##### Table of Contents



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
  þ
    
    Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period ended March 31,
2005
  o
    
    Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 Commission
file number: 001-13997
 BALLY
TOTAL FITNESS HOLDING CORPORATION
  Delaware
    
    36-3228107(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)8700 West Bryn Mawr Avenue, Chicago, Illinois
    
    60631(Address of principal executive offices)
    
    (Zip Code)
 (773) 380-3000
  o þ
 þ o
 o þ




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##### Table of Contents



TABLE OF ADDITIONAL REGISTRANTS
 Jurisdiction of
    
    I.R.S. EmployerExact Name of Additional Registrants
    
    Incorporation
    
    Identification Number59th Street Gym LLC
    
    New York
    
    36-4474644708 Gym LLC
    
    New York
    
    36-4474644Ace, LLC
    
    New York
    
    36-4474644Bally Fitness Franchising, Inc.
    
    Illinois
    
    36-4029332Bally Franchise RSC, Inc.
    
    Illinois
    
    36-4028744Bally Franchising Holdings, Inc.
    
    Illinois
    
    36-4024133Bally Sports
Clubs, Inc.
    
    New York
    
    36-3407784Bally Total Fitness Corporation
    
    Delaware
    
    36-2762953Bally Total Fitness International, Inc.
    
    Michigan
    
    36-1692238Bally Total Fitness of California, Inc.
    
    California
    
    36-2763344Bally Total Fitness of Colorado, Inc.
    
    Colorado
    
    84-0856432Bally Total Fitness of Connecticut Coast, Inc.
    
    Connecticut
    
    36-3209546Bally Total Fitness of Connecticut Valley, Inc.
    
    Connecticut
    
    36-3209543Bally Total Fitness of Greater New York, Inc.
    
    New York
    
    95-3445399Bally Total Fitness of the Mid-Atlantic, Inc.
    
    Delaware
    
    52-0820531Bally Total Fitness of the Midwest, Inc.
    
    Ohio
    
    34-1114683Bally Total Fitness of Minnesota, Inc.
    
    Ohio
    
    84-1035840Bally Total Fitness of Missouri, Inc.
    
    Missouri
    
    36-2779045Bally Total
Fitness of Upstate New York, Inc.
    
    New York
    
    36-3209544Bally Total Fitness of Philadelphia, Inc.
    
    Pennsylvania
    
    36-3209542Bally Total Fitness of Rhode Island, Inc.
    
    Rhode Island
    
    36-3209549Bally Total Fitness of the Southeast, Inc.
    
    South Carolina
    
    52-1230906Bally Total Fitness of Toledo, Inc.
    
    Ohio
    
    38-1803897Ballys Fitness and Racquet Clubs, Inc.
    
    Florida
    
    36-3496461BFIT Rehab of West Palm Beach, Inc.
    
    Florida
    
    36-4154170Crunch Fitness International, Inc.
    
    Delaware
    
    36-4474644Crunch LA LLC
    
    New York
    
    36-4474644Crunch World LLC
    
    New York
    
    36-4474644Flambe LLC
    
    New York
    
    36-4474644Greater Philly No. 1 Holding Company
    
    Pennsylvania
    
    36-3209566Greater Philly No. 2 Holding Company
    
    Pennsylvania
    
    36-3209557Health & Tennis Corporation of New York
    
    Delaware
    
    36-3628768Holiday Health Clubs of the East Coast, Inc.
    
    Delaware
    
    52-1271028Holiday/Southeast Holding Corp.
    
    Delaware
    
    52-1289694Jack La Lanne Holding Corp.
    
    New York
    
    95-3445400Mission Impossible, LLC
    
    California
    
    36-4474644New Fitness Holding Co., Inc.
    
    New York
    
    36-3209555Nycon Holding Co., Inc.
    
    New York
    
    36-3209533Rhode Island Holding Company
    
    Rhode Island
    
    36-3261314Soho Ho LLC
    
    New York
    
    36-4474644Tidelands Holiday Health Clubs, Inc.
    
    Virginia
    
    52-1229398U.S. Health, Inc.
    
    Delaware
    
    52-1137373West Village Gym at the Archives LLC
    
    New York
    
    36-4474644
 nd




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BALLY
TOTAL FITNESS HOLDING CORPORATION
  
 INDEX
 PageNumberFORWARD-LOOKING STATEMENTSPART I. FINANCIAL INFORMATIONItem 1. Financial statements:Condensed consolidated balance sheets (unaudited) March 31, 2005 and December 31, 2004
    
    
    1Consolidated statements of operations (unaudited) Three months ended March 31, 2005 and 2004
    
    
    2Consolidated
statement of stockholders equity (deficit) and comprehensive
income (loss) (unaudited) Three months ended March 31, 2005
    
    
    3Consolidated statements of cash flows (unaudited) Three months ended March 31, 2005 and 2004
    
    
    4Notes to condensed consolidated financial statements (unaudited)
    
    
    6Item 2. Managements discussion and analysis of financial condition and results of operations
    
    
    25Item 3. Quantitative and qualitative disclosures about market risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other information
    
    
    36Item 6.
Exhibits
    
    
    36SIGNATURE PAGE
    
    
    37Certification of the Chief Executive OfficerCertification of the Financial OfficerCertification of the CEO and CFo




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




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BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Condensed Consolidated Balance Sheets
  March 31
    
    
    December 312005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash
    
    $
    33,341
    
    
    $
    19,177Deferred income taxes
    
    
    
    
    
    
    471Other current assets
    
    
    34,443
    
    
    
    30,239Total current assets
    
    
    67,784
    
    
    
    49,887Property and equipment, less accumulated depreciation
and amortization of $728,120 and $713,222
    
    
    353,191
    
    
    
    361,863Goodwill, net
    
    
    41,732
    
    
    
    41,698Trademarks, net
    
    
    9,801
    
    
    
    9,933Intangible assets, less accumulated
amortization of $21,963 and $21,565
    
    
    7,476
    
    
    
    7,909Other assets
    
    
    27,409
    
    
    
    28,279$
    507,393
    
    
    $
    499,569LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    49,662
    
    
    $
    51,373Income taxes payable
    
    
    1,496
    
    
    
    1,399Deferred income taxes
    
    
    505
    
    
    
    Accrued liabilities
    
    
    106,698
    
    
    
    111,226Current maturities of long-term debt
    
    
    20,158
    
    
    
    22,127Deferred revenues
    
    
    332,443
    
    
    
    323,271Total current liabilities
    
    
    510,962
    
    
    
    509,396Long-term debt, less current maturities
    
    
    731,934
    
    
    
    737,432Deferred rent liability
    
    
    108,786
    
    
    
    101,911Deferred income taxes
    
    
    767
    
    
    
    1,637Other liabilities
    
    
    29,114
    
    
    
    21,580Deferred revenues
    
    
    598,293
    
    
    
    601,889Total liabilities
    
    
    1,979,856
    
    
    
    1,973,845Stockholders
equity (deficit)
    
    
    (1,472,463
    )
    
    
    (1,474,276
    )$
    507,393
    
    
    $
    499,569
  1




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BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Operations
   Three months endedMarch 312005
    
    
    2004(As RestatedSee Note 2)Net revenues:Membership services
    
    $
    249,947
    
    
    $
    238,987Retail products
    
    
    14,308
    
    
    
    15,026Miscellaneous
    
    
    4,741
    
    
    
    5,033268,996
    
    
    
    259,046Operating costs and expenses:Membership services
    
    
    182,851
    
    
    
    191,490Retail products
    
    
    13,381
    
    
    
    14,418Advertising
    
    
    17,668
    
    
    
    19,631General and administrative
    
    
    18,335
    
    
    
    15,880Depreciation and amortization
    
    
    17,048
    
    
    
    17,233249,283
    
    
    
    258,652Operating income
    
    
    19,713
    
    
    
    394Interest expense
    
    
    (18,335
    )
    
