##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for
the quarterly period ended March 31, 2006
  o
    
    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
  Delaware
    
    36-3228107(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)8700 West Bryn Mawr Avenue, Chicago, Illinois
    
    60631(Address of principal executive offices)
    
    (Zip Code)
 (773) 380-3000
  þ  o
 o þ  o
 o þ




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##### Table of Contents



TABLE OF ADDITIONAL REGISTRANTS
 Jurisdiction of
    
    I.R.S. EmployerExact Name of Additional Registrants
    
    Incorporation
    
    Identification Number59 th Street Gym LLC
    
    New York
    
    36-4474644708 Gym LLC
    
    New York
    
    36-4474644Ace, LLC
    
    New York
    
    36-4474644Bally Fitness Franchising, Inc.
    
    Illinois
    
    36-4029332Bally Franchise RSC, Inc.
    
    Illinois
    
    36-4028744Bally Franchising Holdings, Inc.
    
    Illinois
    
    36-4024133Bally Sports Clubs, Inc.
    
    New York
    
    36-3407784Bally Total Fitness Corporation
    
    Delaware
    
    36-2762953Bally Total Fitness International, Inc.
    
    Michigan
    
    36-1692238Bally Total Fitness of California, Inc.
    
    California
    
    36-2763344Bally Total Fitness of Colorado, Inc.
    
    Colorado
    
    84-0856432Bally Total Fitness of Connecticut Coast, Inc.
    
    Connecticut
    
    36-3209546Bally Total Fitness of Connecticut Valley, Inc.
    
    Connecticut
    
    36-3209543Bally Total Fitness of Greater New York, Inc.
    
    New York
    
    95-3445399Bally Total Fitness of the Mid-Atlantic, Inc.
    
    Delaware
    
    52-0820531Bally Total Fitness of the Midwest, Inc.
    
    Ohio
    
    34-1114683Bally Total Fitness of Minnesota, Inc.
    
    Ohio
    
    84-1035840Bally Total Fitness of Missouri, Inc.
    
    Missouri
    
    36-2779045Bally Total Fitness of Upstate New York, Inc.
    
    New York
    
    36-3209544Bally Total Fitness of Philadelphia, Inc.
    
    Pennsylvania
    
    36-3209542Bally Total Fitness of Rhode Island, Inc.
    
    Rhode Island
    
    36-3209549Bally Total Fitness of the Southeast, Inc.
    
    South Carolina
    
    52-1230906Bally Total Fitness of Toledo, Inc.
    
    Ohio
    
    38-1803897Ballys Fitness and Racquet Clubs, Inc.
    
    Florida
    
    36-3496461BFIT Rehab of West Palm Beach, Inc.
    
    Florida
    
    36-4154170BTF/CFI, Inc.
    
    Delaware
    
    36-4474644Crunch LA LLC
    
    New York
    
    36-4474644Crunch World LLC
    
    New York
    
    36-4474644Flambe LLC
    
    New York
    
    36-4474644Greater Philly No. 1 Holding Company
    
    Pennsylvania
    
    36-3209566Greater Philly No. 2 Holding Company
    
    Pennsylvania
    
    36-3209557Health & Tennis Corporation of New York
    
    Delaware
    
    36-3628768Holiday Health Clubs of the East Coast, Inc.
    
    Delaware
    
    52-1271028Holiday/Southeast Holding Corp.
    
    Delaware
    
    52-1289694Jack La Lanne Holding Corp.
    
    New York
    
    95-3445400Mission Impossible, LLC
    
    California
    
    36-4474644New Fitness Holding Co., Inc.
    
    New York
    
    36-3209555Nycon Holding Co., Inc.
    
    New York
    
    36-3209533Rhode Island Holding Company
    
    Rhode Island
    
    36-3261314Soho Ho LLC
    
    New York
    
    36-4474644Tidelands Holiday Health Clubs, Inc.
    
    Virginia
    
    52-1229398U.S. Health, Inc.
    
    Delaware
    
    52-1137373West Village Gym at the Archives LLC
    
    New York
    
    36-4474644
 nd




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
 Quarterly Report on Form 10-Q For Period Ended March 31, 2006
 TABLE OF CONTENTS
 PageNumberFORWARD-LOOKING STATEMENTSPART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2006 and 2005
    
    
    2Consolidated Statement of Stockholders Deficit and Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2006
    
    
    3Consolidated Statements of Cash Flows (Unaudited) For The Three Months Ended March 31, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATION
    
    
    36Item 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURE PAGE
    
    
    39Certification of the Chief Executive OfficerCertification of the Principal Financial OfficerCertification of the CEO and Principal Financial Officer




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    success of operating initiatives, advertising and promotional efforts;
    
    the outcome of the Companys exploration of strategic alternatives, for which it has engaged J.P. Morgan
Securities Inc. and The Blackstone Group L.P.;
    
    business abilities and judgment of personnel;
    
    general economic and business conditions;
    
    competition;
    
    acceptance of new product and service offerings;
    
    changes in business strategy or plans;
    
    the disclosure by the Companys management and independent auditors of the existence of material weaknesses in
internal controls over financial reporting;
    
    the outcome of the SEC and Department of Justice investigations;
    
    existence of adverse publicity or litigation (including various stockholder litigations and the insurance
rescission action) and the outcome thereof and the costs and expenses associated therewith;
    
    changes in, or the failure to comply with, government regulations;
    
    ability to maintain existing or obtain new sources of financing, on acceptable terms or at all, to satisfy the
Companys cash needs and obligations;
    
    availability, terms, and development of capital;
    
    ability to satisfy long-term obligations as they become due;
    
    ability to remain in compliance with, or obtain waivers under, the Companys loan agreements and indentures; and
    
    other factors described in this Quarterly Report on Form 10-Q and prior filings of the Company with the SEC.




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
  BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Condensed Consolidated Balance Sheets
  March 31
    
    
    December 312006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash
    
    $
    15,984
    
    
    $
    17,454Deferred income taxes
    
    
    319
    
    
    
    151Prepaid expenses
    
    
    18,400
    
    
    
    20,846Other current assets
    
    
    13,949
    
    
    
    17,394Current assets held for sale
    
    
    
    
    
    
    342Total current assets
    
    
    48,652
    
    
    
    56,187Property and equipment, less accumulated depreciation and
amortization of $757,360 and $749,860
    
    
    311,107
    
    
    
    314,670Goodwill, net
    
    
    19,734
    
    
    
    19,734Trademarks,
net of accumulated amortization of $1,536 and $1,510
    
    
    6,883
    
    
    
    6,912Intangible
assets, net of accumulated amortization of $13,760 and $13,463
    
    
    2,729
    
    
    
    2,879Deferred
financing costs, net of accumulated amortization of $21,593 and
$18,190
    
    
    50,589
    
    
    
    29,501Other assets
    
    
    12,408
    
    
    
    10,317Non-current assets held for sale
    
    
    
    
    
    
    39,894$
    452,102
    
    
    $
    480,094LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    49,760
    
    
    $
    57,832Income taxes payable
    
    
    1,714
    
    
    
    1,697Accrued liabilities
    
    
    126,873
    
    
    
    96,442Current maturities of long-term debt
    
    
    9,327
    
    
    
    13,018Deferred revenues
    
    
    290,585
    
    
    
    299,441Current liabilities associated with assets held for sale
    
    
    
    
    
    
    7,764Total current liabilities
    
    
    478,259
    
    
    
    476,194Long-term debt, less current maturities
    
    
    713,293
    
    
    
    756,304Deferred rent liability
    
    
    90,023
    
    
    
    87,290Deferred income taxes
    
    
    1,689
    
    
    
