##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    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
 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)
   o þ
  o þ o
 o þ




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##### 



TABLE OF ADDITIONAL REGISTRANTS
 Jurisdiction of
    
    I.R.S. EmployerExact Name of Additional Registrants
    
    Incorporation
    
    Identification NumberBally 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
    
    38-1803897BTF/CFI, Inc.
    
    Delaware
    
    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
    
    95-3445400New Fitness Holding Co., Inc.
    
    New York
    
    36-3209555Nycon Holding Co., Inc.
    
    New York
    
    36-3209533Rhode Island Holding Company
    
    Rhode Island
    
    36-3261314Tidelands Holiday Health Clubs, Inc.
    
    Virginia
    
    52-1229398U.S. Health, Inc.
    
    Delaware
    
    52-1137373




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Quarterly Report on Form 10-Q for the Period Ended March 31, 2007
TABLE OF CONTENTS
 PageNumberINTRODUCTORY STATEMENT
    
    
    1FORWARD-LOOKING STATEMENTS
    
    
    2PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006
    
    
    4Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2007 and 2006
    
    
    5Consolidated Statement of Stockholders Deficit and Comprehensive Income (Unaudited) for the Three
Months Ended March 31, 2007
    
    
    6Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2007 and 2006
    
    
    7Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    46Item 4. Controls and Procedures
    
    
    46PART II. OTHER INFORMATION
    
    
    47Item 1. Legal Proceedings
    
    
    47Item 1A. Risk Factors
    
    
    49Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3. Defaults Upon Senior Securities
    
    
    50Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    51Item 6. Exhibits
    
    
    51SIGNATURE PAGE




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##### 



INTRODUCTORY STATEMENT
      
    
    The Companys 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.
    
    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.
    
    The Companys 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 Companys 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 Companys 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.
    
    The Companys primary markets have become more competitive, with
competitors opening new fitness centers. At the same time, the
Companys ability to invest in its fitness centers has been
constrained by its deteriorating financial and liquidity condition.
 FORWARD-LOOKING STATEMENTS
    
    
    the outcome of our Chapter 11 Cases and consummation of our Amended Plan under the
current terms or at all;
    
    the length of time it will take us to complete the restructuring contemplated by the
Amended Plan;
    
    the effect of any alternative proposals or competing plans of reorganization;
    
    the success of our Amended Plan and the outcome of the restructuring in general;
    
    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;
    
    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;
    
    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;
    
    the success of operating initiatives, advertising and promotional efforts to attract and
retain members;
    
    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;
    
    the acceptance of our product and service offerings;
    
    changes in business strategy or plans;
 2




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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;
    
    the outcome of SEC and Department of Justice investigations;
    
    the existence of adverse publicity or litigation (including stockholder litigation and
insurance rescission actions), the outcome thereof and the costs and expenses associated
therewith;
    
    the changes in, or the failure to comply with, government regulations;
    
    the ability to attract, retain and motivate highly skilled employees, including a
permanent Chief Executive Officer and Chief Financial Officer;
    
    the business abilities and judgment of personnel;
    
    general economic and business conditions; and
    
    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




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 BALLY TOTAL FITNESS HOLDING CORPORATION
 Condensed Consolidated Balance Sheets
  March 31
    
    
    December 312007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash
    
    $
    71,873
    
    
    $
    34,799Prepaid expenses
    
    
    19,094
    
    
    
    18,937Other current assets
    
    
    22,771
    
    
    
    21,479Current assets of discontinued operations held for sale
    
    
    1,106
    
    
    
    1,118Total current assets
    
    
    114,844
    
    
    
    76,333Property and equipment, less accumulated depreciation and amortization of
$565,822 and $571,381
    
    
    242,850
    
    
    
    244,052Goodwill, net
    
    
    19,734
    
    
    
    19,734Trademarks, net of accumulated amortization of $528 and $528
    
    
    6,507
    
    
    
    6,507Intangible assets, net of accumulated amortization of $9,562 and $9,527
    
    
    378
    
    
    
    413Deferred financing costs, net of accumulated amortization of $33,468 and $28,661
    
    
    23,151
    
    
    
    27,922Other assets
    
    
    19,901
    
    
    
    17,442Non-current assets of discontinued operations held for sale
    
    
    4,501
    
    
    
    4,368$
    431,866
    
    
    $
    396,771LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    48,989
    
    
    $
    49,197Income taxes payable
    
    
    1,219
    
    
    