    
    (15,912
    )Foreign exchange gain
    
    
    207
    
    
    
    53Other, net
    
    
    75
    
    
    
    (114
    )(18,053
    )
    
    
    (15,973
    )Income
(loss) before income taxes
    
    
    1,660
    
    
    
    (15,579
    )Income tax provision
    
    
    (259
    )
    
    
    (213
    )Net income
(loss)
    
    $
    1,401
    
    
    $
    (15,792
    )Basic and
diluted income (loss) per common share:
    
    $
    0.04
    
    
    $
    (0.48
    )
  2




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statement
of Stockholders Equity (Deficit) and Comprehensive Income (Loss)
   AccumulatedCommon stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    other
    
    
    TotalPar
    
    
    Contributed
    
    
    Accumulated
    
    
    Unearned
    
    
    stock in
    
    
    comprehensive
    
    
    stockholdersShares
    
    
    value
    
    
    capital
    
    
    deficit
    
    
    compensation
    
    
    treasury
    
    

income
(loss)
    
    

equity
(deficit)Balance at December 31, 2004
    
    
    34,013,805
    
    
    $
    347
    
    
    $
    647,367
    
    
    $
    (2,106,391
    )
    
    $
    (1,567
    )
    
    $
    (11,635
    )
    
    $
    (2,397
    )
    
    $
    (1,474,276
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,401Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119
    
    
    
    119Restricted stock activity
    
    
    396,000
    
    
    
    4
    
    
    
    1,359
    
    
    
    
    
    
    
    (1,232
    )
    
    
    
    
    
    
    
    
    
    
    131Issuance of common
stock under stock
purchase and option plans
    
    
    28,328
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Balance at March 31, 2005
    
    
    34,438,133
    
    
    $
    351
    
    
    $
    648,888
    
    
    $
    (2,104,990
    )
    
    $
    (2,799
    )
    
    $
    (11,635
    )
    
    $
    (2,278
    )
    
    $
    (1,472,463
    )
  3




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Cash Flows
   Three months endedMarch 312005
    
    
    2004(As RestatedSee Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
(loss)
    
    $
    1,401
    
    
    $
    (15,792
    )Adjustments to reconcile to cash provided by operating activitiesDepreciation and amortization, including amortization
included in interest expense
    
    
    18,122
    
    
    
    18,101Changes in operating assets and liabilities
    
    
    4,176
    
    
    
    10,972Deferred income taxes, net
    
    
    106
    
    
    
    106Foreign currency translation gain
    
    
    (207
    )
    
    
    (53
    )Stock-based compensation
    
    
    131
    
    
    
    235Cash provided by operating activities
    
    
    23,729
    
    
    
    13,569CASH FLOWS
FROM INVESTING
ACTIVITIES:Purchases and construction of property and equipment
    
    
    (8,430
    )
    
    
    (12,816
    )Other
    
    
    
    
    
    
    (117
    )Cash used in investing activities
    
    
    (8,430
    )
    
    
    (12,933
    )CASH FLOWS
FROM FINANCING ACTIVITIES:Net borrowings under revolving credit agreement
    
    
    3,563
    
    
    
    8,000Net repayments of other long-term debt
    
    
    (5,128
    )
    
    
    (9,918
    )Debt issuance and refinancing costs
    
    
    
    
    
    
    (325
    )Proceeds from issuance of common stock under
stock purchase and option plans
    
    
    162
    
    
    
    310Cash used in financing activities
    
    
    (1,403
    )
    
    
    (1,933
    )Increase (decrease) in cash
    
    
    13,896
    
    
    
    (1,297
    )Effect of exchange rate changes on cash balance
    
    
    268
    
    
    
    511Cash, beginning of period
    
    
    19,177
    
    
    
    13,640Cash, end of period
    
    $
    33,341
    
    
    $
    12,854
  4




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BALLY TOTAL FITNESS HOLDING CORPORATION
 Consolidated Statements of Cash Flows 3⁄4 (continued)
 Three months endedMarch 312005
    
    
    2004(As RestatedSee Note 2)SUPPLEMENTAL CASH FLOWS INFORMATION:Changes in operating assets and liabilities:Decrease (increase) in other current and other assets
    
    $
    (3,930
    )
    
    $
    401Decrease in accounts payable
    
    
    (1,749
    )
    
    
    (5,172
    )Increase in income taxes payable
    
    
    97
    
    
    
    1,673Increase in accrued and other liabilities
    
    
    4,182
    
    
    
    8,557Increase in deferred revenues
    
    
    5,576
    
    
    
    5,513Change in operating assets and liabilities
    
    $
    4,176
    
    
    $
    10,972Cash payments for interest and income taxes
were as follows Interest paid
    
    $
    16,844
    
    
    $
    16,482Interest capitalized
    
    
    (68
    )
    
    
    (458
    )Income taxes paid (refund), net
    
    
    57
    
    
    
    (621
    )Investing and financing activities exclude the following
non-cash transactions Acquisitions of property and equipment
through capital leases/borrowings
    
    $
    140
    
    
    $
    2,128
  5




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BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Notes to Condensed Consolidated Financial Statements
   Note 1 Basis of Presentation
    Seasonal factors
  Market risk
   Note 2 Restatements and Reclassifications
  (a)
    
    Restatements arising from the findings of the investigation conducted by the audit
committee of the Board of Directors; and(b)
    
    Other corrections of errors in prior periods.
  6




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BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements 3⁄4 (continued)
 Consolidated Statement of OperationsThree Months Ended March 31, 2004As
    
    
    
    
    
    
    Reclass-Reference
    
    
    Reported
    
    
    Adjustments
    
    
    ifications
    
    
    RestatedNet revenues:Membership services
    
    
    
    
    
    $
    224,885
    
    
    $
    
    
    
    $
    
    
    
    $
    238,987(a)(i)
    
    
    
    
    
    
    
    7,508
    
    
    
    20,137(a)(v)

    
 
    
    
    
    
    
    129(b)(i)
    
    
    
    
    
    
    
    (10,886
    )(b)(ii)
    
    
    
    
    
    
    (2,566
    )(b)(xix)
    
    
    
    
    
    
    (220
    )Retail products
    
    
    
    
    
    
    15,026
    
    
    
    
    
    
    
    
    
    
    
    15,026Miscellaneous
    
    
    
    
    
    
    4,832
    
    
    
    
    
    
    
    
    
    
    
    5,033(a)(i)

    
    
    
    
    
    
    
    197(a)(v)
        
    
    
    
    
    
    33(b)(ix)
    
    
    
    
    
    
    (29
    )244,743
    
    
    
    (5,834
    )
    
    
    20,137
    
    
    
    259,046Operating costs and expenses:Membership services
    
    
    
    
    
    
    193,894
    
    
    
    
    
    
    
    
    
    
    
    191,490(a)(v)
    
    
    
    
    
    
    
    64(b)(iii)
    
    
    
    
    
    
    (1,401
    )(b)(iv)
    
    
    
    
    
    
    40(b)(xiii)
    
    
    
    
    
    
    (150
    )(b)(xvi)
    
    
    
    
    
    
    81(b)(xvii)
    
    
    
    
    
    
    (780
    )(b)(xix)
    
    
    
    
    
    
    (258
    )Retail products
    
    
    
    
    
    
    14,515
    
    
    
    
    
    
    
    
    
    
    
    14,418(b)(xiv)
    
    
    
    
    
    
    (97
    )Advertising
    
    
    
    
    
    
    19,838
    
    
    
    
    
    
    
    
    
    
    
    19,631(b)(xvii)
    
    
    
    
    
    
    (207
    )
 7




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BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Consolidated Statement
of Operations  (continued)Three Months Ended March 31, 2004As
    
    
    
    
    
    Reclass-Reference
    
    Reported
    
    Adjustments
    
    ifications
    
    RestatedOperating costs and expensescontinued:General and administrative
    
    
    
    
    14,362
    
    
    