    1,435Other liabilities
    
    
    29,854
    
    
    
    28,112Deferred revenues
    
    
    568,984
    
    
    
    566,469Non-current liabilities associated with assets held for sale
    
    
    
    
    
    
    27,976Stockholders deficit
    
    
    (1,430,000
    )
    
    
    (1,463,686
    )$
    452,102
    
    
    $
    480,094
  1




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Operations
   Three months endedMarch 312006
    
    
    2005(As restated)Net revenues:Membership services
    
    $
    239,655
    
    
    $
    236,135Retail products
    
    
    11,937
    
    
    
    13,347Miscellaneous
    
    
    3,574
    
    
    
    4,271255,166
    
    
    
    253,753Operating costs and expenses:Membership services
    
    
    171,138
    
    
    
    167,611Retail products
    
    
    11,011
    
    
    
    12,808Advertising
    
    
    18,895
    
    
    
    17,111General and administrative
    
    
    21,635
    
    
    
    18,220Depreciation and amortization
    
    
    14,214
    
    
    
    14,939236,893
    
    
    
    230,689Operating income
    
    
    18,273
    
    
    
    23,064Interest expense, net
    
    
    (23,033
    )
    
    
    (18,077
    )Foreign exchange gain
    
    
    10
    
    
    
    207Other, net
    
    
    118
    
    
    
    75(22,905
    )
    
    
    (17,795
    )Income (loss) from continuing operations before income taxes
    
    
    (4,632
    )
    
    
    5,269Income tax provision
    
    
    (201
    )
    
    
    (240
    )Income (loss) from continuing operations
    
    
    (4,833
    )
    
    
    5,029Discontinued operations:Loss from discontinued operations, net of income taxes
    
    
    (872
    )
    
    
    (414
    )Gain on disposal
    
    
    38,375
    
    
    
    Gain (loss) from discontinued operations
    
    
    37,503
    
    
    
    (414
    )Net income
    
    $
    32,670
    
    
    $
    4,615Basic income (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.13
    )
    
    $
    0.15Income (loss) from discontinued operations
    
    
    1.00
    
    
    
    (0.01
    )Net income
    
    $
    0.87
    
    
    
    0.14Diluted income (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.13
    )
    
    $
    0.15Income (loss) from discontinued operations
    
    
    1.00
    
    
    
    (0.01
    )Net income
    
    $
    0.87
    
    
    $
    0.14
  2




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statement
of Stockholders Deficit and Comprehensive Income
   AccumulatedCommon stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    other
    
    
    TotalShares
    
    
    Par
    
    
    Contributed
    
    
    Accumulated
    
    
    Unearned
    
    
    stock in
    
    
    comprehensive
    
    
    stockholdersoutstanding
    
    
    value
    
    
    capital
    
    
    deficit
    
    
    compensation
    
    
    treasury
    
    
    loss
    
    
    deficitBalance at December 31, 2005
    
    
    38,503,551
    
    
    $
    392
    
    
    $
    669,089
    
    
    $
    (2,113,854
    )
    
    $
    (5,534
    )
    
    $
    (11,635
    )
    
    $
    (2,144
    )
    
    $
    (1,463,686
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,670Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,544Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    991Reclassification
of unearned compensation balance to contributed capital
    
    
    
    
    
    
    
    
    
    
    (5,534
    )
    
    
    
    
    
    
    5,534Forfeiture of restricted stock
    
    
    (5
    )Issuance of common stock
under stock option plans
    
    
    30,413
    
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151Balance at March 31, 2006
    
    
    38,533,959
    
    
    $
    392
    
    
    $
    664,697
    
    
    $
    (2,081,184
    )
    
    $
    
    
    
    $
    (11,635
    )
    
    $
    (2,270
    )
    
    $
    (1,430,000
    )
  3




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Cash Flows
   Three months endedMarch 312006
    
    
    2005(As restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    32,670
    
    
    $
    4,615Adjustments to reconcile to cash provided by operating activitiesDepreciation and amortization, including amortization included in interest expense
    
    
    17,657
    
    
    
    18,065Changes in operating assets and liabilities
    
    
    (1,389
    )
    
    
    1,019Deferred income taxes, net
    
    
    92
    
    
    
    106Gain on disposal of discontinued operations
    
    
    (38,375
    )
    
    
    Gain on sale of assets
    
    
    (1,058
    )
    
    
    Foreign currency translation gain
    
    
    (11
    )
    
    
    (207
    )Stock-based compensation
    
    
    991
    
    
    
    131Cash provided by operating activities
    
    
    10,577
    
    
    
    23,729CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    (11,629
    )
    
    
    (8,430
    )Proceeds from sale of discontinued operations
    
    
    43,240
    
    
    
    Proceeds from sale of discontinued operations in escrow
    
    
    2,250
    
    
    
    Proceeds
from sale of property
    
    
    1,926
    
    
    
    Cash provided by (used in) investing activities
    
    
    35,787
    
    
    
    (8,430
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings (repayments) under credit agreement
    
    
    (40,000
    )
    
    
    3,563Net repayments of other long-term debt
    
    
    (5,675
    )
    
    
    (5,128
    )Debt issuance and refinancing costs
    
    
    (2,474
    )
    
    
    Proceeds from issuance of common stock under stock option plans
    
    
    151
    
    
    
    162Cash used in financing activities
    
    
    (47,998
    )
    
    
    (1,403
    )Increase (decrease) in cash
    
    
    (1,634
    )
    
    
    13,896Effect of exchange rate changes on cash balance
    
    
    164
    
    
    
    268Cash, beginning of period
    
    
    17,454
    
    
    
    19,177Cash, end of period
    
    $
    15,984
    
    
    $
    33,341
  4




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows-- (continued)
 Three months endedMarch 312006
    
    
    2005(As restated)SUPPLEMENTAL CASH FLOWS INFORMATION:Changes in operating assets and liabilities:Increase in other current and other assets
    
    $
    (18,291
    )
    
    $
    (3,930
    )Decrease in accounts payable
    
    
    (8,094
    )
    
    
    (1,749
    )Increase in income taxes payable
    
    
    17
    
    
    
    97Increase (decrease) in accrued liabilities
    
    
    27,055
    
    
    
    (3,264
    )Increase in other liabilities
    
    
    4,129
    
    
    
    6,875Increase (decrease) in deferred revenues
    
    
    (6,205
    )
    
    
    2,990Change in operating assets and liabilities
    
    $
    (1,389
    )
    
    $
    1,019Cash payments for interest and income taxes were as follows Interest paid
    
    $
    18,495
    
    
    $
    16,844Interest capitalized
    
    
    (192
    )
    
    
    (68
    )Income taxes paid, net
    
    
    98
    
    
    
    57Investing and financing activities exclude the following non-cash transactions Acquisitions of property and equipment through capital leases/borrowings
    
    $
    
    
    
    $
    140Reclassification of unearned compensation balance to contributed capital
    
    $
    5,534
    
    
    $
    
  5




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Notes to Condensed Consolidated Financial Statements
   Note 1 Basis of Presentation
   Accounting
for the Impairment or Disposal of Long-Lived Assets
 Seasonal factors
  Market risk
   Note 2
Restatement of 2005 Quarterly Information
  6




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note
3 Commitments and Contingencies
 Operating leases:
 Litigation:
 Putative Securities Class Actions
 In re Bally Total Fitness Securities Litigation
  Stockholder Derivative Lawsuits in Illinois State Court
  Stockholder Derivative Lawsuits in Illinois Federal Court
 7




