2
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Form of Senior Subordinated Notes Forbearance Agreement relating to the Companys 9 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated May 17, 2007). |
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10.3
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Forbearance Agreement, dated April 5, 2007, under the Amended And Restated Credit Agreement dated
as of October 16, 2006, among the Company, the lenders parties thereto (the ''Lenders), JP Morgan
Chase Bank, N.A., as agent for the Lenders 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, dated April 13, 2007). |
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10.4
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Form of Restructuring Support Agreement, dated as of June 15, 2007, between the Company and the
holders of its 10 1/2% Senior Notes due 2011 and 9 7/8% Senior Subordinated Notes due 2007 parties
thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K,
file no. 001-13997, dated June 18, 2007). |
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10.5
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Form of Subscription and Backstop Purchase Agreement, dated June 27, 2007, between the Company and
the holders of its 9 7/8% Senior Subordinated Notes due 2007 parties thereto (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, file no. 001-13997, dated
June 27, 2007). |
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10.6
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Form of Senior Notes Forbearance Extension relating to the Companys 10 1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated July 17, 2007). |
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10.7
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Form of Senior Subordinated Notes Forbearance Extension relating to the Companys 9 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated July 17, 2007). |
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10.8
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Amendment No. 1 to Forbearance Agreement, dated as of July 16, 2007, by and between the Company,
the Guarantors, the Lenders, JP Morgan Chase Bank, N.A., as agent for the Lenders and Morgan
Stanley Senior Funding, Inc., as Syndication Agent (incorporated by reference to Exhibit 10.3 to
the Companys Current Report on Form 8-K, file no. 001-13997, dated July 17, 2007). |
51
|
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Exhibit |
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Number |
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Name of Exhibit |
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+10.9
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Management Services Agreement, dated as of May 4, 2007, among Bally Total Fitness Holding
Corporation, Alpine Advisors LLC and Don R. Kornstein (incorporated by reference to Exhibit 10.55
to the Companys Current Report on Form 10-K, file no. 001-13997, dated June 29, 2007). |
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+10.10
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Form of Restructuring Bonus Agreement for Marc Bassewitz and John Wildman (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file no. 001-13997, dated
June 1, 2007). |
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+10.11
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Form of Restructuring Bonus Agreement for Don R. Kornstein (incorporated by reference to Exhibit
10.2 to the Companys Current Report on 8-K, file no. 001-13997, dated June 1, 2007). |
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+10.12
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Interim Management and Restructuring Services Agreement, dated as of June 5, 2007, between Bally
Total Fitness Holding Corporation and AP Services, LLC (incorporated by reference to Exhibit 10.1
to the Companys Current Report on 8-K, file no. 001-13997, dated June 11, 2007). |
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+10.13
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Confidential Settlement Agreement and Mutual General Release, dated June 13, 2007, between the
Company and James A. McDonald (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated June 18, 2007). |
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+10.14
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Amendment to Employment Agreement, dated as of June 28, 2007, between the Company and John H.
Wildman (incorporated by reference to Exhibit 10.29 to the Companys Current Report on Form 10-K,
file no. 001-13997, dated June 29, 2007). |
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*+10.15
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Form of Amended Restructuring Bonus Agreement for Marc Bassewitz, William Fanelli and John Wildman. |
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*+10.16
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Form of Amended Restructuring Bonus Agreement for Don R. Kornstein. |
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10.17
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Superpriority Debtor-In-Possession Credit Agreement dated as of August 22, 2007 between the
Company and Morgan Stanley Senior Funding, Inc., as Administrative Agent and as Collateral Agent;
Wells Fargo Foothill, LLC, as Revolving Credit Agent; and The CIT Group/Business Credit, Inc., as
Revolving Syndication Agent (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated August 27, 2007). |
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10.18
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Guaranty and Collateral Agreement dated as of August 22, 2007 between the Company and Morgan
Stanley Senior Funding, Inc., as Administrative Agent and as Collateral Agent; Wells Fargo
Foothill, LLC, as Revolving Credit Agent; and The CIT Group/Business Credit, Inc., as Revolving
Syndication Agent (incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K, file no. 001-13997, dated August 27, 2007). |
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10.19
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Restructuring Support Agreement dated as of August 17, 2007 between the Company and Liberation
Investments, L.P. and Liberation Investments, Ltd. (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, file no. 001-13997, dated August 20, 2007). |
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10.20
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Form of Restructuring Support Agreement between and among the Company and Harbinger Capital
Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund L.P.; certain
holders of the Companys Senior Notes; and certain holders of the Companys Senior Subordinated
Notes Agent (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, dated August 16, 2007). |
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10.21
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Investment Agreement dated as of August 15, 2007, by and among the Company and Harbinger Capital
Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund L.P.
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, file no.
001-13997, dated August 16, 2007). |
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* 31.1
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Certification of Chief Restructuring 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 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 Chief Restructuring 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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* |
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Filed herewith. |
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+ |
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Management contract or compensatory plan or arrangement. |
52
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
Registrant
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By: |
/s/ William G. Fanelli
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William G. Fanelli |
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Senior Vice President, Finance and Corporate
Development
(principal financial officer) |
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Dated: September 28, 2007