    
    
    
    
    
    
    
    
    15,880(b)(iv)
    
    
    
    
    
    
    (31
    )(b)(v)
        
    
    
    
    
    605(b)(xvii)
    
    
    
    
    
    
    843(b)(xix)
    
    
    
    
    
    
    101Depreciation and amortization
    
    
    
    
    19,106
    
    
    
    
    
    
    
    
    
    
    
    17,233(b)(iii)
    
    
    
    
    
    
    4,209(b)(v)
    
    
    
    
    
    
    (535
    )(b)(vi)
    
    
    
    
    
    
    522(b)(vii)
    
    
    
    
    
    
    (5,508
    )(b)(viii)
    
    
    
    
    
    
    619(b)(xi)
    
    
    
    
    
    
    (734
    )(b)(xii)
    
    
    
    
    
    
    (142
    )(b)(xix)
    
    
    
    
    
    
    (304
    )261,715
    
    
    
    (3,063
    )
    
    
    
    
    
    
    258,652Operating income (loss)
    
    
    
    
    (16,972
    )
    
    
    (2,771
    )
    
    
    20,137
    
    
    
    394Finance charges earned
    
    
    
    
    20,137
    
    
    
    
    
    
    
    (20,137
    )
    
    
    (b)(xviii)
    
    
    
    
    
    
    53Interest expense
    
    
    
    
    (16,536
    )
    
    
    
    
    
    
    
    
    
    
    (15,912
    )(a)(iv)
    
    
    
    
    
    
    (165
    )(a)(v)
    
    
    
    
    
    
    (98
    )(b)(iii)
    
    
    
    
    
    
    220(b)(xvii)
    
    
    
    
    
    
    751(b)(xix)
    
    
    
    
    
    
    (84
    )Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Other, net
    
    
    
    
    (114
    )
    
    
    
    
    
    
    
    
    
    
    (114
    )3,487
    
    
    
    677
    
    
    
    (20,137
    )
    
    
    (15,973
    )Loss before income taxes
    
    
    
    
    (13,485
    )
    
    
    (2,094
    )
    
    
    
    
    
    
    (15,579
    )Income tax provision
    
    
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    (213
    )(b)(xx)
    
    
    
    
    
    
    87Net loss
    
    
    
    $
    (13,785
    )
    
    $
    (2,007
    )
    
    $
    
    
    
    $
    (15,792
    )
 8




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 (a) Restatements Arising from the Findings of the Audit Committee Investigation
  (i)
    
    Accounting for membership revenue in accordance with Staff Accounting
Bulletin No. 101The Audit Committee determined that the Company improperly
implemented Staff Accounting Bulletin (SAB) No. 101 in a prior period.
Specifically, after the Companys adoption of SAB No. 101, revenue was
recognized over the average contractual life of twenty-two months. As a
part of this restatement, the Company has modified its membership revenue
recognition methodology such that membership revenue is earned on a
straight-line basis over the longer of the initial membership term or the
estimated membership life. The impact of this change resulted in an
increase in membership services revenue and miscellaneous revenue of
$7,508 and $197, respectively for the three months
ended March 31, 2004.(ii)
    
    Expense membership acquisition costs when incurredThe Audit Committee
determined that the Company improperly accounted for membership acquisition
costs by improperly deferring certain costs in 2002 and prior. This
adjustment had no impact on the financial statements for the three months ended March 31, 2004.(iii)
    
    Adoption of cash basis for recoveries of unpaid dues on inactive
membershipsThe Audit Committee determined that the Company should have
adopted the cash basis for recoveries of unpaid dues on inactive
memberships prior to 2003. This adjustment had no impact on the
financial statements for the three months ended March 31, 2004.(iv)
    
    Unrecorded payment obligationsThe Audit Committee identified that the
Company had improperly accounted for $22,000 of face amount repayment
obligations due in 2015 or later on membership contracts sold by a
subsidiary before Bally acquired it in the late 1980s. The impact of this
change resulted in an increase in interest expense of $165 for the three
months ended March 31, 2004.(v)
    
    Sales of future receivablesAs a result of adopting accounting for
revenue in accordance with SAB No. 101, the Company had to amend its
accounting treatment of the sale of receivables from the sale of financial
assets pursuant to Statement of Financial Accounting Standards (SFAS) No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities to debt treatment in accordance with
Emerging Issues Task Force (EITF) Issue No. 88-18, Sale of Future
Receivables. The change had no impact on net loss for the three months
ended March 31, 2004. However, the change increased membership services
revenue $129, miscellaneous revenue $33, membership services expense $64
and interest expense $98 for the three months ended March 31, 2004
respectively.
 9




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 (b) Correction of Errors
  (i)
    
    Accounting for membership revenue for multiple element
arrangements  The Company enters into contracts that
include a combination of (i) health club services,
(ii) personal training services, and (iii) nutritional
products. The Company improperly separated these multiple element
arrangements into multiple units of accounting resulting in premature
recognition of early delivered nutritional products and personal
training services. As a part of this restatement, the Company has
modified its membership revenue recognition policy to treat these
arrangements as single units of accounting and recognize revenue for
these arrangements on a straight-line basis over the later of when
collected or earned. For the three months ended
March 31, 2004, this adjustment resulted in a decrease in membership
services revenue of $10,886.(ii)
    
    Accounting for prepaid personal training servicesIn prior
periods, the Company inappropriately estimated deferred revenue
related to personal training services that had been paid for but not yet
earned. The impact of this is a decrease in membership
services revenue of $2,566.(iii)
    
    Lease accountingLike other companies with significant leasehold
improvements, in early 2005 we performed review of our accounting policies
and practices with respect to leases. As a result of this internal review,
we concluded that certain of our historical methods of accounting for leases
with escalating rental obligations, tenant improvement allowances and of
determining lives used in the calculation of depreciation of leasehold
improvements were not in accordance with U.S. generally
accepted accounting principles.
 a.
    
    In prior periods, the Company did not recognize rent expense on club
leases with escalating rental obligations using the required
straight-line rent method. For purposes of calculating
straight-line rent expense (and depreciating leasehold
improvements (see below)), the Company uses the contractual lease term,
beginning on the rent commencement date.b.
    
    In prior periods, the Company reflected tenant allowances as a
reduction to property and equipment on the Condensed Consolidated
Balance Sheets and amortized these amounts, and the related
leasehold improvements, to depreciation and amortization expense in the
Consolidated Statements of Operations. Additionally, the Company reflected
tenant allowances as a component of cash flows from investing
activities in the Consolidated Statements of Cash Flows. The
Company has determined that Financial Accounting Standards Board
(FASB) Technical Bulletin No. 88-1, Issues Relating to
Accounting for Leases, requires these allowances to be recorded
as deferred rent liabilities on the Condensed Consolidated Balance
Sheets and requires these allowances to be amortized as a
reduction to membership services expense on the Consolidated Statements of
Operations. Additionally, these rules require tenant allowances to
be reflected as a component of cash flows from operating
activities in the Consolidated Statements of Cash Flows.c.
    