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Lawsuit in Oregon
 Jack Garrison and Deane Garrison v. Bally Total
Fitness Holding Corporation, Lee S. Hillman and John W. Dwyer,
  Lawsuit in Massachusetts
 Fit Tech Inc., et al. v.
Bally Total Fitness Holding Corporation, et al.,
  Securities and Exchange Commission Investigation
  Department of Justice Investigation
  8




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Demand Letters
   Insurance
Lawsuits
 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, 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,
 Other:
  9




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
   10




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 4 Debt
      Note 5 Deferred Revenue
  For the three months ended March 31, 2006Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash


    
    
    Revenue
    
    
    March 31,2005
    
    
    Additions
    
    
    Recognized
    
    
    2006Deferral of receipts from financed members:Initial
contract term payments
    
    $
    517,624
    
    
    $
    59,698
    
    
    $
    (69,111
    )
    
    $
    508,211Down payments
    
    
    100,009
    
    
    
    14,490
    
    
    
    (14,381
    )
    
    
    100,118Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon origination
    
    
    109,819
    
    
    
    10,086
    
    
    
    (9,306
    )
    
    
    110,599Advance payments of periodic dues and membership fees
    
    
    120,696
    
    
    
    27,094
    
    
    
    (26,726
    )
    
    
    121,064Receipts collected and earned without deferral during period
    
    
    
    
    
    
    89,227
    
    
    
    (89,227
    )Deferral of receipts for personal training services
    
    
    17,762
    
    
    
    32,719
    
    
    
    (30,904
    )
    
    
    19,577$
    865,910
    
    
    $
    233,314
    
    
    $
    (239,655
    )
    
    $
    859,569
 For the three months ended March 31, 2005Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash


    
    
    Revenue
    
    
    March 31,2004
    
    
    Additions
    
    
    Recognized
    
    
    2005Deferral of receipts from financed members:Initial
contract term payments
    
    $
    534,446
    
    
    $
    72,297
    
    
    $
    (74,844
    )
    
    $
    531,899Down payments
    
    
    105,614
    
    
    
    15,694
    
    
    
    (13,307
    )
    
    
    108,001Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon origination
    
    
    115,735
    
    
    
    8,537
    
    
    
    (9,037
    )
    
    
    115,235Advance payments of periodic dues and membership fees
    
    
    132,164
    
    
    
    35,788
    
    
    
    (35,233
    )
    
    
    132,719Receipts collected and earned without deferral during period
    
    
    
    
    
    
    74,632
    
    
    
    (74,632
    )Deferral of receipts for personal training services
    
    
    17,697
    
    
    
    31,112
    
    
    
    (29,082
    )
    
    
    19,727$
    905,656
    
    
    $
    238,060
    
    
    $
    (236,135
    )
    
    $
    907,581
 11




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 6 Income (loss) per Common Share
 Earnings per Share
 Three Months Ended March 312006
    
    
    2005Weighted average number of common shares outstanding
    
    
    37,685,264
    
    
    
    32,943,842Effect of outstanding stock options and warrants
    
    
    
    
    
    
    324,553Diluted weighted average number of shares outstanding
    
    
    37,685,264
    
    
    
    33,268,395Options and warrants excluded from the computation
of diluted weighted average number of common shares
because the exercise prices were greater than the average
market prices of the common stock
    
    
    1,722,640
    
    
    
    4,878,403Range of exercise prices per share:High
    
    $
    36.00
    
    
    $
    36.00Low
    
    $
    2.91
    
    
    $
    4.11
 Note 7 Income Taxes
  Accounting for Income Taxes,
 12




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 8 Stock-based Compensation
 Share-Based Payment Accounting for Stock-based Compensation Accounting for Stock Issued to Employees
   Loss from
continuing operations before income taxes
    
    $
    (4,071
    )Loss from
continuing operations
    
    
    (4,272
    )Net income
    
    
    33,231Cash flow
from operating activities
    
    
    10,577Cash flow from financing activities
    
    
    (47,998
    )Basic and
diluted income (loss) per common shareLoss from
continuing operations
    
    $
    (0.11
    )Income from
discontinued operations
    
    
    1.00Net income(1)
    
    $
    0.88
  (1)
    
    Per share amounts do not sum due to rounding differences.
  Net income, as reported
    
    $
    4,615Plus: stock-based compensation expense included in net income
    
    
    131Less: stock-based compensation expense determined under fair value
based method
    
    
    (701
    )Pro forma net income
    
    $
    4,045Basic and diluted income  per common shareAs reported
    
    $
    0.14Pro forma
    
    
    0.12
 Stock-Based Compensation Plans
   13




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
    14




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Stock Options
  WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of Shares
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    4,138,514
    
    
    $
    13.26Granted
    
    
    7,500
    
    
    
    8.40Exercised
    
    
    (30,413
    )
    
    
    4.96Forfeited
    
    
    (33,250
    )
    
    
    6.13Canceled
    
    
    (33,792
    )
    
    
    19.57Outstanding at March 31, 2006
    
    
    4,048,559
    
    
    $
    13.32
    
    
    
    6.4
    
    
    $
    8,468Exercisable at March 31, 2006
    
    
    2,747,641
    
    
    $
    17.00
    
    
    
    5.3
    
    
    $
    3,498
  For the Three Months endedMarch 31,2006
    
    
    2005Weighted average grant-date fair value of
stock options granted
    
    $
    4.60
    
    
    $
    1.74Total intrinsic value of stock options exercised
    
    $
    134
    
    
    $
    
   For the Three Months EndedMarch 31,2006
    
    2005Expected option life in years
    
    
    6
    
    
    
    6Risk-free interest rate
    
    
    4.7
    %
    
    
    4.2
    %Dividend yield
    
    
    
    
    
    
    Expected volatility
    
    
    52
    %
    
    
    52
    %
  Restricted Stock
  15




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Weighted AverageGrant Date FairNumber of Shares
    
    
    ValueOutstanding at December 31, 2005
    
    
    837,000
    
    
    $
    6.92Granted
    
    
    Vested
    
    
    (2,500
    )
    
    
    7.01Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    834,500
    
    
    $
    6.92
  Note 9 Guarantees
     16




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note
10 Insurance Proceeds
  Note 11 Discontinued Operations
   Summarized
    
    Three months ended March 31,2006
    
    
    2005Revenue
    
    $
    4,687
    
    
    $
    17,830Loss from discontinued operations before income taxes
    
    
    (866
    )
    
    
    (395
    )Income tax provision
    
    
    (6
    )
    
    
    (19
    )Loss from discontinued operations
    
    
    (872
    )
    
    
    (414
    )Gain on disposal of discontinued operations
    
    
    38,375
    
    
    
    Net income (loss) from discontinued operations
    
    $
    37,503
    
    
    $
    (414
    )
 Note 12 Subsequent Events
 Credit Agreement Amendment and Noteholder Consent Solicitation
    17




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
     Management Changes
  Note 13 Condensed Consolidating Financial Statements
    18




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  CONDENSED CONSOLIDATING BALANCE SHEET
 March 31, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    13,787
    
    
    $
    2,197
    
    
    $
    
    
    
    $
    15,984Other current assets
    
    
    
    
    
    
    31,153
    
    
    
    1,515
    
    
    
    
    
    
    
    32,668Total current assets
    
    
    
    
    
    
    44,940
    
    
    
    3,712
    
    
    
    
    
    
    
    48,652Property and equipment, net
    
    
    
    
    
    
    292,705
    
    
    
    18,402
    
    
    
    
    
    
    
    311,107Goodwill, net
    
    
    
    
    
    
    19,734
    
    
    
    
    
    
    
    
    
    
    
    19,734Trademarks, net
    
    
    6,507
    
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    6,883Intangible assets, net
    
    
    
    
    
    
    2,230
    
    
    
    499
    
    
    
    
    