    1,430Accrued liabilities
    
    
    111,819
    
    
    
    115,435Current maturities of long-term debt
    
    
    801,489
    
    
    
    513,913Deferred revenues
    
    
    273,645
    
    
    
    274,399Current liabilities of discontinued operations held for sale
    
    
    5,664
    
    
    
    5,424Total current liabilities
    
    
    1,242,825
    
    
    
    959,798Long-term debt, less current maturities
    
    
    11,401
    
    
    
    247,434Deferred rent liability
    
    
    83,322
    
    
    
    83,215Deferred income taxes
    
    
    1,657
    
    
    
    1,925Other liabilities
    
    
    52,024
    
    
    
    42,746Deferred revenues
    
    
    442,669
    
    
    
    449,653Non-current liabilities of discontinued operations held for sale
    
    
    12,708
    
    
    
    12,422Stockholders deficit
    
    
    (1,414,740
    )
    
    
    (1,400,422
    )$
    431,866
    
    
    $
    396,771
  4




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
 Three months endedMarch 312007
    
    
    2006Net revenues:Membership services
    
    $
    218,794
    
    
    $
    230,531Retail products
    
    
    9,711
    
    
    
    11,343Miscellaneous
    
    
    4,910
    
    
    
    4,471233,415
    
    
    
    246,345Operating costs and expenses:Membership services
    
    
    162,469
    
    
    
    164,676Retail products
    
    
    8,747
    
    
    
    10,710Marketing and advertising
    
    
    19,290
    
    
    
    18,538General and administrative
    
    
    22,129
    
    
    
    20,834Net gain on sale of land and building
    
    
    (175
    )
    
    
    Depreciation and amortization
    
    
    10,755
    
    
    
    13,464223,215
    
    
    
    228,222Operating income
    
    
    10,200
    
    
    
    18,123Interest expense, net
    
    
    (25,752
    )
    
    
    (22,970
    )Other, net
    
    
    509
    
    
    
    118(25,243
    )
    
    
    (22,852
    )Loss from continuing operations before income taxes
    
    
    (15,043
    )
    
    
    (4,729
    )Income tax
benefit (provision)
    
    
    160
    
    
    
    (201
    )Loss from continuing operations
    
    
    (14,883
    )
    
    
    (4,930
    )Discontinued operations:Loss from discontinued operations
    
    
    (16
    )
    
    
    (775
    )Gain on disposal
    
    
    
    
    
    
    38,375Income (loss) from discontinued operations
    
    
    (16
    )
    
    
    37,600Net income (loss)
    
    $
    (14,899
    )
    
    $
    32,670Basic income (loss) per common share:Loss from continuing operations
    
    $
    (0.37
    )
    
    $
    (0.13
    )Income from discontinued operations
    
    
    
    
    
    
    1.00Net income (loss)
    
    $
    (0.37
    )
    
    $
    0.87Diluted income (loss) per common share:Loss from continuing operations
    
    $
    (0.37
    )
    
    $
    (0.13
    )Income from discontinued operations
    
    
    
    
    
    
    1.00Net income (loss)
    
    $
    (0.37
    )
    
    $
    0.87
  5




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Stockholders Deficit and Comprehensive Loss
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    Other
    
    
    TotalShares
    
    
    Par
    
    
    Contributed
    
    
    Accumulated
    
    
    Stock in
    
    
    Comprehensive
    
    
    StockholdersOutstanding
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Treasury
    
    
    loss
    
    
    DeficitBalance 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
    
    
    
    48Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,851
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    533Forfeiture 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
    )
  6




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows
 Three months endedMarch 312007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (14,899
    )
    
    $
    32,670Gain 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
    
    
    
    16,905Changes in operating assets and liabilities
    
    
    4,864
    
    
    
    (2,397
    )Deferred income taxes, net
    
    
    87
    
    
    
    92Loss (gain) on sale of assets
    
    
    251
    
    
    
    (157
    )Realized gain on sale/leaseback transaction
    
    
    (175
    )
    
    
    Stock-based compensation
    
    
    533
    
    
    
    991Cash provided by discontinued operations
    
    
    1,247
    
    
    
    73Cash provided by operating activities
    
    
    7,525
    
    
    
    10,577CASH FLOWS FROM INVESTING ACTIVITIES:Purchases, advances on and construction of property and equipment
    
    
    (21,395
    )
    