    Historically, the Company depreciated leasehold improvements over the
contractual term of the lease. The Company also depreciated leasehold improvements acquired subsequent to store opening,
such as remodels, over the contractual term of the lease. In both instances, optional renewal periods were
included in the contractual term of the lease if renewal was
reasonably assured at the time the asset was placed in service. The Company have concluded that such leasehold
improvements should be depreciated over the lesser of the assets economic life, with a maximum of 15 years, or
the contractual term of the lease, excluding all renewal options. The Companys club leases generally have a
term of 10 to 15 years and provide options to renew for between 5 to 15 additional years.
  10




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 (iv)
    
    Self-insurance liabilitiesThe Company concluded that our previous methodologies
for estimating our self-insured workers compensation, health and life and
general insurance claims resulted in a net understatement of our self-insured
liabilities. For the three months ended March 31, 2004, there was an increase
in membership services expense of $40 and a decrease in general and
administrative expense of $31.(v)
    
    Deferred expense recognition for IT servicesThe Company improperly deferred
recognition of internal and external costs incurred to develop
internal-use computer software. For the three months ended March 31, 2004,
there was an increase in general and administrative expense of $605 and a
decrease in depreciation and amortization expense of $535.(vi)
    
    Valuation of goodwillThe Company incorrectly calculated the amount of
consideration paid in certain acquisitions due to the use of improper
dates for valuing the common stock issued. In addition, the Company did not
identify all intangible assets acquired in certain acquisitions (see
Identification of separately identifiable assets apart from goodwill).
Further, the Company concluded that our practice of amortizing goodwill over 40
years was inconsistent with the maximum reasonably likely duration of
material benefit from the acquired goodwill. We determined that the
Company did not properly apply the guidance in FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Ofto measure the amount of impairment losses. In addition, the Company
determined conditions at various dates which indicated the carrying
amounts of fixed assets were impaired, but determined that impairment
analyses had not been performed even though trigger events were present.
As a result, the Company performed the impairment analyses not previously completed
for the periods being restated and recorded impairment adjustments as
applicable. The effect of these adjustments for the three months
ended March 31, 2004 include an increase in
depreciation and amortization expense of $522.(vii)
    
    Valuation of fixed assetsThe Company determined that the Company did not
properly apply the guidance in FASB Statement No. 121 to measure the
amount of impairment losses. The Company determined conditions at various dates
which indicated the carrying amounts of fixed assets were impaired, but
determined that impairment analyses had not been performed even though
trigger events were present. As a result, the Company performed the impairment
analyses not previously completed for the periods being restated and
recorded impairment adjustments as applicable. This correction resulted in
a reduction in depreciation and amortization expense of $5,508 for the
three months ended March 31, 2004.(viii)
    
    Identification of separately identifiable assets apart from
goodwillThe Company concluded that our previous method of allocating the excess of
the purchase price over the fair market value of assets acquired to
goodwill resulted in an overstatement of goodwill. Specifically, in
applying Accounting Principles Board (APB) Opinion 16, Business
Combinations,the Company should have allocated a portion of the excess to certain
separately identifiable intangible assets: a) Membership Relationswhich
represents the fair market value of relationships with existing members as
of the acquisition date: b) Non-compete Agreementswhich represents the
fair market value of the non-competition agreement with the seller of the
company: c) Trade namewhich represents the fair market value of the
trade names associated with the acquired operations, and; c) Leasehold
Rightswhich represents the estimate of the favorable and unfavorable
lease agreements in place as of the acquisition date. The impact of this
correction was an increase in depreciation and amortization expense of
$619.(ix)
    
    Escheatment obligationsThe Company determined that the liability for the
potential escheatment of certain payroll-related and supplier-related
checks was understated. For the three months ended March 31, 2004, this
adjustment resulted in a decrease in miscellaneous revenue of $29.(x)
    
    Capitalized advertisingThe Company determined that our previous method of
deferring recognition of production costs over the estimated life of the
advertising resulted in an overstatement of capitalized advertising and
that the cost of advertising should be expensed no later than the first
time the advertising takes place. This adjustment had no impact on
the financial statements for the three months ended March 31,
2004.
 11




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##### Table of Contents





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


(xi)
    
    Capitalized maintenanceThe Company improperly deferred recognition of
internal compensation costs incurred in conjunction with the build out of
various clubs. These payments should have been recorded as an expense when
services were rendered, rather than deferred and recorded as an expense in
later periods. For the three months ended on March 31, 2004, these
adjustments resulted in a decrease in depreciation and amortization
expense of $734.(xii)
    
    Presale costsThe Company determined that our previous method of deferring
rent costs associated with club leases during the construction period
resulted in an overstatement of leasehold improvements and that the rent
costs during the construction period should be expensed as paid. For the
three months ended March 31, 2004, these adjustments resulted in a
decrease in depreciation and amortization expense of $142.(xiii)
    
    Other capitalized costsAs part of the restatement, the Company determined
that other capitalized costs, none of which were individually significant,
should have been expensed as paid. For the three months ended March 31,
2004, these adjustments resulted in a decrease in membership service
expense of $150.(xiv)
    
    Retail InventoryThe Company determined that the recorded value of retail
inventories were overstated, primarily as a result of differences in
physical count and as a result of incorrect accounting for cost of goods
sold. These adjustments resulted in a decrease in retail products expense
of $97 for the three months ended March 31, 2004.(xv)
    
    Equipment inventoryThe Company determined that the Companys accounting for
equipment trade-ins resulted in an overstatement of the cost basis of the
Companys investment in exercise equipment. This adjustment had
no impact on the financial statements for the three months ended
March 31, 2004.(xvi)
    
    Asset impairmentThe Company assessed its long-lived assets for
indicators of impairment based on operational performance. Impairment was
determined by comparing projected undiscounted cash flows to be generated
by the asset to its carrying value. For identified impairments, a loss
was recorded equal to the excess of the assets net book value over the
assets fair value. The impact of these adjustments was an increase in
membership services expense of $81 for the three months ended March 31, 2004.(xvii)
    
    Period-end accruals and other out of period itemsThe Company
identified obligations that were not properly accrued for as of the end of
an accounting period. As part of the restatement, these out of period
items are being recognized in the period in which the underlying
transaction occurred. These adjustments resulted in decreases in
membership services expense of $780, advertising expense of $207,
and interest expense of $751 and an increase in general and
administrative expense of $843 for the
three months ended March 31, 2004.(xviii)
    
    Foreign exchange gainThe Company determined gains and losses from
various foreign currency transactions, such as those relating to
management fees and, although not significant, the settlement of foreign
receivables or payables, were not properly accounted for in prior periods.
These adjustments resulted in a foreign exchange gain of $53 for the
three months ended March 31, 2004.(xix)
    
    OtherAs part of the restatement, other adjustments were identified,
none of which were individually significant. For the three months ended
March 31, 2004, these adjustments decreased membership services revenue
$220, membership services expense $258 and depreciation and amortization
expense $304 and increased general and administrative expense $101 and interest expense
$84.(xx)
    
    Effect of restatement on tax accountsThe Company determined it has overprovided for tax
expense. The impact of this adjustment was a decrease to income tax
provision of $87 for the three months ended March 31, 2004.


Changes
to the Consolidated Statement of Cash Flows


Cash provided by operating activities:As
reported
  
  $
  9,373As
restated
  
  
  13,569Restatement adjustment
  
  
  4,196Cash used in investing activities:As
reported
  
  
  (10,081
  )As
restated
  
  
  (12,933
  )Restatement adjustment
  
  
  (2,852
  )Cash used in financing activities:As
reported
  
  
  (589
  )As
restated
  
  
  (1,933
  )Restatement adjustment
  
  
  (1,344
  )


12



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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 3 Debt
   Note 4 Deferred Revenue
 For
the three months ended March 31, 2005Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Revenue
    
    March 312004
    
    Additions
    
    Recognized
    
    2005Deferral of
receipts from financed members:Initial term payments
    
    $
    542,886
    
    
    $
    88,296
    
    
    $
    (89,794
    )
    
    $
    541,388Down payments
    
    
    105,482
    
    
    
    16,026
    
    
    
    (13,505
    )
    
    
    108,003Deferral of
receipts representing advance payments:Paid-in-full membership fees collected upon
origination
    
    
    124,884
    
    
    
    11,938
    
    
    
    (11,151
    )
    
    
    125,671Advance payments of periodic dues and
membership fees
    
    
    130,399
    
    
    
    107,313
    
    
    
    (107,079
    )
    
    
    130,633Deferral of
receipts for personal training services
    
    
    21,509
    
    
    
    31,950
    
    
    
    (28,418
    )
    
    
    25,041$
    925,160
    
    
    $
    255,523
    
    
    $
    (249,947
    )
    