    
    
    2,729Investment in and advances to subsidiaries
    
    
    (734,243
    )
    
    
    221,315
    
    
    
    
    
    
    
    512,928
    
    
    
    Other assets
    
    
    50,390
    
    
    
    8,880
    
    
    
    3,727
    
    
    
    
    
    
    
    62,997$
    (677,346
    )
    
    $
    589,804
    
    
    $
    26,716
    
    
    $
    512,928
    
    
    $
    452,102LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    49,509
    
    
    $
    251
    
    
    $
    
    
    
    $
    49,760Income taxes payable
    
    
    
    
    
    
    1,658
    
    
    
    56
    
    
    
    
    
    
    
    1,714Accrued liabilities
    
    
    44,196
    
    
    
    74,195
    
    
    
    8,482
    
    
    
    
    
    
    
    126,873Current maturities of long-term debt
    
    
    4,579
    
    
    
    1,513
    
    
    
    3,235
    
    
    
    
    
    
    
    9,327Deferred revenues
    
    
    
    
    
    
    284,655
    
    
    
    5,930
    
    
    
    
    
    
    
    290,585Total current liabilities
    
    
    48,775
    
    
    
    411,530
    
    
    
    17,954
    
    
    
    
    
    
    
    478,259Long-term debt, less current maturities
    
    
    703,879
    
    
    
    3,722
    
    
    
    5,692
    
    
    
    
    
    
    
    713,293Net affiliate payable
    
    
    
    
    
    
    456,846
    
    
    
    54,673
    
    
    
    (511,519
    )
    
    
    Other liabilities
    
    
    
    
    
    
    111,675
    
    
    
    9,891
    
    
    
    
    
    
    
    121,566Deferred revenues
    
    
    
    
    
    
    557,801
    
    
    
    11,183
    
    
    
    
    
    
    
    568,984Stockholders deficit
    
    
    (1,430,000
    )
    
    
    (951,770
    )
    
    
    (72,677
    )
    
    
    1,024,447
    
    
    
    (1,430,000
    )$
    (677,346
    )
    
    $
    589,804
    
    
    $
    26,716
    
    
    $
    512,928
    
    
    $
    452,102
 19




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 December 31, 2005Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    16,238
    
    
    $
    1,216
    
    
    $
    
    
    
    $
    17,454Other current assets
    
    
    
    
    
    
    36,976
    
    
    
    1,415
    
    
    
    
    
    
    
    38,391Current assets held for sale
    
    
    
    
    
    
    342
    
    
    
    
    
    
    
    
    
    
    
    342Total current assets
    
    
    
    
    
    
    53,556
    
    
    
    2,631
    
    
    
    
    
    
    
    56,187Property and equipment, net
    
    
    
    
    
    
    294,888
    
    
    
    19,782
    
    
    
    
    
    
    
    314,670Goodwill, net
    
    
    
    
    
    
    19,734
    
    
    
    
    
    
    
    
    
    
    
    19,734Trademarks, net
    
    
    6,507
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    6,912Intangible assets, net
    
    
    
    
    
    
    2,333
    
    
    
    546
    
    
    
    
    
    
    
    2,879Investment in and advances to subsidiaries
    
    
    (724,893
    )
    
    
    221,315
    
    
    
    
    
    
    
    503,578
    
    
    
    Other assets
    
    
    29,265
    
    
    
    6,580
    
    
    
    3,973
    
    
    
    
    
    
    
    39,818Non-current assets held for sale
    
    
    
    
    
    
    39,894
    
    
    
    
    
    
    
    
    
    
    
    39,894$
    (689,121
    )
    
    $
    638,300
    
    
    $
    27,337
    
    
    $
    503,578
    
    
    $
    480,094LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    57,724
    
    
    $
    108
    
    
    $
    
    
    
    $
    57,832Income taxes payable
    
    
    
    
    
    
    1,641
    
    
    
    56
    
    
    
    
    
    
    
    1,697Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrued liabilities
    
    
    22,407
    
    
    
    67,768
    
    
    
    6,267
    
    
    
    
    
    
    
    96,442Current maturities of long-term debt
    
    
    6,594
    
    
    
    485
    
    
    
    5,939
    
    
    
    
    
    
    
    13,018Deferred revenues
    
    
    
    
    
    
    293,116
    
    
    
    6,325
    
    
    
    
    
    
    
    299,441Current liabilities associated with assets
held for sale
    
    
    
    
    
    
    7,764
    
    
    
    
    
    
    
    
    
    
    
    7,764Total current liabilities
    
    
    29,001
    
    
    
    428,498
    
    
    
    18,695
    
    
    
    
    
    
    
    476,194Long-term debt, less current maturities
    
    
    745,564
    
    
    
    5,182
    
    
    
    5,558
    
    
    
    
    
    
    
    756,304Net affiliate payable
    
    
    
    
    
    
    519,997
    
    
    
    56,460
    
    
    
    (576,457
    )
    
    
    Other liabilities
    
    
    
    
    
    
    108,259
    
    
    
    8,578
    
    
    
    
    
    
    
    116,837Deferred revenues
    
    
    
    
    
    
    554,722
    
    
    
    11,747
    
    
    
    
    
    
    
    566,469Non-current liabilities associated with assets
held for sale
    
    
    
    
    
    
    27,976
    
    
    
    
    
    
    
    
    
    
    
    27,976Stockholders deficit
    
    
    (1,463,686
    )
    
    
    (1,006,334
    )
    
    
    (73,701
    )
    
    
    1,080,035
    
    
    
    (1,463,686
    )$
    (689,121
    )
    
    $
    638,300
    
    
    $
    27,337
    
    
    $
    503,578
    
    
    $
    480,094
 20




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Three Months Ended March 31, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    230,315
    
    
    $
    9,340
    
    
    $
    
    
    
    $
    239,655Retail products
    
    
    
    
    
    
    11,618
    
    
    
    319
    
    
    
    
    
    
    
    11,937Miscellaneous
    
    
    
    
    
    
    3,199
    
    
    
    375
    
    
    
    
    
    
    
    3,574
    
    
    
    245,132
    
    
    
    10,034
    
    
    
    
    
    
    
    255,166Operating costs and expenses:Membership services
    
    
    
    
    
    
    164,952
    
    
    
    6,186
    
    
    
    
    
    
    
    171,138Retail products
    
    
    
    
    
    
    10,710
    
    
    
    301
    
    
    
    
    
    
    
    11,011Advertising
    
    
    
    
    
    
    18,538
    
    
    
    357
    
    
    
    
    
    
    
    18,895General and administrative
    
    
    1,283
    
    
    
    19,788
    
    
    
    564
    
    
    
    
    
    
    
    21,635Depreciation and amortization
    
    
    
    
    
    
    13,626
    
    
    
    588
    
    
    
    
    
    
    
    14,2141,283
    
    
    
    227,614
    
    
    
    7,996
    
    
    
    
    
    
    
    236,893Operating income (loss)
    
    
    (1,283
    )
    
    
    17,518
    
    
    
    2,038
    
    
    
    
    
    
    
    18,273Equity in income from continuing operations
of
subsidiaries
    
    
    18,211
    
    
    
    
    
    
    
    
    
    
    
    (18,211
    )
    
    
    Interest expense
    
    
    (22,345
    )
    
    
    (345
    )
    
    
    (976
    )
    
    
    633
    
    
    
    (23,033
    )Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Other, net
    
    
    584
    
    
    
    89
    
    
    
    78
    
    
    
    (633
    )
    
    
    118(3,550
    )
    
    
    (256
    )
    
    
    (888
    )
    
    
    (18,211
    )
    