    
    (11,629
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    45,490Proceeds from sales of properties
    
    
    
    
    
    
    598Cash provided by (used in) discontinued operations
    
    
    (129
    )
    
    
    1,328Cash provided by (used in) investing activities
    
    
    (21,524
    )
    
    
    35,787CASH 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
    
    
    
    
    
    
    151Cash 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
    
    
    
    164Cash, beginning of period
    
    
    34,799
    
    
    
    17,454Cash, end of period
    
    $
    71,873
    
    
    $
    15,984SUPPLEMENTAL 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
    )
    
    
    17Increase in accrued liabilities
    
    
    10,387
    
    
    
    26,048Increase in other liabilities
    
    
    3,857
    
    
    
    4,186Decrease 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
    
    
    $
    18,495Interest capitalized
    
    
    (56
    )
    
    
    (192
    )Income taxes paid, net
    
    
    23
    
    
    
    98Investing and financing activities exclude the following non-cash transactions Reclassification of unearned compensation balance to contributed capital
    
    $
    
    
    
    $
    5,534Property disposal related to sales/leaseback transaction
    
    
    8,973
    
    
    
    
  7




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements
 Note 1 Basis
of Presentation and Going Concern
   Accounting
for the Impairment or Disposal of Long-Lived Asset
    Planned reorganization and bankruptcy filing
   8




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
    Financial
Reporting by Entities in Reorganization under the Bankruptcy Code
 Seasonal factors
  Market risk
   9




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Fair value of financial instruments
  Note 2 Discontinued Operations
   March 31,
    
    
    December 31,2007
    
    
    2006Prepaid expenses and other current assets
    
    $
    1,106
    
    
    $
    1,118Property and equipment, net
    
    
    3,881
    
    
    
    3,745Intangible assets, net
    
    
    558
    
    
    
    562Other long-term assets
    
    
    62
    
    
    
    61Total assets of discontinued operations held for sale
    
    $
    5,607
    
    
    $
    5,486Deferred rent
    
    $
    5,038
    
    
    $
    4,956Deferred revenue
    
    
    13,334
    
    
    
    12,890Total liabilities of discontinued operations held for sale
    
    $
    18,372
    
    
    $
    17,846
  Three months ended March 31,2007
    
    
    2006Revenue
    
    $
    8,334
    
    
    $
    13,508Loss from discontinued operations before income taxes
    
    $
    (16
    )
    
    $
    (769
    )Income tax provision
    
    
    
    
    
    
    (6
    )Loss from discontinued operations
    
    
    (16
    )
    
    
    (775
    )Gain on disposal of discontinued operations
    
    
    
    
    
    
    38,375Income (loss) from discontinued operations
    
    $
    (16
    )
    
    $
    37,600
 10




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 3 Commitments and Contingencies
 Operating leases:
 Litigation:
 Securities and Exchange Commission Investigation
  Department of Justice Investigation
  Putative Securities Class Actions
 In re Bally Total Fitness Securities Litigation
 Makor Issues & Rights v. Tellabs
 Stockholder Derivative Lawsuit in Illinois Federal Court
  11




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Individual Securities Action in Illinois
 Levine v. Bally Total Fitness Holding Corporation, et
al.
 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,
 12




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Great American Insurance Company
v. Bally Total Fitness Holding Corporation, ab initio
 Other
    Note 4 Debt
  New Facility
  13




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##### 



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




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
      Cash Collateral and DIP Facility
    15




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
    Other Secured Debt
  Liquidity
  16




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 5 Deferred Revenue
  Three months ended March 31, 2007Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    Revenue
    
    
    March 31,2006
    
    
    Additions
    
    
    Recognized
    
    
    2007Deferral of receipts from financed members:Initial contract term payments
    
    $
    408,798
    
    
    $
    42,670
    
    
    $
    (58,307
    )
    
    $
    393,161Down payments
    
    
    80,263
    
    
    
    10,217
    
    
    
    (10,420
    )
    
    
    80,060Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon origination
    
    
    101,546
    
    
    
    13,564
    
    
    
    (6,588
    )
    
    
    108,522Advance payments of periodic dues and membership fees
    
    
    117,654
    
    
    
    29,410
    
    
    
    (31,593
    )
    
    
    115,471Receipts 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, 2006Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    Revenue
    