    $
    930,736For
the three months ended March 31, 2004 (As Restated See Note 2)Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Revenue
    
    March 312003
    
    Additions
    
    Recognized
    
    2004Deferral of
receipts from financed members:Initial term payments
    
    $
    535,392
    
    
    $
    83,545
    
    
    $
    (79,633
    )
    
    $
    539,304Down payments
    
    
    111,656
    
    
    
    16,421
    
    
    
    (14,501
    )
    
    
    113,576Deferral of
receipts representing advance payments:Paid-in-full membership fees collected upon
origination
    
    
    135,082
    
    
    
    5,887
    
    
    
    (8,475
    )
    
    
    132,494Advance payments of periodic dues and
membership fees
    
    
    145,938
    
    
    
    106,123
    
    
    
    (107,445
    )
    
    
    144,616Deferral of
receipts for personal training services
    
    
    19,818
    
    
    
    32,524
    
    
    
    (28,933
    )
    
    
    23,409$
    947,886
    
    
    $
    244,500
    
    
    $
    (238,987
    )
    
    $
    953,399
 Note 5 Membership Services
 Three
months ended March 312005
    
    
    2004(As RestatedSee Note 2)Membership
    
    $
    221,529
    
    
    
    $210,054Personal training
    
    
    28,418
    
    
    
    28,933$
    249,947
    
    
    
    $238,987
 13




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 6
Income (loss) per Common Share
 Earnings per Share
 Three
Months Ended March 312005
    
    
    2004Weighted
average number of common shares outstanding
    
    
    32,943,842
    
    
    
    32,718,196Effect of
outstanding stock options and warrants
    
    
    324,553
    
    
    
    699,332Diluted
weighted average number of shares outstanding
    
    
    33,268,395
    
    
    
    33,417,528Options 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
    
    
    4,878,403
    
    
    
    3,533,406Range of
exercise prices per share:High
    
    $
    36.00
    
    
    $
    36.00Low
    
    $
    4.11
    
    
    $
    7.00
 Note 7
Income Taxes
 Accounting for Income Taxes,
 Note 8 Stock Plans
 Accounting for Stock Issued to Employees, and
related Interpretations. Accounting for StockBased CompensationTransition
and Disclosure, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
 14




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Three months endedMarch 312005
    
    
    2004(As RestatedSee Note 2)Net income (loss), as reported
    
    $
    1,401
    
    
    $
    (15,792
    )Plus: stock-based compensation expense
included in net income (loss)
    
    
    127
    
    
    
    257Less: stock-based compensation expense determined
under fair value based method
    
    
    (822
    )
    
    
    (1,717
    )Pro forma net income (loss)
    
    $
    706
    
    
    $
    (17,253
    )Basic and diluted income (loss) per common shareAs reported
    
    $
    0.04
    
    
    $
    (0.48
    )Pro forma
    
    
    0.02
    
    
    
    (0.53
    )
  Equity
Inducement Plan
  Note 9 Guarantees
  Note 10 Investigations, Disputes and Legal Proceedings
   Fit Tech Inc., et al. v.
Bally Total Fitness Holding Corporation, et al.,
  15




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##### Table of Contents



| |  | In February 2005, the United States Justice Department commenced a criminal investigation in
connection with the Companys restatement. The investigation is being conducted by the United
States Attorney for the Northern District of Illinois. The Company is fully cooperating with the
investigation. It is not yet possible to determine the ultimate outcome of this investigation.                                                                                                                                                                                                                                                                                                                                                                 
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial condition
or results of operations of the Company. In addition, from time to time, customer complaints are
investigated by various governmental bodies. In the opinion of management, none of these other
complaints or investigations currently pending should have a material
adverse effect on the Companys financial
condition or results of operations.
|
| |  | In
addition, the Company is and has been in the past, named as defendants in a number of purported
class action lawsuits based on alleged violations of state and local consumer protection laws and
regulations
governing the sale, financing and collection of membership fees. To date the Company has successfully
defended or settled such lawsuits without a material adverse effect on our financial condition or
results of operation. However, the Company cannot provide assurances that we will be able to successfully defend or
settle all pending or future purported class action claims, and the
Companys failure to do so may have a
material adverse effect on its financial condition or results of operations.                        

Note 11 Subsequent Events


Stockholder Derivative Lawsuits in Illinois Federal Court




Vesting of Restricted Stock under the 1996 Long-Term Incentive Plan




Arbitration Award




Consent Solicitation




Crunch Purchase Agreement


sm sm


Adoption of Rights Plan


16



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##### Table of Contents









Net Operating Loss Carryforwards




Insurance Lawsuit


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,


Amendments to Employment Agreements




Director Compensation




Engagement of J.P. Morgan Securities Inc.




Note 12 Condensed Consolidating Financial Statements


1 2




th


17



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BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
   18




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 March 31, 2005Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    32,411
    
    
    $
    930
    
    
    $
    
    
    
    $
    33,341Other current assets
    
    
    
    
    
    
    33,102
    
    
    
    1,341
    
    
    
    
    
    
    
    34,443Total current assets
    
    
    
    
    
    
    65,513
    
    
    
    2,271
    
    
    
    
    
    
    
    67,784Property and equipment, net
    
    
    
    
    
    
    335,087
    
    
    
    18,104
    
    
    
    
    
    
    
    353,191Goodwill, net
    
    
    
    
    
    
    40,225
    
    
    
    1,507
    
    
    
    
    
    
    
    41,732Trademarks,
net
    
    
    6,507
    
    
    
    2,773
    
    
    
    521
    
    
    
    
    
    
    
    9,801Intangible assets, net
    
    
    
    
    
    
    6,583
    
    
    
    893
    
    
    
    
    
    
    
    7,476Investment in and advances
to subsidiaries
    
    
    (743,267
    )
    
    
    221,315
    
    
    
    
    
    
    
    521,952
    
    
    
    Other assets
    
    
    13,460
    
    
    
    10,753
    
    
    
    3,196
    
    
    
    
    
    
    
    27,409$
    (723,300
    )
    
    $
    682,249
    
    
    $
    26,492
    
    
    $
    521,952
    
    
    $
    507,393LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    49,291
    
    
    $
    371
    
    
    $
    
    
    
    $
    49,662Income taxes
payable
    
    
    
    
    
    
    1,496
    
    
    
    
    
    
    
    
    
    
    
    1,496Deferred income taxes
    
    
    
    
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    505Accrued liabilities
    
    
    19,907
    
    
    
    80,348
    
    
    
    6,443
    
    
    
    
    
    
    
    106,698Current maturities
of long-term debt
    
    
    10,852
    
    
    
    3,079
    
    
    
    6,227
    
    
    
    
    
    
    
    20,158Deferred revenues
    
    
    
    
    
    
    326,299
    
    
    
    6,144
    
    
    
    
    
    
    
    332,443Total current liabilities
    
    
    30,759
    
    
    
    461,018
    
    
    
    19,185
    
    
    
    
    
    
    
    510,962Long-term debt, less current
maturities
    
    
    718,404
    
    
    
    5,148
    
    
    
    8,382
    
    
    
    
    
    
    
    731,934Net affiliate payable
    
    
    
    
    
    
    557,185
    
    
    
    58,743
    
    
    
    (615,928
    )
    
    
    Other liabilities
    
    
    
    
    
    
    136,308
    
    
    
    2,359
    
    
    
    
    
    
    
    138,667Deferred revenues
    
    
    
    
    
    
    586,882
    
    
    
    11,411
    
    
    
    
    
    
    
    598,293Stockholders equity (deficit)
    
    
    (1,472,463
    )
    
    
    (1,064,292
    )
    
    
    (73,588
    )
    
    
    1,137,880
    
    
    
    (1,472,463
    )$
    (723,300
    )
    
    $
    682,249
    
    
    $
    26,492
    
    
    $
    521,952
    
    
    $
    507,393
 19




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BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 December
31, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    18,726
    