    
    (22,905
    )Income (loss) from continuing operations
before
income taxes
    
    
    (4,833
    )
    
    
    17,262
    
    
    
    1,150
    
    
    
    (18,211
    )
    
    
    (4,632
    )Income tax provision
    
    
    
    
    
    
    (201
    )
    
    
    
    
    
    
    
    
    
    
    (201
    )Income (loss) from continuing operations
    
    
    (4,833
    )
    
    
    17,061
    
    
    
    1,150
    
    
    
    (18,211
    )
    
    
    (4,833
    )Discontinued operations:Gain on disposal of discontinued operations
    
    
    38,375
    *
    
    
    38,375
    
    
    
    
    
    
    
    (38,375
    )
    
    
    38,375Loss from discontinued operations
    
    
    (872)
    *
    
    
    (872
    )
    
    
    
    
    
    
    872
    
    
    
    (872
    )Income from discontinued operations
    
    
    37,503
    
    
    
    37,503
    
    
    
    
    
    
    
    (37,503
    )
    
    
    37,503Net income
    
    $
    32,670
    
    
    $
    54,564
    
    
    $
    1,150
    
    
    $
    (55,714
    )
    
    $
    32,670
 
 *
    
    Equity in amounts from subsidiaries related to discontinued operations. 21




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Three Months Ended March 31, 2005(As restated)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    226,396
    
    
    $
    9,739
    
    
    $
    
    
    
    $
    236,135Retail products
    
    
    
    
    
    
    12,985
    
    
    
    362
    
    
    
    
    
    
    
    13,347Miscellaneous
    
    
    
    
    
    
    3,853
    
    
    
    418
    
    
    
    
    
    
    
    4,271
    
    
    
    243,234
    
    
    
    10,519
    
    
    
    
    
    
    
    253,753Operating costs and expenses:Membership services
    
    
    
    
    
    
    160,359
    
    
    
    7,252
    
    
    
    
    
    
    
    167,611Retail products
    
    
    
    
    
    
    12,462
    
    
    
    346
    
    
    
    
    
    
    
    12,808Advertising
    
    
    
    
    
    
    16,750
    
    
    
    361
    
    
    
    
    
    
    
    17,111General and administrative
    
    
    878
    
    
    
    17,053
    
    
    
    289
    
    
    
    
    
    
    
    18,220Depreciation and amortization
    
    
    
    
    
    
    14,138
    
    
    
    801
    
    
    
    
    
    
    
    14,939878
    
    
    
    220,762
    
    
    
    9,049
    
    
    
    
    
    
    
    230,689Operating income (loss)
    
    
    (878
    )
    
    
    22,472
    
    
    
    1,470
    
    
    
    
    
    
    
    23,064Equity in income from continuing
operations
of subsidiaries
    
    
    22,586
    
    
    
    
    
    
    
    
    
    
    
    (22,586
    )
    
    
    Interest expense
    
    
    (17,101
    )
    
    
    (582
    )
    
    
    (864
    )
    
    
    470
    
    
    
    (18,077
    )Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207Other, net
    
    
    422
    
    
    
    65
    
    
    
    58
    
    
    
    (470
    )
    
    
    755,907
    
    
    
    (517
    )
    
    
    (599
    )
    
    
    (22,586
    )
    
    
    (17,795
    )Income from continuing operations before
income taxes
    
    
    5,029
    
    
    
    21,955
    
    
    
    871
    
    
    
    (22,586
    )
    
    
    5,269Income tax provision
    
    
    
    
    
    
    (240
    )
    
    
    
    
    
    
    
    
    
    
    (240
    )Income from continuing operations
    
    
    5,029
    
    
    
    21,715
    
    
    
    871
    
    
    
    (22,586
    )
    
    
    5,029Loss from discontinued operations
    
    
    (414)
    *
    
    
    (414
    )
    
    
    
    
    
    
    414
    
    
    
    (414
    )Net income
    
    $
    4,615
    
    
    $
    21,301
    
    
    $
    871
    
    
    $
    (22,172
    )
    
    $
    4,615
 
 *
    
    Equity in amounts from subsidiaries related to discontinued operations. 22




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Three months ended March 31, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    32,670
    
    
    $
    54,564
    
    
    $
    1,150
    
    
    $
    (55,714
    )
    
    $
    32,670Adjustments to reconcile to cash provided 
Depreciation and amortization, including
   amortization included in interest expense
    
    
    3,250
    
    
    
    13,819
    
    
    
    588
    
    
    
    
    
    
    
    17,657Changes in operating assets and liabilities
    
    
    (112
    )
    
    
    (3,877
    )
    
    
    2,600
    
    
    
    
    
    
    
    (1,389
    )Changes in net affiliate balances
    
    
    
    
    
    
    (63,693
    )
    
    
    (1,245
    )
    
    
    64,938
    
    
    
    Other, net
    
    
    991
    
    
    
    (39,341
    )
    
    
    (11
    )
    
    
    
    
    
    
    (38,361
    )Cash provided by (used in) operating activities
    
    
    36,799
    
    
    
    (38,528
    )
    
    
    3,082
    
    
    
    9,224
    
    
    
    10,577CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and
equipment
    
    
    
    
    
    
    (11,543
    )
    
    
    (86
    )
    
    
    
    
    
    
    (11,629
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    43,240
    
    
    
    
    
    
    
    
    
    
    
    43,240Proceeds from sale of discontinued operations
in escrow
    
    
    
    
    
    
    2,250
    
    
    
    
    
    
    
    
    
    
    
    2,250Proceeds from sale of property
    
    
    
    
    
    
    1,926
    
    
    
    
    
    
    
    
    
    
    
    1,926Investment in and advances to subsidiaries
    
    
    9,224
    
    
    
    
    
    
    
    
    
    
    
    (9,224
    )
    
    
    Cash provided by (used in) investing activities
    
    
    9,224
    
    
    
    35,873
    
    
    
    (86
    )
    
    
    (9,224
    )
    
    
    35,787CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments under credit agreement
    
    
    (40,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Net borrowings (repayments) of other
long-term debt
    
    
    (3,700
    )
    
    
    204
    
    
    
    (2,179
    )
    
    
    
    
    
    
    (5,675
    )Debt issuance and refinancing costs
    
    
    (2,474
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,474
    )Stock purchase and options plans
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151Cash 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
    
    
    
    
    
    
    
    164Cash, beginning of year
    
    
    
    
    
    
    16,238
    
    
    
    1,216
    
    
    
    
    
    
    
    17,454Cash, end of year
    
    $
    
    
    
    $
    13,787
    
    
    $
    2,197
    
    
    $
    
    
    
    $
    15,984
 23




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Three months ended March 31, 2005(As restated)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,615
    
    
    $
    21,301
    
    
    $
    871
    
    
    $
    (22,172
    )
    
    $
    4,615Adjustments to reconcile to cash provided 
Depreciation and amortization, including
   amortization included in interest expense
    
    
    788
    
    
    
    16,476
    
    
    
    801
    
    
    
    
    
    
    
    18,065Changes in operating assets and liabilities
    
    
    1,406
    
    
    
    532
    
    
    
    (919
    )
    
    
    
    
    
    
    1,019Changes in net affiliate balances
    
    
    
    
    
    
    (17,014
    )
    
    
    923
    
    
    
    16,091
    
    
    
    Other, net
    
    
    131
    
    
    
    106
    
    
    
    (207
    )
    
    
    
    
    
    
    30Cash provided by operating activities
    
    
    6,940
    
    
    
    21,401
    
    
    
    1,469
    
    
    
    (6,081
    )
    
    
    23,729CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (8,198
    )
    
    
    (232
    )
    
    
    
    
    