    
    March 31,2006
    
    
    Additions
    
    
    Recognized
    
    
    2007Deferral of receipts from financed members:Initial contract term payments
    
    $
    515,159
    
    
    $
    59,261
    
    
    $
    (68,553
    )
    
    $
    505,867Down payments
    
    
    97,510
    
    
    
    13,947
    
    
    
    (13,846
    )
    
    
    97,611Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon origination
    
    
    106,712
    
    
    
    9,704
    
    
    
    (9,042
    )
    
    
    107,374Advance payments of periodic dues and membership fees
    
    
    119,697
    
    
    
    27,077
    
    
    
    (26,722
    )
    
    
    120,052Receipts 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
    )
    
    
    849,054SAB 108 transitional deferred revenue adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,709
    )$
    843,345
 Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements,
 17




---



##### 



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 31,2007
    
    
    2006Weighted average number of common shares outstanding
    
    
    40,718,262
    
    
    
    37,685,264Effect of outstanding stock options and warrants
    
    
    
    
    
    
    Diluted weighted average number of shares outstanding
    
    
    40,718,262
    
    
    
    37,685,264Options 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
    
    
    
    1,722,640Range of exercise prices per share:High
    
    $
    36.00
    
    
    $
    36.00Low
    
    $
    2.30
    
    
    $
    2.91
 Note 7 Income Taxes
      Accounting for Uncertainty
in Income Taxes
 18




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Note 8 Share-based Payments
 Share-Based Payment Accounting for Stock-based Compensation Accounting for Stock Issued to
Employees
  Stock-Based Compensation Plans
     19




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Stock Options
  WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicNumber of Shares
    
    
    Price
    
    
    (Years)
    
    
    ValueOutstanding at December 31, 2006
    
    
    3,386,426
    
    
    $
    13.34Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    (26,998
    )
    
    
    5.11Canceled
    
    
    (39,702
    )
    
    
    8.98Outstanding at March 31, 2007
    
    
    3,319,726
    
    
    
    13.46
    
    
    
    5.3
    
    
    $
    Exercisable at March 31, 2007
    
    
    2,897,737
    
    
    $
    14.62
    
    
    
    4.9
    
    
    $
    
  Three months endedMarch 31,2007
    
    2006Weighted average grant-date fair value of stock options granted (per share)
    
    $
    
    
    
    $
    4.60Total intrinsic value of stock options exercised
    
    $
    
    
    
    $
    92
    Restricted Stock
  20




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  WeightedAverageGrant DateFairNumber of Shares
    
    ValueOutstanding at December 31, 2006
    
    
    568,250
    
    
    $
    6.90Vested
    
    
    
    
    
    
    Forfeited
    
    
    (48,500
    )
    
    $
    6.84Outstanding at March 31, 2007
    
    
    519,750
    
    
    $
    6.91
  Note 9 Guarantees
    Note 10 Sale/Leaseback Transactions
 Accounting for Leases.
 Note 11 Subsequent Events
 Sale of Canada Clubs
  21




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Non-payment
of Interest and Forbearance Agreement
  Planned Reorganization and Chapter 11 Bankruptcy Proceeding
     
    
    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 Companys 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 Companys 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 Companys 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)
  
    
    Holders of the Companys 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 Companys Senior Subordinated Notes. These notes bear interest at 13-5/8%
if paid-in-kind and 11.5% if paid in cash, at the Companys 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 Companys existing common stock would be extinguished for no consideration.
  DIP Financing
     23




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Exit Credit Facility
       24




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Harry Schwartz Settlement
  Note 12 Condensed Consolidating Financial Statements
     25




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 March 31, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    67,471
    
    
    $
    4,402
    
    
    $
    
    
    
    $
    71,873Other current assets
    
    
    
    
    
    
    41,169
    
    
    
    696
    
    
    
    
    
    
    
    41,865Current assets of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    1,106
    
    
    
    
    
    
    
    1,106Total current assets
    
    
    
    
    
    
    108,640
    
    
    
    6,204
    
    
    
    
    
    
    
    114,844Property and equipment, net
    
    
    
    
    
    
    235,065
    
    
    
    7,785
    
    
    
    
    
    
    
    242,850Goodwill, net
    
    
    
    
    
    
    19,734
    
    
    
    
    
    
    
    
    
    
    
    19,734Trademarks, net
    
    
    6,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,507Intangible assets, net
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    378Investment in and advances to
subsidiaries
    
    
    (617,113
    )
    