    
    $
    451
    
    
    $
    
    
    
    $
    19,177Other current assets
    
    
    
    
    
    
    29,365
    
    
    
    1,345
    
    
    
    
    
    
    
    30,710Total current assets
    
    
    
    
    
    
    48,091
    
    
    
    1,796
    
    
    
    
    
    
    
    49,887Property and equipment, net
    
    
    
    
    
    
    342,946
    
    
    
    18,917
    
    
    
    
    
    
    
    361,863Goodwill, net
    
    
    
    
    
    
    40,157
    
    
    
    1,541
    
    
    
    
    
    
    
    41,698Trademarks, net
    
    
    6,507
    
    
    
    2,875
    
    
    
    551
    
    
    
    
    
    
    
    9,933Intangible assets, net
    
    
    
    
    
    
    6,953
    
    
    
    956
    
    
    
    
    
    
    
    7,909Investment
in and advances to subsidiaries
    
    
    (743,351
    )
    
    
    221,315
    
    
    
    
    
    
    
    522,036
    
    
    
    Other assets
    
    
    14,248
    
    
    
    10,859
    
    
    
    3,172
    
    
    
    
    
    
    
    28,279$
    (722,596
    )
    
    $
    673,196
    
    
    $
    26,933
    
    
    $
    522,036
    
    
    $
    499,569LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    49,965
    
    
    $
    1,408
    
    
    $
    
    
    
    $
    51,373Income taxes
payable
    
    
    
    
    
    
    1,399
    
    
    
    
    
    
    
    
    
    
    
    1,399Accrued liabilities
    
    
    21,403
    
    
    
    83,247
    
    
    
    6,576
    
    
    
    
    
    
    
    111,226Current maturities
of long-term debt
    
    
    11,899
    
    
    
    3,382
    
    
    
    6,846
    
    
    
    
    
    
    
    22,127Deferred revenues
    
    
    
    
    
    
    317,197
    
    
    
    6,074
    
    
    
    
    
    
    
    323,271Total current liabilities
    
    
    33,302
    
    
    
    455,190
    
    
    
    20,904
    
    
    
    
    
    
    
    509,396Long-term debt, less current
maturities
    
    
    718,378
    
    
    
    10,097
    
    
    
    8,957
    
    
    
    
    
    
    
    737,432Net affiliate payable
    
    
    
    
    
    
    577,456
    
    
    
    58,012
    
    
    
    (635,468
    )
    
    
    Other liabilities
    
    
    
    
    
    
    122,769
    
    
    
    2,359
    
    
    
    
    
    
    
    125,128Deferred revenues
    
    
    
    
    
    
    590,610
    
    
    
    11,279
    
    
    
    
    
    
    
    601,889Stockholders equity (deficit)
    
    
    (1,474,276
    )
    
    
    (1,082,926
    )
    
    
    (74,578
    )
    
    
    1,157,504
    
    
    
    (1,474,276
    )$
    (722,596
    )
    
    $
    673,196
    
    
    $
    26,933
    
    
    $
    522,036
    
    
    $
    499,569
 20




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
 Three Months Ended March 31, 2005Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
    
    $
    
    
    
    $
    240,208
    
    
    $
    9,739
    
    
    $
    
    
    
    $
    249,947Retail products
    
    
    
    
    
    
    13,946
    
    
    
    362
    
    
    
    
    
    
    
    14,308Miscellaneous
    
    
    
    
    
    
    4,323
    
    
    
    418
    
    
    
    
    
    
    
    4,741
    
    
    
    258,477
    
    
    
    10,519
    
    
    
    
    
    
    
    268,996Operating costs and expenses:Membership
services
    
    
    
    
    
    
    175,599
    
    
    
    7,252
    
    
    
    
    
    
    
    182,851Retail products
    
    
    
    
    
    
    13,035
    
    
    
    346
    
    
    
    
    
    
    
    13,381Advertising
    
    
    
    
    
    
    17,307
    
    
    
    361
    
    
    
    
    
    
    
    17,668General and
administrative
    
    
    878
    
    
    
    17,168
    
    
    
    289
    
    
    
    
    
    
    
    18,335Depreciation
and amortization
    
    
    
    
    
    
    16,247
    
    
    
    801
    
    
    
    
    
    
    
    17,048878
    
    
    
    239,356
    
    
    
    9,049
    
    
    
    
    
    
    
    249,283Operating
income (loss)
    
    
    (878
    )
    
    
    19,121
    
    
    
    1,470
    
    
    
    
    
    
    
    19,713Equity in net income
of subsidiaries
    
    
    19,505
    
    
    
    
    
    
    
    
    
    
    
    (19,505
    )
    
    
    Interest expense
    
    
    (17,648
    )
    
    
    (293
    )
    
    
    (864
    )
    
    
    470
    
    
    
    (18,335
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207Other, net
    
    
    422
    
    
    
    65
    
    
    
    58
    
    
    
    (470
    )
    
    
    752,279
    
    
    
    (228
    )
    
    
    (599
    )
    
    
    (19,505
    )
    
    
    (18,053
    )Income before income taxes
    
    
    1,401
    
    
    
    18,893
    
    
    
    871
    
    
    
    (19,505
    )
    
    
    1,660Income tax provision
    
    
    
    
    
    
    (259
    )
    
    
    
    
    
    
    
    
    
    
    (259
    )Net income
    
    $
    1,401
    
    
    $
    18,634
    
    
    $
    871
    
    
    $
    (19,505
    )
    
    $
    1,401
 21




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
 Three
Months Ended March 31, 2004 (As Restated See Note 2)Guarantor
    
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    
    Subsidiaries
    
    

Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    229,759
    
    
    $
    9,228
    
    
    $
    
    
    
    $
    238,987Retail products
    
    
    
    
    
    
    14,618
    
    
    
    408
    
    
    
    
    
    
    
    15,026Miscellaneous
    
    
    
    
    
    
    4,609
    
    
    
    424
    
    
    
    
    
    
    
    5,033
    
    
    
    248,986
    
    
    
    10,060
    
    
    
    
    
    
    
    259,046Operating costs and expenses:Membership
services
    
    
    
    
    
    
    184,177
    
    
    
    7,313
    
    
    
    
    
    
    
    191,490Retail products
    
    
    
    
    
    
    14,067
    
    
    
    351
    
    
    
    
    
    
    
    14,418Advertising
    
    
    
    
    
    
    19,310
    
    
    
    321
    
    
    
    
    
    
    
    19,631General and
administrative
    
    
    957
    
    
    
    14,500
    
    
    
    423
    
    
    
    
    
    
    
    15,880Depreciation
and amortization
    
    
    
    
    
    
    16,702
    
    
    
    531
    
    
    
    
    
    
    
    17,233957
    
    
    
    248,756
    
    
    
    8,939
    
    
    
    
    
    
    
    258,652Operating
income (loss)
    
    
    (957
    )
    
    
    230
    
    
    
    1,121
    
    
    
    
    
    
    
    394Equity in net loss
of subsidiaries
    
    
    (1,935
    )
    
    
    
    
    
    
    
    
    
    
    1,935
    
    
    
    Interest
expense
    
    
    (13,525
    )
    
    
    (1,846
    )
    
    
    (2,563
    )
    
    
    2,022
    
    
    
    (15,912
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    53Other, net
    
    
    625
    
    
    
    14
    
    
    
    1,269
    
    
    
    (2,022
    )
    
    
    (114
    )(14,835
    )
    
    
    (1,832
    )
    
    
    (1,241
    )
    
    
    1,935
    
    
    
    (15,973
    )Loss before income taxes
    
    
    (15,792
    )
    
    
    (1,602
    )
    
    
    (120
    )
    
    
    1,935
    
    
    
    (15,579
    )Income tax provision
    
    
    
    
    
    
    (213
    )
    
    
    
    
    
    
    
    
    
    
    (213
    )Net loss
    
    $
    (15,792
    )
    