    
    (8,430
    )Investment in and advances to subsidiaries
    
    
    (6,081
    )
    
    
    
    
    
    
    
    
    
    
    6,081
    
    
    
    Cash provided by (used in) investing activities
    
    
    (6,081
    )
    
    
    (8,198
    )
    
    
    (232
    )
    
    
    6,081
    
    
    
    (8,430
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under revolving credit agreement
    
    
    3,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,563Net borrowings (repayments) of other long-term debt
    
    
    (4,584
    )
    
    
    482
    
    
    
    (1,026
    )
    
    
    
    
    
    
    (5,128
    )Stock purchase and options plans
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Cash provided by (used in) financing activities
    
    
    (859
    )
    
    
    482
    
    
    
    (1,026
    )
    
    
    
    
    
    
    (1,403
    )Increase in cash
    
    
    
    
    
    
    13,685
    
    
    
    211
    
    
    
    
    
    
    
    13,896Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    268Cash, beginning of year
    
    
    
    
    
    
    18,726
    
    
    
    451
    
    
    
    
    
    
    
    19,177Cash, end of year
    
    $
    
    
    
    $
    32,411
    
    
    $
    930
    
    
    $
    
    
    
    $
    33,341
 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Executive Summary of Business
   ®
 SM
  1)
    
    Our primary revenue source is membership services revenue derived from
the operation of our fitness centers. Membership services revenue
includes amounts paid by our members in the form of membership fees
and dues payments. It also includes revenue generated from provision
of personal training services.Currently, the majority of our members choose to purchase their membership
under our multi-year value plan by paying an enrollment fee and by
making monthly payments throughout the obligatory term of their membership.
After the obligatory period of
membership, our members enter the non-obligatory renewal period of
membership and make monthly payments (renewal payments) to maintain
membership privileges. Under sales methods in effect prior to December
2005, renewal payments were substantially discounted from the
obligatory period monthly payment level. Following the nationwide
implementation of our new BYOM pricing plan, in most markets renewal
payments carry a smaller or no discount from the obligatory period
monthly payment level. Our members may also choose to purchase a
prepaid membership for periods up to three years. Members choosing our
month-to-month membership payment option make month-to-month
non-obligatory payments after paying an enrollment fee. Ongoing
membership dues for members in renewal periods may be paid monthly or
annually or may be prepaid for multiple future periods.Our membership services revenue is generally collected as cash on a
basis that does not conform to its basis of revenue recognition,
resulting in the deferral of significant amounts received early in the
membership period that will be recognized in later periods. This
recognition methodology is a consequence of our long history of
offering membership programs with higher levels of monthly or total
payments during the obligatory period of membership, generally for
periods of up to three years, followed by discounted payments in the
subsequent renewal phase of membership. Our revenue recognition
objective
 25




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##### Table of Contents



is to recognize an even amount of membership revenue from
our members throughout their entire term of membership, regardless of
the payment pattern. As a result, we make estimates of membership term
length on a composite group basis of all members joining in a period
and set up separate amortization pools based on estimated total group
membership term length averages. Estimated term lengths used to create
the separate amortization term groups for revenue recognition are
based on historical average membership terms experienced by our
members.Membership services revenue related to members who maintain their
membership for periods beyond the obligatory term of membership is
deferred as collected and recognized on a straight-line basis over the
estimated term of total membership. Our historical evaluation of
members has resulted in a determination that approximately 37% of
originated monthly payment revenue from our members is subject to
deferral to be recognized over their entire term of membership. As a
result, we defer all collections received from members in this group,
and recognize as membership service revenue these amounts based on
five amortization pools with amortization periods of 39 months to 245
months, representing composite average membership terms of membership
of between 37 months and 360 months. Membership services revenues that
have been prepaid in their entirety for the obligatory period of
membership are recognized in a similar manner, except that the
estimate of the group expected to remain a member for only the
obligatory period of membership is amortized over the length of the
contract, which is generally 36 months, but varies by state. Based on
the historical attrition patterns of members who pay their membership
in full upon origination, approximately 57% of such membership revenue
relates to members who maintain their membership beyond the obligatory
three-year period of membership, which is amortized using the same
five amortization pools as described for monthly collections.We evaluate the actual attrition patterns of all of our deferred
revenue pools on a quarterly basis and make adjustments from our
historical experience to take into account actual attrition by
origination month groups. As we determine that our new estimated
attrition is different than the initial estimate based on historical
patterns, we recognize as a change in accounting estimate a charge or
credit to membership services revenue in the period of evaluation to
cumulatively adjust past recognition and ending deferred revenue.
Under our deferred revenue methodology, an increase in membership
attrition rates will result in an increase in revenue in the period of
adjustment as it is determined that amounts previously deferred to
future periods of membership no longer need to be deferred.
Alternatively, a decrease in membership attrition rates can reduce
membership services revenue as it is determined that amounts
previously considered earned are required to be deferred for
recognition in future periods.Personal training and other services are provided at most of the
Companys fitness centers. Personal training services contracts are
either paid-in-full at the point of origination, or are financed and
collected generally over three months after an initial payment.
Collections related to paid-in-full personal training services
contracts are deferred and recognized as personal training services
are rendered. Revenue related to personal training services contracts
that have been financed is recognized at the later of cash receipt or
the rendering of personal training services.Membership services revenue comprised approximately 94% and 93% of
total revenue for the three months ended March 31, 2006 and 2005,
respectively. Membership services revenue is recognized at the later
of when membership services fees are collected or earned. Membership
services fees collected but not yet earned are included as a deferred
revenue liability on the balance sheet.2)
    
    We generate revenue from the sales of products at our in-fitness
center retail stores including Bally-branded and third-party
nutritional products, juice bar nutritional drinks and fitness-related
convenience products such as clothing. Revenue from product sales
represented approximately 5% of total revenue for each of the three
months ended March 31, 2006 and 2005.3)
    
    The balance of our revenue (approximately 1% and 2% for the three
months ended March 31, 2006 and 2005, respectively), primarily
consists of franchising revenue, guest fees and specialty fitness programs. We also generate revenue through
granting concessions in our facilities to operators offering
wellness-related services such as physical therapy and from sales of
Bally-branded products by third-parties. Revenue from sales of
in-club advertising and sponsorships is also included in this
category, which we refer to as miscellaneous revenue.
  1)
    
    Membership services expenses consist primarily of salaries,
commissions, payroll taxes, benefits, rent, real estate taxes and
other occupancy costs, utilities, repairs and maintenance and supplies
to operate our fitness centers and provide personal training. Also
included are the costs to operate member processing and collection
centers, which provide contract processing, member relations, billing
and collection services.
 26




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##### Table of Contents









2)
    
    Retail products expenses consist primarily of the cost of products
sold as well as the payroll and related costs of dedicated retail
associates.3)
    
    Advertising expenses consist of our marketing department, media and
production and advertising costs to support fitness center membership
growth as well as the growth of our brand.4)
    
    General and administrative expenses include costs relating to our
centralized support functions, such as information technology,
accounting, treasury, human resources, procurement, real estate and
development and senior management. General and administrative also
includes professional services costs such as legal, consulting and
auditing as well as expenses related to various accounting
investigations.5)
    
    Depreciation and amortization expenses represent primarily the
depreciation on our fitness centers, including amortization of
leasehold improvements. Owned buildings and related improvements are depreciated over 5 to 35
years and leasehold improvements are amortized on the straight-line
method over the lesser of the estimated useful lives of the
improvements or the remaining noncancelable lease terms. In addition,
equipment and furnishings are depreciated over 5 to 10 years.
 th
     Industry Data Survey of the Health and Fitness Club Industry,
 Critical Accounting Policies
  27