    
    221,315
    
    
    
    
    
    
    
    395,798
    
    
    
    Other assets
    
    
    23,137
    
    
    
    16,930
    
    
    
    2,985
    
    
    
    
    
    
    
    43,052Non-current assets of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    4,501
    
    
    
    
    
    
    
    4,501$
    (587,469
    )
    
    $
    602,062
    
    
    $
    21,475
    
    
    $
    395,798
    
    
    $
    431,866LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    48,745
    
    
    $
    244
    
    
    $
    
    
    
    $
    48,989Income taxes payable
    
    
    
    
    
    
    1,073
    
    
    
    146
    
    
    
    
    
    
    
    1,219Accrued liabilities
    
    
    24,497
    
    
    
    78,479
    
    
    
    8,843
    
    
    
    
    
    
    
    111,819Current maturities of long-term debt
    
    
    799,032
    
    
    
    539
    
    
    
    1,918
    
    
    
    
    
    
    
    801,489Deferred revenues
    
    
    
    
    
    
    273,645
    
    
    
    
    
    
    
    
    
    
    
    273,645Current liabilities of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    5,664
    
    
    
    
    
    
    
    5,664Total current liabilities
    
    
    823,529
    
    
    
    402,481
    
    
    
    16,815
    
    
    
    
    
    
    
    1,242,825Long-term debt, less current maturities
    
    
    3,742
    
    
    
    5,299
    
    
    
    2,360
    
    
    
    
    
    
    
    11,401Net affiliate payable
    
    
    
    
    
    
    457,774
    
    
    
    64,810
    
    
    
    (522,584
    )
    
    
    Other liabilities
    
    
    
    
    
    
    131,261
    
    
    
    5,742
    
    
    
    
    
    
    
    137,003Deferred revenues
    
    
    
    
    
    
    442,669
    
    
    
    
    
    
    
    
    
    
    
    442,669Non-current liabilities of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    12,708
    
    
    
    
    
    
    
    12,708Stockholders 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)
 CONDENSED CONSOLIDATING BALANCE SHEET
 December 31, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    31,911
    
    
    $
    2,888
    
    
    $
    
    
    
    $
    34,799Other current assets
    
    
    
    
    
    
    39,646
    
    
    
    770
    
    
    
    
    
    
    
    40,416Current assets of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    1,118
    
    
    
    
    
    
    
    1,118Total current assets
    
    
    
    
    
    
    71,557
    
    
    
    4,776
    
    
    
    
    
    
    
    76,333Property and equipment, net
    
    
    
    
    
    
    234,689
    
    
    
    9,363
    
    
    
    
    
    
    
    244,052Goodwill, net
    
    
    
    
    
    
    19,734
    
    
    
    
    
    
    
    
    
    
    
    19,734Trademarks, net
    
    
    6,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,507Intangible assets, net
    
    
    
    
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    413Investment in and advances to subsidiaries
    
    
    (662,464
    )
    
    
    221,315
    
    
    
    
    
    
    
    441,149
    
    
    
    Other assets
    
    
    27,898
    
    
    
    14,540
    
    
    
    2,926
    
    
    
    
    
    
    
    45,364Non-current assets of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    
    
    
    
    4,368$
    (628,059
    )
    
    $
    562,248
    
    
    $
    21,433
    
    
    $
    441,149
    
    
    $
    396,771LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    48,963
    
    
    $
    234
    
    
    $
    
    
    
    $
    49,197Income taxes payable
    
    
    
    
    
    
    1,284
    
    
    
    146
    
    
    
    
    
    
    
    1,430Accrued liabilities
    
    
    21,957
    
    
    
    77,759
    
    
    
    15,719
    
    
    
    
    
    
    
    115,435Current maturities of long-term debt
    
    
    511,205
    
    
    
    658
    
    
    
    2,050
    
    
    
    
    
    
    
    513,913Deferred revenues
    
    
    
    
    
    
    274,399
    
    
    
    
    
    
    
    
    
    
    
    274,399Current liabilities of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    5,424
    
    
    
    
    
    
    
    5,424Total current liabilities
    
    
    533,162
    
    
    
    403,063
    
    
    
    23,573
    
    
    
    
    
    
    
    959,798Long-term debt, less current maturities
    
    
    239,201
    
    
    
    5,373
    
    
    
    2,860
    
    
    
    
    
    
    
    247,434Net affiliate payable
    
    
    