    $
    (1,815
    )
    
    $
    (120
    )
    
    $
    1,935
    
    
    $
    (15,792
    )
 22




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements 3⁄4 (continued)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Three months ended March 31, 2005Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,401
    
    
    $
    18,634
    
    
    $
    871
    
    
    $
    (19,505
    )
    
    $
    1,401Adjustments
to reconcile to cash provided Depreciation and amortization, including amortization
included in interest expense
    
    
    788
    
    
    
    16,533
    
    
    
    801
    
    
    
    
    
    
    
    18,122Changes in operating assets and liabilities
    
    
    (1,496
    )
    
    

    6,462
    
    
    

(790
    )
    
    

    
    
    
    
    4,176Changes in net affiliate balances
    
    
    
    
    
    
    (20,334
    )
    
    
    794
    
    
    
    19,540
    
    
    
    Other, net
    
    
    131
    
    
    
    106
    
    
    
    (207
    )
    
    
    
    
    
    
    30Cash provided by operating activities
    
    
    824
    
    
    
    21,401
    
    
    
    1,469
    
    
    
    35
    
    
    
    23,729CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (8,198
    )
    
    
    (232
    )
    
    
    
    
    
    
    (8,430
    )Investment in and advances to subsidiaries
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    Cash provided by (used in) investing activities
    
    
    35
    
    
    
    (8,198
    )
    
    
    (232
    )
    
    
    (35
    )
    
    
    (8,430
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under revolving credit agreement
    
    
    3,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,563Net borrowings (repayments) of other long-term debt
    
    
    (4,584
    )
    
    
    482
    
    
    
    (1,026
    )
    
    
    
    
    
    
    (5,128
    )Stock purchase and options plans
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Cash provided by (used in) financing activities
    
    
    (859
    )
    
    
    482
    
    
    
    (1,026
    )
    
    
    
    
    
    
    (1,403
    )Increase in cash
    
    
    
    
    
    
    13,685
    
    
    
    211
    
    
    
    
    
    
    
    13,896Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    268Cash, beginning of year
    
    
    
    
    
    
    18,726
    
    
    
    451
    
    
    
    
    
    
    
    19,177Cash, end of year
    
    $
    
    
    
    $
    32,411
    
    
    $
    930
    
    
    $
    
    
    
    $
    33,341
 23




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements 3⁄4 (continued)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Three months ended March 31, 2004 (restated)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (15,792
    )
    
    $
    (1,815
    )
    
    $
    (120
    )
    
    $
    1,935
    
    
    $
    (15,792
    )Adjustments to reconcile to cash provided Depreciation and amortization, including amortization
included in interest expense
    
    
    572
    
    
    
    16,620
    
    
    
    909
    
    
    
    
    
    
    
    18,101Changes in operating assets and liabilities
    
    
    (443
    )
    
    
    10,746
    
    
    
    669
    
    
    
    
    
    
    
    10,972Changes in net affiliate balances
    
    
    
    
    
    
    (8,169
    )
    
    
    326
    
    
    
    7,843
    
    
    
    Other, net
    
    
    235
    
    
    
    106
    
    
    
    (53
    )
    
    
    
    
    
    
    288Cash provided by (used in) operating activities
    
    
    (15,428
    )
    
    
    17,488
    
    
    
    1,731
    
    
    
    9,778
    
    
    
    13,569CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (12,816
    )
    
    
    
    
    
    
    
    
    
    
    (12,816
    )Acquisitions of businesses, net of cash acquired and
other
    
    
    
    
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    (117
    )Investment in and advances to subsidiaries
    
    
    9,778
    
    
    
    
    
    
    
    
    
    
    
    (9,778
    )
    
    
    Cash provided by (used in) investing activities
    
    
    9,778
    
    
    
    (12,816
    )
    
    
    (117
    )
    
    
    (9,778
    )
    
    
    (12,933
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under revolving credit agreement
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Net repayments of other long-term debt
    
    
    (2,335
    )
    
    
    (5,598
    )
    
    
    (1,985
    )
    
    
    
    
    
    
    (9,918
    )Debt issuance and refinancing costs
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )Stock purchase and options plans
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310Cash provided by (used in) financing activities
    
    
    5,650
    
    
    
    (5,598
    )
    
    
    (1,985
    )
    
    
    
    
    
    
    (1,933
    )Decrease in cash
    
    
    
    
    
    
    (926
    )
    
    
    (371
    )
    
    
    
    
    
    
    (1,297
    )Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    511
    
    
    
    
    
    
    
    511Cash, beginning of year
    
    
    
    
    
    
    13,394
    
    
    
    246
    
    
    
    
    
    
    
    13,640Cash, end of year
    
    $
    
    
    
    $
    12,468
    
    
    $
    386
    
    
    $
    
    
    
    $
    12,854
 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Restatements and Reclassifications
   Executive Summary of Business
    SM
 25




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##### Table of Contents



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 enrollment fees and monthly membership and dues payments. It also includes revenue generated from sales of
personal training services provided.Currently, most of our members
choose to purchase their membership under our multi-year value plan
by paying an initial enrollment fee and by making monthly payments
throughout the term of their membership. Monthly payments under our
value plan are generally fixed during an initial obligatory payment
period, for up to three years pursuant to retail installment
contracts. After the initial obligatory period of membership, our
members enter the non-obligatory renewal period of membership and
continue to make monthly payments to maintain membership privileges.
Under sales methods in effect during 2004, non-obligatory term
membership monthly payments were substantially discounted from the initial obligatory term monthly payment levels. Following the
nationwide 2005 implementation of our new BYOM pricing plan, monthly
payments in the renewal phase of membership carry a smaller or no
discount to the initial period monthly payment level. Our members may
also choose to purchase a prepaid membership for periods up to three years. Members choosing our
pay-as-you-go membership payment option make
month-to-month non-obligatory payments after paying an initial
enrollment fee. Ongoing membership dues for members in renewal
periods may be paid monthly or annually or may be prepaid for
multiple future periods.Our membership services revenue is generally collected as cash
    on a basis that does not conform to its basis of revenue
    recognition, resulting in the deferral of significant amounts
    received early in the membership period that will be recognized
    in later periods. This recognition methodology is a consequence
    of our long history of offering membership programs with higher
    levels of monthly or total payments during the initial period of
    membership, generally for periods of up to three years, followed
    by discounted payments in the subsequent renewal phase of
    membership. Our revenue recognition objective is to recognize an even amount of
    membership revenue from our members throughout their entire term
    of membership, regardless of the payment pattern. As a result,
    we make estimates of membership term length on a composite group
    basis of all members joining in a period, and set up separate
    amortization pools based on estimated total group membership
    term length averages. Estimated term lengths used to create the
    separate amortization term groups for revenue recognition are
    based on historical average membership terms experienced by our
    members.Membership services revenue related to members who maintain
    their membership for periods beyond the initial term of
    membership is deferred as collected and recognized on a
    straight-line basis over the estimated term of total membership.
    Our historical evaluation of members who have joined since 1996
    resulted in a determination that approximately 35% of originated
    monthly payment revenue from our members is subject to deferral
    to be recognized over their entire term of membership. As a
    result, we defer all collections received from members in this
    group, and recognize as membership service revenue these amounts
    based on five amortization pools with amortization periods of 39
    months to 245 months, representing composite average membership
    terms of membership of between 37 months and 360 months.
    Membership services revenues that have been prepaid in their
    entirety for the initial term of membership are recognized in a
    similar manner, except that the estimate of the group expected
    to remain a member for only the initial period of membership is
    amortized over 36 months. Based on the historical attrition
    patterns of members who pay their membership in full upon
    origination, approximately 69% of such membership revenue
    relates to members who maintain their membership beyond the
    initial three-year period of membership, which is amortized
    using the same five amortization pools as described for monthly
    collections.We evaluate the actual attrition patterns of all of our deferred
    revenue pools on a quarterly basis and make adjustments from our
    historical experience to take into account actual attrition by
    origination month groups. As we determine that our new estimated
    attrition is different than the initial estimate based on
    historical patterns, we recognize as a change in accounting
    estimate a charge or credit to membership services revenue in
    the period of evaluation to cumulatively adjust past recognition
    and future deferred revenue amounts. Under our deferred revenue
    methodology, an increase in membership attrition rates will
    result in an increase in revenue in the period of adjustment as
    it is determined that amounts previously deferred to future
    periods of membership no longer need to be deferred.
    Alternatively, a decrease in membership attrition rates can
    reduce membership services revenue as it is determined that
    amounts previously considered earned are required to be deferred
    for recognition in future periods.Membership services revenue comprised
approximately 93 percent and 92 percent
of total revenue for the three months ended March 31, 2005 and 2004, respectively. Membership
services revenue is recognized at the later of when membership services fees are collected
or earned. Membership services fees collected but not yet earned are included
as a deferred revenue liability on the balance sheet.2)
    