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##### Table of Contents



Results of Operations
  Three Months
    
    
    
    
    
    
    Three Months
    
    
    % of
    
    
    Change fromEnded
    
    
    % of
    
    
    Ended
    
    
    Net
    
    
    Previous PeriodMarch 31, 2006
    
    
    Net Revenue
    
    
    March 31, 2005
    
    
    Revenue
    
    
    Dollars
    
    
    Percent(As restated)REVENUEMembership
    
    $
    208,751
    
    
    
    82
    %
    
    $
    207,053
    
    
    
    82
    %
    
    $
    1,698
    
    
    
    1
    %Personal training
    
    
    30,904
    
    
    
    12
    %
    
    
    29,082
    
    
    
    11
    %
    
    
    1,822
    
    
    
    6
    %Membership services revenue
    
    
    239,655
    
    
    
    94
    %
    
    
    236,135
    
    
    
    93
    %
    
    
    3,520
    
    
    
    1
    %Retail products
    
    
    11,937
    
    
    
    5
    %
    
    
    13,347
    
    
    
    5
    %
    
    
    (1,410
    )
    
    
    -11
    %Miscellaneous
    
    
    3,574
    
    
    
    1
    %
    
    
    4,271
    
    
    
    2
    %
    
    
    (697
    )
    
    
    -16
    %Net revenues
    
    
    255,166
    
    
    
    100
    %
    
    
    253,753
    
    
    
    100
    %
    
    
    1,413
    
    
    
    1
    %OPERATING COSTS AND EXPENSESMembership services
    
    
    171,138
    
    
    
    67
    %
    
    
    167,611
    
    
    
    66
    %
    
    
    3,527
    
    
    
    2
    %Retail products
    
    
    11,011
    
    
    
    4
    %
    
    
    12,808
    
    
    
    5
    %
    
    
    (1,797
    )
    
    
    -14
    %Advertising
    
    
    18,895
    
    
    
    7
    %
    
    
    17,111
    
    
    
    7
    %
    
    
    1,784
    
    
    
    11
    %Information technology
    
    
    5,095
    
    
    
    2
    %
    
    
    5,310
    
    
    
    2
    %
    
    
    (215
    )
    
    
    -4
    %Other general and administrative
    
    
    16,540
    
    
    
    7
    %
    
    
    12,910
    
    
    
    5
    %
    
    
    3,630
    
    
    
    28
    %Depreciation and amortization
    
    
    14,214
    
    
    
    6
    %
    
    
    14,939
    
    
    
    6
    %
    
    
    (725
    )
    
    
    -5
    %236,893
    
    
    
    93
    %
    
    
    230,689
    
    
    
    91
    %
    
    
    6,204
    
    
    
    3
    %Operating income
    
    $
    18,273
    
    
    
    7
    %
    
    $
    23,064
    
    
    
    9
    %
    
    $
    (4,791
    )
    
    
    -21
    %
 28




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##### Table of Contents



Key
Operating Data
 Three Months Ended March 31,2006
    
    
    2005Average
monthly membership revenue recognized per member (1)
    
    $
    19.34
    
    
    $
    18.99Average number of members during the period
(000s) (1)
    
    
    3,598
    
    
    
    3,635Number of
members joining during the period (000s)
    
    
    357
    
    
    
    365Number of members at end of period (000s)
    
    
    3,563
    
    
    
    3,677Fitness
centers open at end of period
    
    
    384
    
    
    
    391
  Summary
of revenue recognition method
         29




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##### Table of Contents



Comparison
of the Three Months Ended March 31, 2006 and 2005
   
    
    Membership revenue recognized increased to
$208.8 million from $207.1 million in 2005, an increase of $1.7 million (1%) from the prior year
period. In the current year, a 1% decrease in average number of
members to 3.598 million members and a decrease in the number of
health clubs was offset by an increase in the average monthly membership
revenue per member to $19.34 from $18.99.
    
    Cash collections of membership revenue during the three months ended
March 31, 2006 was $200.6 million, a decrease of $6.4 million (3%)
from 2005. This decrease is the result of a decrease in advance
payments of dues and membership fees and a decrease in cash received
from initial term monthly payments as more members select value plan
and month-to-month memberships.
    
    Personal training revenue increased to $30.9 million from $29.1
million in 2005, an increase of $1.8 million (6%), primarily
reflecting the Companys emphasis on growth in personal training
services and expansion of new programs such as small group training.
    
    Retail products revenue decreased to $11.9 million from $13.3 million
in 2005, a decrease of $1.4 million (11%), due primarily to the
conversion of lower performing full size in-club retail stores to a
more efficient, but lower sales model integrated with the front desk
operation.
    
    Miscellaneous revenue decreased to $3.6 million from $4.3 million in
2005, primarily due to lower revenue from income producing strategic
partnerships and franchising fees.
  
    
    Membership services expenses for the three months ended March 31, 2006
increased $3.5 million (2%) from 2005, reflecting increases in
occupancy and insurance costs offset by a reduction in personnel costs
as a result of the Companys cost reduction initiatives. In
addition, in March 2006, the Company sold an under performing health
club in Canada for a gain of approximately $0.9 million.
    
    Retail products expenses, which included labor costs, for the three
months ended March 31, 2006 decreased $1.8 million (14%) from 2005,
primarily as a result of the conversion of some stores to an
integrated model and a decrease in retail sales in the Companys
fitness centers.
    
    Advertising expenses for the three months ended March 31, 2006
increased $1.8 million (11%) from 2005, primarily from a planned
increase in media spending and the impact of deferred production
costs from the fourth quarter of 2005.
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##### Table of Contents




    
    Information technology expenses for the three months ended March 31,
2006 decreased $0.2 million (4%) from 2005 primarily as a result
of reduced use of outside consultants partially offset by increased
internal salaries.
    
    Other general and administrative expenses for the three months ended
March 31, 2006 increased $3.6 million (28%) from 2005, primarily as a
result of costs incurred in connection with the proxy solicitation,
restructuring and ongoing investigations and litigation related to the
restatement of the Companys financial statements and an increase in
insurance, Directors fees and audit costs.
    
    Depreciation and amortization expense for the three months ended March
31, 2006 decreased $0.7 million from 2005, reflecting a reduction in
capital expenditures in prior periods.
   Financial Condition
  
    
    a decrease in assets held for sale of $40.2 million resulting from the sale of
Crunch Fitness (however, $30 million of the proceeds of the sale of such assets was
used to make a repayment under the term loan of the Credit Agreement);
    
    a $3.6 million decrease in property and equipment.
Capital expenditures of $11.6 million include a scheduled replacement of exercise equipment.
The Company will continue a controlled capital spending program reflective of its limited capital
resources;
    
    an increase in deferred financing costs of $21.1 million
primarily resulting from  the consent solicitation; and
    
    a decrease in prepaid expenses of $2.4 million primarily from a decrease in prepaid advertising.
 Liquidity
and Capital Resources
  Change fromMarch 31, 2006
    
    
    December 31, 2005
    
    
    previous yearCash and equivalents
    
    $
    16.0
    
    
    $
    17.5
    
    
    $
    (1.5
    )Undrawn revolving credit facility
    
    
    60.9
    
    
    
    51.4
    
    
    
    9.5Total liquidity
    
    $
    76.9
    
    
    $
    68.9
    
    
    $
    8.0
  31




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##### Table of Contents



Interest
Expense
   Cash Flows
  Three Months Ended March 31,
    
    
    Change from2006
    
    

2005
    
    
    Previous Period(As
restated)Cash provided by operating activities
    
    $
    10,577
    
    
    $
    23,729
    
    
    $
    (13,152
    )Cash provided (used in) investing activities
    
    
    35,787
    
    
    