    
    
    
    426,151
    
    
    
    61,911
    
    
    
    (488,062
    )
    
    
    Other liabilities
    
    
    
    
    
    
    126,526
    
    
    
    1,360
    
    
    
    
    
    
    
    127,886Deferred revenues
    
    
    
    
    
    
    449,653
    
    
    
    
    
    
    
    
    
    
    
    449,653Non-current liabilities of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    12,422
    
    
    
    
    
    
    
    12,422Stockholders 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
 CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
 Three months ended March 31, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    218,794
    
    
    $
    
    
    
    $
    
    
    
    $
    218,794Retail products
    
    
    
    
    
    
    9,711
    
    
    
    
    
    
    
    
    
    
    
    9,711Miscellaneous
    
    
    
    
    
    
    4,910
    
    
    
    
    
    
    
    
    
    
    
    4,910
    
    
    
    233,415
    
    
    
    
    
    
    
    
    
    
    
    233,415Operating costs and expenses:Membership services
    
    
    
    
    
    
    162,991
    
    
    
    (522
    )
    
    
    
    
    
    
    162,469Retail products
    
    
    
    
    
    
    8,747
    
    
    
    
    
    
    
    
    
    
    
    8,747Marketing and advertising
    
    
    
    
    
    
    19,290
    
    
    
    
    
    
    
    
    
    
    
    19,290General and administrative
    
    
    989
    
    
    
    21,132
    
    
    
    8
    
    
    
    
    
    
    
    22,129Gain on sales of land and buildings
    
    
    
    
    
    
    (120
    )
    
    
    (55
    )
    
    
    
    
    
    
    (175
    )Depreciation and amortization
    
    
    
    
    
    
    10,541
    
    
    
    214
    
    
    
    
    
    
    
    10,755989
    
    
    
    222,581
    
    
    
    (355
    )
    
    
    
    
    
    
    223,215Operating income (loss)
    
    
    (989
    )
    
    
    10,834
    
    
    
    355
    
    
    
    
    
    
    
    10,200Equity 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
    
    
    
    
    
    
    
    
    
    
    
    160Income (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)
 CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
 Three months ended March 31, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    230,531
    
    
    $
    
    
    
    $
    
    
    
    $
    230,531Retail products
    
    
    
    
    
    
    11,343
    
    
    
    
    
    
    
    
    
    
    
    11,343Miscellaneous
    
    
    
    
    
    
    4,471
    
    
    
    
    
    
    
    
    
    
    
    4,471
    
    
    
    246,345
    
    
    
    
    
    
    
    
    
    
    
    246,345Operating costs and expenses:Membership services
    
    
    
    
    
    
    165,285
    
    
    
    (609
    )
    
    
    
    
    
    
    164,676Retail products
    
    
    
    
    
    
    10,710
    
    
    
    
    
    
    
    
    
    
    
    10,710Marketing and advertising
    
    
    
    
    
    
    18,538
    
    
    
    
    
    
    
    
    
    
    
    18,538General and administrative
    
    
    1,283
    
    
    
    19,542
    
    
    
    9
    
    
    
    
    
    
    
    20,834Depreciation and amortization
    
    
    
    
    
    
    13,225
    
    
    
    239
    
    
    
    
    
    
    
    13,4641,283
    
    
    
    227,300
    
    
    
    (361
    )
    
    
    
    
    
    
    228,222Operating income (loss)
    
    
    (1,283
    )
    
    
    19,045
    
    
    
    361
    
    
    
    
    
    
    
    18,123Equity 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
    )
    
    
    37,600Net income (loss)
    
    $
    32,670
    
    
    $
    56,092
    
    
    $
    (378
    )
    
    $
    (55,714
    )
    
    $
    32,670
 29




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
 Three months ended March 31, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH 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
    
    
    
    
    
    
    
    15,601Changes in operating assets and liabilities
    
    
    2,540
    
    
    
    4,399
    
    
    
    (2,075
    )
    
    
    
    
    
    
    4,864Changes in net affiliate balances
    
    
    
    
    
    
    30,856
    
    
    
    2,899
    
    
    
    (33,755
    )
    
    
    Other, net
    
    
    533
    
    
    
    218
    
    
    
    (39
    )
    
    
    
    
    
    
    712Cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,247
    
    
    
    
    
    
    
    1,247Cash provided by (used in) operating activities
    
    
    (7,030
    )
    