    We generate revenue from the sales of products at our in-fitness center retail stores
including Bally-branded and third-party nutritional products, juice bar nutritional drinks
and fitness-related convenience products such as clothing. Revenue from product sales
represented approximately 5 percent and 6 percent of total revenue for the three months ended March 31,
2005 and 2004, respectively.3)
    
    The balance of our revenue (approximately 2 percent for each of the three months ended
March 31, 2005 and 2004), primarily consists of franchising revenue, guest fees and
specialty programs such as martial arts programs. We also generate revenue through granting
concessions in our facilities to operators offering wellness-related services such as
physical therapy, from sales of Bally-branded products by third-parties, and from weight
management programs. 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 salary, commissions, payroll
taxes, benefits, rent, real estate taxes and other occupancy costs, utilities, repairs
and maintenance, supplies, administrative support and communications to operate our
fitness centers as well as the costs to operate member processing and collection centers.
The centers 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)
    
    Advertising expenses consist of our marketing department, media and advertising
costs to support fitness center membership growth as well as the growth of our brand.4)
    
    General and administrative expenses include costs relating to our centralized
support functions, such as information technology, accounting, treasury, human resources,
procurement, real estate and development and senior management. General and
administrative also includes professional services costs such as legal, consulting and
auditing as well as expenses related to the various accounting investigations.
 26




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##### Table of Contents



5)
    
    Depreciation and amortization expenses represent primarily the depreciation on our fitness
centers, including amortization of leasehold improvements. Owned buildings are
depreciated over 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.
 th
      Industry Data Survey of the Health and Fitness Club Industry,
 27




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Critical Accounting Policies
  Results of Operations
  28




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##### Table of Contents



Three months endedMarch 312005
    
    
    2004(As RestatedSee Note 2)Net revenuesMembership
    
    $
    221,529
    
    
    $
    210,054Personal training
    
    
    28,418
    
    
    
    28,933Membership services revenue
    
    
    249,947
    
    
    
    238,987Retail products
    
    
    14,308
    
    
    
    15,026Miscellaneous
    
    
    4,741
    
    
    
    5,033Net revenues
    
    
    268,996
    
    
    
    259,046Operating costs and expensesMembership services
    
    
    182,851
    
    
    
    191,490Retail products
    
    
    13,381
    
    
    
    14,418Advertising
    
    
    17,668
    
    
    
    19,631Information technology
    
    
    5,815
    
    
    
    3,712Other general and administrative
    
    
    12,520
    
    
    
    12,168Depreciation and amortization
    
    
    17,048
    
    
    
    17,233249,283
    
    
    
    258,652Operating income
    
    $
    19,713
    
    
    $
    394Operating dataAverage monthly membership revenue per member
    
    $
    20.02
    
    
    $
    19.11Average number of members during the period
    
    
    3,688
    
    
    
    3,665Number of members at end of period
    
    
    3,732
    
    
    
    3,713Number of members joined during period
    
    
    377
    
    
    
    343Fitness centers operating at end of period
    
    
    416
    
    
    
    418
 Summary of revenue recognition method
     Comparison of the Three Months Ended March 31, 2005 and 2004
   
    
    Membership revenue increased to $221.5 million from
$210.1 million in 2004, an increase
of $11.4 million (5%) from the prior year. The increase in membership revenue in the current year is the
result of a 1% increase in the average number of members to 3.688 million members for 2005 as
well as a 5% increase in the average monthly membership revenue per member to $20.02 for 2005.
    
    Cash collections of membership revenue during the three
months ended March 31, 2005 was $223.6 million, an increase
of $11.6 million (5%) from 2004. This increase is the result of
an increase in advance payments of dues and membership fees and an increase in cash
received from initial term monthly payments. See Note 4, Deferred Revenue.
 29




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##### Table of Contents




    
    Personal training revenue decreased to $28.4 million from $28.9 million in 2004, a
decrease of $.5 million (2%), resulting from a consolidation of
the management of the personal training business.
    
    Retail products revenue decreased to $14.3 million from $15.0 million in 2004, a
decrease of $.7 million (5%), primarily reflecting lower retail sales in the Companys
fitness centers.
    
    Miscellaneous revenue decreased to $4.7 million from $5.0 million in 2004 primarily due
to lower revenue from initial franchising fees.
  
    
    Membership services expenses for the three months ended
March 31, 2005 decreased $9.1
million (5%) from 2004, reflecting increases in occupancy and insurance costs offset by a
reduction in personnel costs as a result of the Companys cost reduction initiatives.
    
    Retail products costs and expenses for the three months ended March 31, 2005 decreased
$1.0 million (7%) from 2004 as a result of lower retail sales in the Companys fitness centers.
    
    Advertising expenses for the three months ended March 31, 2005 decreased $2.0 million
(10%) from 2004 primarily from a reduction in fees paid for media and reduced production
costs.
    
    Information technology expenses for the three months ended
March 31, 2005 increased $2.1
million (57%) from 2004 as a result of costs associated with improved controls, compliance
and security enhancements.
    
    Other general and administrative expenses for the three months ended March 31, 2005
increased $1.0 million (9%) from 2004, primarily as a result of costs incurred in connection
with the investigations and litigation related to the restatement of the Companys
financial statements as well as an increase in insurance costs.
    
    Depreciation and amortization expense for the three months ended March 31, 2005
decreased $.2 million (1%) from 2004 reflecting the relatively high proportion of the
Companys facilities that are in excess of 15 years old, which is the longest period over
which the Company depreciates its leasehold improvements.
  30




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##### Table of Contents



Liquidity and Capital Resources
  Three months ended
March
312005
    
    
    2004(As RestatedSee Note 2)Cash provided by operating activities
    
    $
    23,729
    
    
    $
    13,569Cash used in investing activities
    
    
    (8,430
    )
    
    
    (12,933
    )Cash used in
financing activities
    
    
    (1,403
    )
    
    
    (1,933
    )Increase
(decrease) in cash
    
    $
    13,896
    
    
    $
    (1,297
    )
  Debt
   Risk
Factors
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##### Table of Contents



Item 3. Interest Rate Risk and Market Risk
   Foreign
Exchange Risk
  
 Item 4.
Controls and Procedures
 Evaluation
of Disclosure Controls and Procedures
 Controls and Procedures
    Changes
in Internal Controls over Financial Reporting (ICFR)
  33




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##### Table of Contents








PART II. OTHER INFORMATION





Item 1. Legal Proceedings


LITIGATION


Lawsuit in Massachusetts


Fit Tech Inc., et al. v.
Bally Total Fitness Holding Corporation, et al.,




Department of Justice Investigation




Other




34



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35




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     
 Item 3 Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
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##### Table of Contents



SIGNATURE PAGE
  BALLY TOTAL FITNESS HOLDING CORPORATIONRegistrantBy:
    
    /s/ Carl J. LandeckCarl J. LandeckSenior Vice President and Chief Financial Officer(principal financial officer)
  37