    (8,430
    )
    
    
    44,217Cash used in financing activities
    
    
    (47,998
    )
    
    
    (1,403
    )
    
    
    (46,595
    )Increase (decrease) in cash
    
    $
    (1,634
    )
    
    $
    13,896
    
    
    $
    (15,530
    )
 Operating
Activities
  Investing
Activities and Capital Expenditures
  32




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##### Table of Contents



Financing
Activities
  Dividend and Other Commitments
  Debt
 Credit Agreement
  Consent Solicitations
     33




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##### Table of Contents



Other Secured Debt
   Off-Balance Sheet Arrangements
  Recently Issued Accounting Standards
 Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140 Accounting for Derivative Instruments and Hedging Activities Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities  a Replacement of FASB Statement No. 125
 34




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##### Table of Contents



Item 3. Interest Rate Risk and Market Risk
   Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Controls and Procedures
   Changes in Internal Controls over Financial Reporting (ICFR)
  35




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Repurchases of Common Stock
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 Annual Meeting of Stockholders held on January 26, 2006
    Nominees
    
    Votes Cast For
    
    Votes WithheldEric Langshur
    
    
    4,572,342
    
    
    
    1,384,862Charles J. Burdick
    
    
    29,254,705
    
    
    
    517,615Barry R. Elson
    
    
    29,257,838
    
    
    
    514,482Don R. Kornstein
    
    
    24,715,066
    
    
    
    287,685
 Proposal
    
    For
    
    Against
    
    Abstain2006 Omnibus Equity Compensation Plan
    
    
    4,790,557
    
    
    
    23,923,679
    
    
    
    1,058,083KMPG LLP as Independent Auditor
    
    
    27,818,822
    
    
    
    52,466
    
    
    
    1,876,132Stockholder proposal regarding the
repeal of, or amendments to, the
Companys by-laws if any, adopted
without stockholder approval after
May 25, 2005 and prior to the annual
meeting
    
    
    24,170,116
    
    
    
    256,061
    
    
    
    5,321,243Stockholder proposal to give
stockholders the authority to remove
the Chief Executive Officer and
President of the Company*
    
    
    19,612,635
    
    
    
    8,344,746
    
    
    
    1,814,938Stockholder proposal to increase
stockholder authority in determining
tenure of Ballys officers*
    
    
    19,612,820
    
    
    
    8.344,746
    
    
    
    1,814,753Stockholder proposal to protect
stockholder authority to remove
Bally officers*
    
    
    19,613,347
    
    
    
    8,344,746
    
    
    
    1,814,226Stockholder proposal to remove Paul
A. Toback as Chief Executive Officer
and President of the Company*
    
    
    19,605,733
    
    
    
    8,347,503
    
    
    
    1,819,083
 
 *Proposal required approval of 75% of outstanding common shares of the Company. 36




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##### Table of Contents



Consent Solicitation
  Principal Amount
    
    Principal Amount
    
    Principal Amount
    
    Principal AmountNotes
    
    Outstanding ($)
    
    Voted For ($)
    
    Voted Against ($)
    
    Abstained ($)Senior Notes
    
    
    299,764,000
    
    
    
    283,970,000
    
    
    
    N/A
    
    
    
    15,794,000Senior Subordinated Notes
    
    
    235,000,000
    
    
    
    233,029,000
    
    
    
    N/A
    
    
    
    1,971,000
 
 Item 5. Other Information
  
 Item 6. Exhibits
  4.1
    
    Supplemental Indenture, dated as of April 7, 2006, among Bally Total
Fitness Holding Corporation and U.S. Bank National Association, as
trustee for the Registrants 9-7/8% Senior Subordinated Notes due
2007 (incorporated by reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K, file no. 001-13997, dated April 12,
2006).4.2
    
    Supplemental Indenture, dated as of April 7, 2006, among Bally Total
Fitness Holding Corporation and U.S. Bank National Association, as
trustee for the Registrants 10-1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated April 12, 2006).4.3
    
    Amended and Restated Registration Rights Agreement dated as of April
13, 2006 by and between Bally Total Fitness Holding Corporation and
certain holders who are signatories thereto (incorporated by
reference as Exhibit 10.4 to the Companys Current Report on Form
8-K, file no. 001-13997, dated April 18, 2006).4.4
    
    Registration Rights Agreement, dated as of April 11, 2006, among
Bally Total Fitness Holding Corporation and the purchasers listed on
the signature page thereto (incorporated by reference as Exhibit 4.3
to the Companys Current Report on Form 8-K, file no. 001-13997,
dated April 12, 2006).+10.1
    
    Employment Agreement effective as of January 1, 2006 between the
Company and John H. Wildman (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated February 10, 2006).+10.2
    
    Interim Executive Services Agreement dated as of April 12, 2006
between Tatum, LLC and the Company (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated April 18, 2006).
 37




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##### Table of Contents



10.3
    
    Third Amendment and Waiver, dated as of March 24, 2006, under the
Credit Agreement, dated as of November 18, 1997, as amended and
restated as of October 14, 2004 (as in effect on March 23, 2006),
among Bally Total Fitness Holding Corporation, a Delaware
corporation, the lenders parties thereto, JPMorgan Chase Bank, N.A.,
as agent for the lenders, Deutsche Bank Securities, Inc., as
syndication agent, and LaSalle Bank National Association, as
documentation agent (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, file no. 001-13997, dated
March 31, 2006).10.4
    
    Consent Agreement by and between Bally Total Fitness Holding
Corporation and Special Value Bond Fund II, LLC, Special Value
Absolute Return Fund, LLC, Special Value Opportunities Fund, LLC and
Special Value Expansion Fund, LLC (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated April 18, 2006).10.5
    
    Consent Agreement by and between Bally Total Fitness Holding
Corporation and Everest Capital Limited as agent for HFR ED
Advantage Master Trust, Everest Capital Event Fund, LP, GMAM
Investment Funds Trust II and Everest Capital Senior Debt Fund, L.P.
(incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated April 18, 2006).10.6
    
    Consent Agreement by and between Bally Total Fitness Holding
Corporation and Pardus European Special Opportunities Master Fund
L.P. (incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K, file no. 001-13997, dated April 18,
2006).10.7
    
    Stock Purchase Agreement, dated as of April 11, 2006, among Bally
Total Fitness Holding Corporation and Wattles Capital Management,
LLC (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, file no. 001-13997, dated April 12,
2006).10.8
    
    Stock Purchase Agreement, dated as of April 11, 2006, among Bally
Total Fitness Holding Corporation and investment funds affiliated
with Ramius Capital Group, L.L.C. (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K, file no.
001-13997, dated April 12, 2006).10.9
    
    Fourth Amendment dated as of June 23, 2006, under the Credit
Agreement, dated as of November 18, 1997, as amended and restated as
of October 14, 2004, among Bally Total Fitness Holding Corporation,
a Delaware corporation, the lenders parties thereto, JPMorgan Chase
Bank, N.A., as agent for the lenders, Deutsche Bank Securities,
Inc., as syndication agent, and LaSalle Bank National Association,
as documentation agent (incorporated by reference to Exhibit 10.39
to the Companys Annual Report on Form 10-K, file no. 001-13997, for
the fiscal year ended December 31, 2005).31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, filed herewith.31.2
    
    Certification of the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.32.1
    
    Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 +
    
    Management contract or compensatory plan or arrangement. 38




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##### Table of Contents



SIGNATURE PAGE
  BALLY TOTAL FITNESS HOLDING
CORPORATION RegistrantBy:
    /s/ David S. ReynoldsDavid S. ReynoldsVice President and Controller
(principal financial officer)  39