    
    57,159
    
    
    
    1,932
    
    
    
    (44,536
    )
    
    
    7,525CASH 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,500Repayments 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
    )
    
    
    
    
    
    
    50,766Increase in cash
    
    
    
    
    
    
    35,560
    
    
    
    1,207
    
    
    
    
    
    
    
    36,767Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    307Cash, beginning of period
    
    
    
    
    
    
    31,911
    
    
    
    2,888
    
    
    
    
    
    
    
    34,799Cash, end of period
    
    $
    
    
    
    $
    67,471
    
    
    $
    4,402
    
    
    $
    
    
    
    $
    71,873
 30




---



##### 



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
    
    
    
    13,476
    
    
    
    179
    
    
    
    
    
    
    
    16,905Changes 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
    
    
    
    10,577CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (11,543
    )
    
    
    (86
    )
    
    
    
    
    
    
    (11,629
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    45,490
    
    
    
    
    
    
    
    
    
    
    
    45,490Proceeds 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 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 period
    
    
    
    
    
    
    16,238
    
    
    
    1,216
    
    
    
    
    
    
    
    17,454Cash, end of period
    
    $
    
    
    
    $
    13,787
    
    
    $
    2,197
    
    
    $
    
    
    
    $
    15,984
 31




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Summary of Business
    Financial Condition
     32




---



##### 



Liquidity and Capital Resources
  March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    ChangeCash and equivalents
    
    $
    71.9
    
    
    $
    34.8
    
    
    $
    37.1Unutilized revolving credit facility
    
    
    0.1
    
    
    
    25.8
    
    
    
    (25.7
    )Liquidity before delayed draw term loan
    
    
    72.0
    
    
    
    60.6
    
    
    
    11.4Undrawn delayed draw term loan
    
    
    1.1
    
    
    
    29.1
    
    
    
    (28.0
    )Total liquidity
    
    $
    73.1
    
    
    $
    89.7
    
    
    $
    (16.6
    )
       33




---



##### 



Interest Expense
   Cash Flows
  Three months endedMarch 31,
    
    
    Change from2007
    
    
    2006
    
    
    Previous PeriodCash 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
    )
    
    
    98.8Increase (decrease) in cash
    
    $
    36.8
    
    
    $
    (1.6
    )
    
    $
    38.4
 Operating Activities
  Investing Activities and Capital Expenditures
  Financing Activities
  34




---



##### 



Dividend and Other Commitments
  Debt
 Forbearance Agreements
    Extension of Forbearance Agreements
      35




---



##### 



DIP Financing
       Other Secured Debt
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
  36




---



##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    
    
    
    
    Change fromMarch 31,
    
    
    % of Net
    
    
    March 31,
    
    
    % of Net
    
    
    Previous Period2007
    
    
    revenues
    
    
    2006
    
    
    revenues
    
    
    Dollars
    
    
    %REVENUEMembership
    
    $
    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 EXPENSESMembership 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
    )
    
    NMDepreciation 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
    
    
    NMLoss from continuing operations before
income taxes
    
    
    (15,043
    )
    
    
    (7)
    %
    
    
    (4,729
    )
    
    
    (2)
    %
    
    
    (10,314
    )
    
    NMIncome tax
benefit (provision)
    
    
    160
    
    
    
    
    
    
    
    (201
    )
    
    
    
    
    
    
    361
    
    
    NMLoss from continuing operations
    
    $
    (14,883
    )
    
    
    (7)
    %
    
    $
    (4,930
    )
    
    
    (2)
    %
    
    $
    (9,953
    )
    
    NM
 
  37




---



##### 



Key Operating Data
 Membership rollforward and statistics (in thousands, except dollars and fitness center data):
 Three months ended March 31,2007
    
    2006
    
    change
    
    % changeMembers 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
   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




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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 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.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.
   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




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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.
     Industry Data Survey of the Health and Fitness Club Industry,
 Summary of revenue recognition method
    41




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42




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43




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Comparison of the Three Months Ended March 31, 2007 and 2006
  
    
    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%).
    
    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.
    
    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.
    
    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
 44




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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.
    
    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.
    
    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.
    
    Miscellaneous revenue increased to $4.9 million (10%) in the first quarter, 2007 from $4.5 million in 2006.
  
    
    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.
    
    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.
    
    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.
    
    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.
    
    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.
   Discontinued Operations
  Recently Issued Accounting Standards
 The Fair Value Option for
Financial Assets or Financial Liabilities
 45




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Other Matters
 NYSE Delisting
  Management Changes
   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
  46




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Changes in Internal Control over Financial Reporting (ICFR)
 Controls and Procedures
 PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
 Litigation
 Securities and Exchange Commission Investigation
  Department of Justice Investigation
  Putative Securities Class Actions
 In re Bally Total Fitness Securities Litigation
 Makor Issues & Rights v. Tellabs
 47




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Stockholder Derivative Lawsuit in Illinois Federal Court
  Individual Securities Action in Illinois
 Levine v. Bally Total Fitness Holding Corporation, et
al.
 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,
 48




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Great American Insurance Company
v. Bally Total Fitness Holding Corporation, ab initio
 Other
    Item 1A. Risk Factors
 Managements Discussion and Analysis
of Financial Condition and Results of Operations
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Repurchases of Common Stock
  49




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Item 3. Defaults Upon Senior Securities
        50




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Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  Item 6. Exhibits
  ExhibitNumber
    
    Name of Exhibit4.1
    
    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 Companys Current Report on 8-K, file
no. 001-13997, dated May 29, 2007).4.2
    
    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 Companys Current Report on 8-K, file no. 001-13997, dated May
29, 2007).10.1
    
    Form of Senior Notes Forbearance Agreement relating to the Companys 10 1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on 8-K, file no.
001-13997, dated May 17, 2007).10.2
    
    Form of Senior Subordinated Notes Forbearance Agreement relating to the Companys 9 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated May 17, 2007).10.3
    
    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 Companys Current Report on Form 8-K, file
no. 001-13997, dated April 13, 2007).10.4
    
    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 Companys Current Report on Form 8-K,
file no. 001-13997, dated June 18, 2007).10.5
    
    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 Companys Current Report on Form 8-K, file no. 001-13997, dated
June 27, 2007).10.6
    
    Form of Senior Notes Forbearance Extension relating to the Companys 10 1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated July 17, 2007).10.7
    
    Form of Senior Subordinated Notes Forbearance Extension relating to the Companys 9 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated July 17, 2007).10.8
    
    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 Companys Current Report on Form 8-K, file no. 001-13997, dated July 17, 2007).
 51




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ExhibitNumber
    
    Name of Exhibit+10.9
    
    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 Companys Current Report on Form 10-K, file no. 001-13997, dated June 29, 2007).+10.10
    
    Form of Restructuring Bonus Agreement for Marc Bassewitz and John Wildman (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file no. 001-13997, dated
June 1, 2007).+10.11
    
    Form of Restructuring Bonus Agreement for Don R. Kornstein (incorporated by reference to Exhibit
10.2 to the Companys Current Report on 8-K, file no. 001-13997, dated June 1, 2007).+10.12
    
    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 Companys Current Report on 8-K, file no. 001-13997, dated June 11, 2007).+10.13
    
    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 Companys Current
Report on Form 8-K, file no. 001-13997, dated June 18, 2007).+10.14
    
    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 Companys Current Report on Form 10-K,
file no. 001-13997, dated June 29, 2007).*+10.15
    
    Form of Amended Restructuring Bonus Agreement for Marc Bassewitz, William Fanelli and John Wildman.*+10.16
    
    Form of Amended Restructuring Bonus Agreement for Don R. Kornstein.10.17
    
    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 Companys Current
Report on Form 8-K, file no. 001-13997, dated August 27, 2007).10.18
    
    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 Companys Current Report on
Form 8-K, file no. 001-13997, dated August 27, 2007).10.19
    
    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 Companys Current Report on Form 8-K, file no. 001-13997, dated August 20, 2007).10.20
    
    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 Companys Senior Notes; and certain holders of the Companys Senior Subordinated
Notes Agent (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, dated August 16, 2007).10.21
    
    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 Companys Current Report on Form 8-K, file no.
001-13997, dated August 16, 2007).* 31.1
    
    Certification of Chief Restructuring Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.* 31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.* 32.1
    
    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.
 
 *
    
    Filed herewith.+
    
    Management contract or compensatory plan or arrangement. 52




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SIGNATURE PAGE
  BALLY TOTAL FITNESS HOLDING CORPORATION
RegistrantBy:
    /s/ William G. FanelliWilliam G. FanelliSenior Vice President, Finance and Corporate
Development
(principal financial officer)